Professional Competition and Professional Power

How do professions construct markets for their services? What is the role of the professions in the creationof national and transnational regimes of regulation?

‘First rate…it beautifully positions the arguments and is of enormous significance in research and policymaking.’

Anthony G.Hopwood, Professor of International Accounting and Financial Management, London Schoolof Economics

‘There is no book containing a wider range of first-rate material illustrating contemporary approaches tothe study of the legal professions and their competitors. P.S.C.Lewis, Stanford University

This pathbreaking work examines the on-going efforts of lawyers and allied professionals to construct,police and redefine their respective boundaries. It provides a unique academic focus on the leadingcorporate practitioners, notably the newly emerging large multinational firms of lawyers and accountants,and on the ways in which they are reshaping the roles and structure of their respective fields. In this newcontext of transnational deal-making and regulaton building, traditional models of professionalization havebeen rendered invalid by the increasing gulf between solo practitioners and their counterparts in large firms.Moreover, it is these new mega firms of professionals who are playing an increasingly important role in theconstruction of legal regulation, both national and international, and therefore influencing the character ofthe nation state. By focusing on this new type of organization and its impact on the respective professionalfields it becomes possible to examine anew the relationship between the professions, the economy and stateregulation.

David Sugarman is Professor of Law and Director of the Law in History Programme, LancasterUniversity; Yves Dezalay is a charge de recherches at the Centre National de la Recherche Scientifique andan affiliated scholar of the American Bar Foundation.

Contributors: Alain Bancaud and Anne Boigeol; Pierre Bourdieu; John Flood; Michael Hartmann; PeterMiller and Michael Power; Joseph McCahery; Vittorio Olgiati; Sol Picciotto; Ralf Rogowski.

Professional Competition and ProfessionalPower

Lawyers, Accountants and the Social Construction ofMarkets

Edited by Yves Dezalay and David Sugarman

London and New York

First published 1995by Routledge

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© 1995 Yves Dezalay and David Sugarman, selection and editorial matter.Copyright for the individual chapters, the contributors.

All rights reserved. No part of this book may be reprintedor reproduced or utilized in any form or by any electronic,

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Contents

List of tables vi

List of contributors vii

ForewordPierre Bourdieu

ix

Introduction: Professional competition and the social construction of transnational marketsYves Dezalay

1

Part I

1 The construction of international taxationSol Picciotto

17

2 Calculating corporate failurePeter Miller and Michael Power

36

3 Technological warfare: the battle to control the mergers and acquisition market in EuropeYves Dezalay

55

4 A new judge for a new system of economic justice?Alain Bancaud and Anne Boigeol

74

5 German corporate lawyers: social closure in autopoietic perspectiveRalf Rogowski

82

Part II

6 The cultures of globalization: professional restructuring for the international marketJohn Flood

99

7 Process and policy of legal professionalization in Europe: the deconstruction of anormative orderVittorio Olgiati

122

8 Bank lawyers: a professional group holding the reins of powerMichael Hartmann

148

9 Who colonized whom? Historical reflections on the intersection between law, lawyers andaccountants in EnglandDavid Sugarman

163

10 Creative lawyering and the dynamics of business regulationJoseph McCahery and Sol Picciotto

171

Index 198

v

List of tables

5.1 The 33 largest corporate law firms in Germany in 1989 and 1992 896.1 Top 20 law firms in England and Wales by market share based on gross fees in 1989 1077.1 Questionnaires and interviews: allocation and responses 1327.2 Number of lawyers in the European Community, 1990 1378.1 Lawyers in Bank A (%) 1498.2 Hierarchical positions of graduates (excluding trainees) in banking 1588.3 Management structure in Bank A 1588.4 Percentage of graduates in Bank A 159

Contributors

Alain Bancaud is a researcher attached to the Institut d’histoire du temps present (IHTP), Paris. His firstresearches concerned the production of sociology of law. He has published a book on French judges, Lahaute magistrature entre politique et sacerdoce (1993), and is now working on the role of judges duringthe Second World War.Anne Boigeol is a researcher attached to the Institut d’histoire du temps present (IHTP), Paris, and forseveral years her researches concerned family dissolution and the regulation of economic relationshipsfollowing divorce. She began her work on legal professional by analysing legal aid and lawyers; she thenfocused her work on the question of the recruitment and training of judges. She is now working on theprocess of feminization of the French legal professions.Pierre Bourdieu is Professor of Sociology at the Collège de France, Paris, and Director of Studies at theEcole des Hautes Etudes.Yves Dezalay is a charge de recherches au CNRS (Centre National de la Recherche Scientifique), as wellas an affiliated scholar of the American Bar Foundation where he works with Bryant Garth on theemergence of an international legal field and the restructuring of state and political elite. His work hasbeen focused on corporate professionals whose transformations are analysed from a comparativist andmultidisciplinary perspective, in particular within the ‘European Working Group on CorporatePractitioners’, an international research network that he has initiated and organized. His books includeMarchands du droit (1992), and Batailles territoriales et querelles de cousinage, Juristes et comptableseuropéens sur le marché de droit des affaires (1993).Michael Hartmann is based at the University Gesamthochschule, Paderborn.John Flood is University of Westminster/Vizards Reader in Law. He is trained both in law and sociologyand specializes in the legal and cognate professions. His current research is concerned with the interfaceof law and accounting and he is currently preparing two books: Real Law: Inside the Large Law Firm andCorporate Rescue in the UK: Recession and the Insolvency Profession.Joseph McCahery was judicial clerk for the Honorable Nathaniel R.Jones of the United States Court ofAppeals for the Sixth Circuit. He teaches international economic law at the University of Warwick. He isthe co-author (with Keith Ansell-Pearson and Nick Land) of Machinic Postmodernism: Complexity,Technics and Regulation (1996) and co-editor of International Regulatory Competition and Co-ordination (forthcoming) and Corporate Control and Accountability (1993).Peter Miller is Senior Lecturer in Accounting at the London School of Economics. Originally trained asa sociologist, he has published extensively in the fields of accounting, management and sociology. He isthe author of a number of books, most recently Accounting as Social and Institutional Practice.

Vittorio Olgiati is a Professor at the Institute for the Philosophy and Sociology of Law, University ofMilan.Sol Picciotto is a law professor at Lancaster University, and has previously taught at Warwick and Dar esSalaam universities, and spent a year as Jean Monnet Fellow at the European University Institute in 1991–2. His interests are in the internationalization of business and the interaction of law, political economyand other social factors in that process. His book International Business Taxation, was published in 1992.Michael Power is Lecturer in Accounting and Finance and Coopers & Lybrand Fellow at the LondonSchool of Economics. He is a professionally qualified chartered accountant and a member of the UKInstitute of Taxation. He has published on the sociology of accounting with special reference to therelationship between accounting and the law.Ralf Rogowski is a Senior Lecturer in Law and the Director of European Legal Studies at the School ofLaw, University of Warwick. His main research interest lies in the area of comparative sociology of law,including research on courts and the legal professions. He is the author of a number of articles and books,including The Resolution of Labour Conflicts: An International Comparison.David Sugarman is Professor of Law and Director of the Law in History Programme at LancasterUniversity. His major publications include Legality, Ideology and the State (1983), Law, Economy andSociety, 1750–1914 (with G.R.Rubin, 1984), Regulating Corporate Groups in Europe (with GuntherTeubner, 1990) and Law and Social Change in England, 1780–1900 (1993). He is currently completing apolitical and cultural history of The Law Society.

viii

ForewordPierre Bourdieu

There is no worse epistemological obstacle than the almost true but not quite false pronouncements ofjournalism, of ‘essayism’, and the semi-science of all the opinion-formers or doxosophs who, whileappearing to break with appearances and reveal that which is most hidden, merely enunciate and reinforcethe most obvious, the most ‘endoxic’ of truths, as Aristotle would have put it. This is so of discussions onthe theme of globalization (‘global culture’, ‘global economy’, ‘global city’, etc.), which are now eruptingeverywhere, and which, much like the invocations of the ‘planetary’ and ‘planetarization’ dear to Frenchessayists of the 1960s, rely on a series of common-sense observations such as, to throw out a few examples,the spread of the electronic media and the commercial entertainment they transmit (of which the paradigmis sport as spectacle), transcontinental demonstrations of humanitarian solidarity, large-scale tourist travel,world-wide circulation of goods and services, the intensification and acceleration of the exchange ofinformation, or human migratory flows, linked with improvements in transport and communication, and soon. One would indeed have to be very ill-humoured or ill-disposed to ask if so-called globalization isnothing but another name for ‘westernization’ or ‘Americanization’ and, more precisely, the gradualinstitution of a new world order, dominated by a few industrial powers capable of exporting and imposing,on a universal scale, not only their products but their lifestyle. But this is merely to take a stance which isreactive and thus, at bottom, almost as superficial as the naively ecumenical representation it opposes. Andit is necessary to break with both points of view to truly construct the fitting object of a scientific analysis ofthe phenomenon, which common-sense or ‘endoxic’ discourse can reveal only by obscuring it: namely, theworld field which is in the process of being constituted in the various areas of practice, or, to put it anotherway, the process of constitution of specific world fields (the economic field, the literary field, the legalfield, etc.) into which the national fields have been drawn, while retaining a greater or lesser relativeautonomy.

To speak of a world legal field, or better still an international legal field, as do most of the authors in thisvolume, is immediately to escape from the dichotomy between harmonious unification or discordantdivergence, and to take note of the fact of unification through competition and through struggle whichaccurately characterizes the field as I understand it, as opposed in particular to the notion of a ‘profession’, aprefabricated concept which Anglo-Saxon sociological tradition borrowed directly from its historical doxa.It is necessary, and it suffices indeed, to make the break, implied by the notion of field, with common senseand with the academic dichotomy of consensus and conflict, in order to understand that, paradoxically, it isthese struggles between lawyers of different countries striving to impose legal forms or, better, modes ofproduction of law, which have contributed towards unifying the world legal field and the world market ofexpertise in law (or, following a comparable logic, in economics).

In the conquest of new markets for their legal services, the big law firms rely on the fact that legal capitalplays a determining role in the regulation of trade, and also in organizations defending ‘human rights’

which, with the big international institutions such as the World Bank and the IMF, are quite often the Trojanhorse of the ‘Chicago boys’ and their strategies of legal-economic import-export, which combine ethicalidealism and economic realism. But these new bourgeois conquerors have to reckon with resistance fromnational legal fields threatened by the new world legal order or, more exactly, with the power relations andthe conflicts, generated within these fields, between the modernisers, who take the side of internationalism,and the traditionalists, who put their money on protectionist barriers and the maintenance of nationaltradition (demonstrating a similar opposition to that expressed, in many countries, in the political positionstaken towards supranational institutions).

Thus, to think in terms of a field also provides the means of grasping the global logic of the new worldlegal order, while escaping geopolitical considerations that are as vast and vague as their object and towhich the adherents of the ‘global’ or ‘globalization’ often give sacrifice, to return to the more concretestrategies of agents, themselves defined by their dispositions (linked to a social position and a trajectory),their assets and their interests. To discover, for instance, that within each national field the partisans of the‘global’ or of the ‘local’ are not randomly scattered, since international strategies are only truly accessible tothose who, owing to a (highly) privileged social origin, have the aptitudes and competencies (especiallylinguistic) that cannot be easily acquired on the school bench. If one also realizes that, as Yves Dezalaywrites, ‘the prohibitive cost of tuition in those great North American universities which give access to theinternational legal market in fact makes them the preserve of those students best endowed with social andfinancial capital’, one understands that the cultured and cosmopolitan heirs of the national bourgeoisieswhose privileges are threatened, on the national market, by the effects of the intensified educationalcompetition, are the first to find ways to train for the new careers opened up to them by the newinternational arena of expertise. Further, it is perhaps because this gives them a very particular interest in aparticular form of the universal that the members of this new international learned aristocracy (noblesse derobe), when they exercise their skills in transnational bodies, humanitarian organizations, or even in the biglegal multinationals, can help to elevate their local universes to a higher level of universalization by joiningin the power struggles using as their weapon, and as their stake, the law or rights (of business, of man, or ofthe businessman), in other words the piously hypocritical reference to the universal.

September 1994(Translated from the French by Berenice Cleeve and Sol Picciotto)

x

IntroductionProfessional competition and the social construction of transnational markets

Yves Dezalay(Translated from French by Berenice Cleeve)

Recent debate brought about by the ratification of international economic agreements—Maastricht, NAFTA,GATT—has made the public at large aware of the massive scale of the political stakes involved in theinternationalization of trade. Reaction has been all the more dynamic in that these questions were, until now,the prerogative of experts. As Jacques Delors (1993) writes, ‘The return of politics in European constructionis first and foremost that involvement of the people in a project that has been elitist for far too long.’

The observation is valid, even though somewhat extreme in its implications that politics are out of placein the debates of experts. Indeed, the various antagonists have been confronting one another on questionsthat are to all appearances extremely technical; but although these confrontations are played out betweenspecialists, within the discreet confines of professional or ministerial chambers, they are no less fierce. Orless political. What was at stake was the politics of the world of expertise.

In the same way that debates surrounding the trade agreements revealed —and revived—social rifts thatthe welfare states tried to lessen, thanks to reconstruction and the long period of post-war prosperity, theopening of borders and the trials and tribulations of attempting to put into place a new transnational orderhave created serious schisms within the professional world. Not only were its unity and homogeneity calledinto question, but so also was the public image of collegiality, of respectability and civic responsibility thatit liked to give. The phenomenon is widespread (Galanter and Palay 1991), but is particularly acute inEurope (Dezalay 1990, 1992). The advent of the Yuppies, the greed of legal entrepreneurs, the race towardsgigantism by the service multinationals; in brief, the invasion of market forces, of competition, and also ofinnovation in the world of ‘distinguished artisans’, would-be guardians of established order, all coincidedwith the opening of borders and the speeding up of European construction. These events are by no meansrandom or accidental.

As Bourdieu (1991a) suggests, the professionals of law who describe themselves as the guardians ofpublic order are only credible if they start by imposing upon themselves the rules of conduct that they wishto impose upon others. The strict self-discipline of these professionals in their dealings with their peers andtheir clients is essential to their legitimacy. To para-phrase Weber, it represents the ‘stock in trade’ of ‘thesemerchants of social order’.

A ‘LAWYERS’ PARADISE’…

Inversely, during periods of crisis such as the one we are going through at the moment, with the painfulbirth of a new international order out of the ruins of an economic order based on state intervention (Boyer1986), the professional world is no mere spectator on the sidelines of these upheavals; on the contrary. Tobypass rules, if not with complete legality at least without too much risk, it is preferable to seek help fromthose veterans who are all the more knowledgeable of loopholes in the text of regulations because they

themselves helped create them (McBarnet and Whelan 1992). The invention of the off-shore haven and itsexpansion due to ‘regulatory shopping’ has been, even according to those concerned, a veritable ‘lawyers’paradise’. And those other professionals who put their skills at the service of entrepreneurs are not left out.

But that is not all: it is not enough to destroy, one has also to rebuild. A market cannot exist without rules(North 1990; Wade 1990). Producers need a minimum amount of regulation and foreknowledge in order toinvest. Merchants need security for their transactions, particularly when these take place at a distance andwith unfamiliar—or unknown—partners (Milgrass et al. 1990). Risk increases with distance, geographic orsocial. The economic value of a well-regulated and institutional framework capable of minimizingtransaction costs depends on the extent of the market. It is at its greatest in a so-called ‘global’ market.Renewal of interest in norms is to the advantage of the experts, above all to the lawyers. What otherprofessional group could claim to be able to call upon knowledge—and legitimacy—sufficient to constructthe devices of regulation needed for the emergence of a transnational market?

The market for expertise in national and international regulation is thus going through an unquestionableboom (Dezalay 1993a). These experts have never been so much in demand: whether to circumvent existingdevices or to build new ones. This dual role gives them a strategic position in the construction of theregional ‘big markets’ which are gradually replacing national markets. By selling their services as consultantsto this gargantuan enterprise of international ‘re-regulation’, these merchants of norms of all descriptionsfor the business community not only ensure their own immediate prosperity, they invest in the future—theirfuture! Who better than they to guide enterprises through the complex quagmire of rules and institutions,national as well as international, that overlap and very often clash? Here is a legal underground loaded withas many traps and obstacles as with tactical opportunities for whoever is willing to do battle on the terrainof law—on condition, needless to say, that the services of the most competent mercenaries have beenengaged in advance, even at exorbitant rates. Potential profits and losses related to the complexity of thisconstantly redefined multilayered regulatory network are sufficiently awesome to incite enterprises to extraexpenditure on preventative legal consultation.

In fact, multinational firms of experts make full use of this marketing strategy. They dazzle their clients withthe advantages of ‘forum shopping’ or ‘regulatory shopping’ to justify increasingly large fees. Thedevelopment of this sort of delocalized practice also serves as their excuse for accelerating a process ofconcentration which constitutes a genuine revolution in a field of expertise dominated until now by moreartisanal structures. The effect of this breakaway is particularly noticeable among European lawyers whocongratulated themselves for escaping, until now, market imperatives by limiting the potential forcompetition and the concentration of capital. And the Guardians of the Temple who played at beingCassandras by denouncing commercial logic within law were not wholly wrong when they pointed out thatthe end had come for a ‘gentleman’s’ profession that saw itself as ‘the last bastion of Athenian democracy’.

… AND A LAWYERS’ CHAOS

The spectacular rise of the market in international expertise is not without its counterpart. To accede to itand carry off all the profits it is necessary to accept different work methods and organization: from theartisan model to that of the supermarket or factory. It is a positive upheaval which is all the more brutal inthat it operates under the coercion of competition: that of the Wall Street law firms and also of the Big Six(Trubek et al. 1993).

It is also a ‘revolution from above’. In effect, as many of the essays in this book demonstrate (seeChapters 3, 4 and 5), far from opposing such reconstruction, large sections of the European professionalelite have, with varying enthusiasm, been part of it: some because they are resigned to the inevitable,

2 YVES DEZALAY

whereas others have enlisted more wholeheartedly in order to join the ranks of the new international elitebefore it is too late. These last are a minority, but an influential one. Not only do they control vast materialand institutional resources, but they are determined. For these representatives of national elites, the stakesare worthwhile. The aim is to occupy, if not the place of honour, which is for the moment firmly held by thebig American law firms, at least the next best in the enormous market for legal consultancy which iscurrently emerging. In this palace revolution, the modernist faction of the professional elite sacrifices onthe altar of the international market a large part of the traditions upon which the noblesse de robe built itspower within the national arena. The rulers themselves are bending the tacit rules which divide labouraccording to rank and limit attempts to concentrate abilities and resources in the field of practice. Thisrunaway dash by professional leaders towards the international market has disorganized the means ofresistance of national systems confronted by market pressures and the attractions of a dominant legalculture. The commercialization of law and its Americanization go hand in hand.

This strategy of reconversion, which at first sight seems paradoxical, represents in fact a wager on thefuture. By contributing to the elaboration of a new international economic order, this modernizing section ofthe professional elite is in its own way watching over the renewal of the collective, symbolic capitalrepresented by the privileged positions of these dexterous professionals in the field of state, even if thismeans the dismemberment of nation-states by turning their own weapons against them (Bihr 1992). In thistransitional situation, where national regulatory devices have lost most of their autonomy withoutcompensating for it by the development of really efficient structures of international co-ordination, theexperts are condemned for ever to the parallel track of the national and the international, along with all thecontradictions that this implies. Not only does the logic of the market, of which they are the agents,gradually submerge the national cultures of which they are the inheritors; but to construct an internationalmarket, they rely on the very state structures they are undermining.

The authority of experts in international relations reflects in effect what they can command within theirown national spheres (Dezalay and Garth 1993), as well as what they have been able to acquire abroadthrough personal investment or local alliances. There is an excellent reason for this: the international fieldof expertise does not exist—at least, not yet. Even on the level of the most structured regional areas, such asthe European Union, there is still a long way to go to a grand market of expertise where products andproducers circulate freely because their value is recognized everywhere. Even in Europe, as a number ofcontributions in the second part of this book underline (see Chapters 6 and 7), the history of professionalfields is too closely identified with that of nations for the constitution of a common market to run smoothly.This also applies a fortiori to national regulatory devices where history frequently serves as an excuse for‘competition between capitalisms’ (Albert 1992; Trachtman 1993).

‘GLOBALIZATION’ AS PROFESSIONAL RHETORIC…

This is why, in this area at least, dissertations on ‘globalization’ are but rhetorical figures that should beavoided, even though they are increasingly employed. For some, they are merely ornamental references tolend a note of modernity to perfectly traditional statements; for others, on the contrary, this is a tacticalargument meant to give weight to a strategy of internationalization by giving it all the appearance ofhistorical inevitability, as if the technological revolution necessarily leads towards a ‘globalization’ of law.

It is not only towards such ‘modernistic discourses’ which are often ‘prescriptive discourses’ (Bourdieu1981) that intellectual caution should be exercised. The warning applies to culturalist arguments too oftenused to justify protectionist strategies. Rather than take sides, it is far more significant to observe their areaof strategic combat. Each uses rhetorical arguments that owe as much to ideological as to learned discourse.

INTRODUCTION 3

Some dazzle with the ‘technological revolution’ and the ‘global village’, others denounce the risks of a‘degradation’ of law—and, more generally, of knowledge—were they to become transformed into a‘vulgar’ commodity.

Such constant confusion between practices and the discourses that orchestrate them is doubtless one ofthe main obstacles to objective inquiry into the question of the internationalization of the field of expertise.The risk is all the greater in that academics and researchers also play this strategic game. Not only throughtheir alliances in the field of practices or through their political affiliations, but also because theinternationalization of the scientific field, even though it preceded that of expertise, only served toexacerbate hostile competition between academics who tend at times to behave like ‘national champions’(Bourdieu 1991b).

… AND EYE OPENER

Despite these pitfalls, the internationalization of the market in expertise provides a range of opportunities toaid progress of knowledge in these fields of practice. Competition between national elites and publicconfrontation between modernizers and guardians of tradition contribute to the revelation of hiddenstructures or the tacit rules on which rests the authority of these symbolic fields. The opening of borders, theincreasing delocalization of the market of financial-legal services and the existence of expertisemultinationals that offer their clientèle ‘forum shopping’, are leading to competition between various modesof production and reproduction of law. By importing other means of producing law—as well as legallegitimacy—the business law multinationals raise the political and professional stakes created by thedivision of legal labour into hierarchies. Thus, this division or sharing of roles, that sociology tended toignore because it was considered unalterable, becomes once more a fundamental question: sociologicalanalysis benefits from the social visibility generated by conflicting modes of production of law.

If these territorial battles, aggravated by the disintegration of national or disciplinary monopolies,stimulate sociological curiosity, they also create an opportunity to review its paradigms (Abel and Lewis1989). This applies to the sociology of legal professionals which, because of increasing territorial disputes,is driven to question the process through which the professional field constructs and reconstructs itsidentity. Instead of reproducing, albeit objectively, a group’s self-image, sociologists should analysecompetition in ‘know-how’ through which this identity is continually reconstructed (Abbott 1988; Dezalay1991, 1993c).

This renewal is also valid for the sociology of norms or the analysis of regulation which can no longerignore the professional dimension of normative stakes (Clarke 1986; Hancher and Moran 1989). These largestructures of production and accumulation of expertise which now dominate the international scene play anincreasing role in the redefinition of law and of knowledge of law. They do it on account of their clientèle inmultinational companies anxious to structure regional or even global markets. But they also do it toreinforce their own dominant position in the market in expertise through increased control over theprocesses for the ratification of new legal devices. Financial-legal engineering has thus become one of thekey elements of the technological warfare which is restructuring the international economic landscape andthe composition of the elite (Moran 1991).

Thus one can no longer study the emergence of norms or, more broadly, the regulation of economicactivity, without taking into account the transformation of the mode of production of law—and thelegitimacy of law. Analyses of regulation and the sociology of professions can no longer continue to co-exist in ignorance of one another as they have done until recently. On the other hand, by giving mutual aidthey would provide the necessary intellectual framework to analyse the complexity of the structures of the

4 YVES DEZALAY

production of law—and lawyers—who play a determining role in international competition in the field ofregulation (see Chapter 10).

This ‘intellectual unfettering’ of the sociology of law is full of possibilities. Because its priority is to observethe construction of a transnational market in expertise—and simultaneously the construction of a neweconomic representation of social relations by professionals who are also legal entrepreneurs—this newapproach fits into the general stream of research that unites economists and sociologists in their thinking onthe social processes that redefine regulatory devices (Salais and Thevenot 1986; Strange 1988; North 1990;Zukin and Di Maggio 1990; Granovetter and Swedberg 1992; Castells 1992; Boyer 1993). Lastly, becauseits subject is at the convergence of the field of power with that of knowledge, it can also hope to contributetowards a political sociology that would study relations between the state and the professional elite(Martines 1968; Larson 1977; Mintz and Schwartz 1985; Auerbach 1986; Bourdieu 1989; Perkin 1989).

BRINGING INTERNAL POLITICS AND CLASS RIVALRIES BACK IN

Though the struggles and readjustments related to the internationalization of the market in expertisestimulate new approaches to studying these fields of practice, it would be a danger to consider thephenomenon exceptional. These encounters are continuous in that they are at the basis of a constantremodelling of these fields of symbolic power. The battles are as much internal as external. If these turfbattles between different know-hows (Abbott 1988) are often more visible, because more public, internalquarrels between the different factions fighting for power within a professional field are by no means lessfierce. And the stakes involved in these battles between vested interests are considerable because theoutcome decides political priorities or the hierarchy of competences.

This is why, though the question of internationalization brought the authors of this book together, theirstudies tackle very different themes— such as the setting up of instruments to measure bankruptcy—and areless contemporaneous—a number of essays give a major place to history. Even though all these essays dealwith those professionals who place their competence at the service of enterprise, it is less the object ofanalysis than the form of interrogation that gives unity to the chapters in this book. Even if not directlytreated, the international reorganization of the field of expertise is always in the background. It provokes adifferent awareness. By accentuating the importance of strategic stakes in a professional world thatendlessly tries to deny conflictual interdependences, it reintroduces the ephemeral to a social world given asimmanent, natural and predetermined. In brief, it redirects thinking towards the social construction of know-how and the professional market as a constantly revitalized project, which is endlessly called into questionby internal battles between professionals. And it helps to avoid the trap of hagiographic discourse whichthreatens all those who inquire into those ‘preconstructed’ objects, such as the professions, but who forgetthat they are the ‘product of a whole social work of construction of a group and the delineation of this groupwhich has unobtrusively stolen into the science of the social world’ (Bourdieu and Wacquant 1992:213).

Herein lies the attraction of a form of thinking which, even though it bears mostly on professionals of law,wishes to be interdisciplinary. To think through the diversity of the professional world is still the best wayto avoid thinking of each of the know-how components as an independent entity. It is also one of the mostdirect ways to observe those discordant relationships which constitute the field of expertise. As Abbottemphasizes, these turf battles are particularly evident where technological or social transformations open upnew areas which the different professional categories then try to commandeer by developing ad hoctechnologies or by setting up new organizational structures. The internationalization of exchange increasesopportunities of this kind: be it apropos of taxation (cf. Chapter 1) or mergers and acquisitions (Chapters 3,4, 5). But the process is broader, as demonstrated in Chapter 2 on the construction of tools to measure

INTRODUCTION 5

bankruptcy. Via the study of internationalization, but also beyond this specific phenomenon, it is thus theprofessional stakes in the construction of devices of regulation which form the key theme of this firstsection.

Part II is in some ways even more ambitious, in the sense that the analyses try to go beyond a problematicset in terms of markets (Abel and Lewis 1989) and territories. It strives to demonstrate that confrontationswithin a profession or between neighbouring professions are endemic, even in the absence of disputes orterritorial claims. They are equally related to the social diversity of the various groups which form theprofessional potpourri, and to their ambitions, political or otherwise. Doubtless, here again, as shown inChapters 6 and 7, the opening of borders has only exacerbated underlying antagonisms, in that it has raisedthe possibility of redefining positions in the field of power. However, as in the earlier chapters, we did notwish to conform to the incidental character of a broader phenomenon: that of the strategic game of thedifferent professional groups within the field of power (Larson 1977; Auerbach 1986), particularly withinthe state. Obviously, we make no claim here to treat this theme in a systematic manner. It is simply a matterof spotlighting concrete examples—the threatened positions of lawyers in the world of German finance(Chapter 8) or the ambiguous relations between lawyers and accountants (Chapter 9)—of the pertinence ofan analytical dimension, that of politics, somewhat ignored by a sociology of the professions which hasfocused on the market to too great a degree.

To summarize, this book does not claim to have as its object a grand tour of the questions raised by theinternationalization of the market in expertise. That ambition would be both excessive and extravagant. Inany case, our horizons have been limited more modestly to Europe. The back-drop is the American model,because it is impossible to consider the construction of a European regulation—or a European market inexpertise —without reference to this powerful neighbour and competitor. Far from being a book on the‘globalization’ of law, it is more ‘apropos internationalization’. In effect, our real ambition is to takeadvantage of the current state of crisis which calls everything into question—customs, as well as certitudesof professional ideology—in order to sketch out some new analytical pathways which may enrich botheconomic and legal theories on regulation and the sociology of the professions. One could not dream of amore opportune moment than this when the opening of borders encourages professionals to throwthemselves into politico-commercial grand manoeuvres to reintroduce that strategic dimension, all too oftenabsent from analyses of this field of symbolic power.

PART I:TECHNOLOGIES OF REGULATION AS PROFESSIONAL STAKES

The area of international taxation, studied by Sol Picciotto, provides an excellent example of some of thethemes introduced above. It underlines the role of competition between practitioners—more precisely,between lawyers and accountants—in the elaboration of regulatory devices. The legal creativity ofsolicitors’ firms is stimulated by their desire to catch up on ground lost to the Big Six. But thesepractitioners are not satisfied with imagining increasingly sophisticated devices to reduce their clients’ taxbills; they also place their talents at the service of institutions of national or international regulation where,in fact, many of them did their apprenticeship. This familiarity allows them to guide their clients all thebetter towards loopholes within the cabalistic mazes of complex legislation: efficiently and with no qualmsof conscience. By pointing out breaches in these regulatory devices, do they not, indirectly, help to improvethem? In return, if these devices become too impermeable, it only makes their competences even moredesirable and valuable in the eyes of their clients. As Gordon (1984) demonstrates apropos of antitrustlegislation, this two-fold game by practitioners serves both their prosperity and their legitimacy.

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It also accelerates the rationalization and formalization of this field of practice. This evolution, fed byinter- and intra-professional rivalry conforms with the growth of this market. From that point of view, theprocess of legalization, described by Picciotto, calls to mind Moran’s analyses of the effect ofinternationalization on the regulation of financial markets (1991). The increasing number of players—andparticularly their decreasing social homogeneity—gradually disqualifies a relatively informal model ofregulation which he describes as ‘bargaining within the framework of broad discretionary rules’. While theclub of multinational firms was limited to a small number careful of their public image, this model ofnegotiated regulation worked fairly well, thanks to the mediation of the ‘professional gentlemen’. Theseknew the tolerance limits of tax institutions, and to preserve their credibility were careful not to overstep thelimits. On the other hand, when new technologies made tax havens available to all and sundry—includingthe Mafia—the business establishment rediscovered the virtues of more rigorous and potentially tougherlegislation. This does not mean that it is impossible to manipulate; on the contrary. But for that, the servicesof the most competent professionals are required.

Chapter 2, which deals with the ‘invention’ of accounting ratios used to measure bankruptcy, gives both acontrasting and a complementary perspective to the previous one. Although time and place are very different,both focus on the grey areas shared and fought over by the professionals of both law and numbers. There isa simple explanation: in both cases, legal rules defer to microeconomic knowledge. Accountancy expertiseis all the more determining in that it intervenes at the apex of a regulatory process that is frequently happy toratify the social compromise it represents—and embodies. These antecedents and the strategy of ‘governingby numbers’ are evoked by Peter Miller and Michael Power. The pertinent reason is that all too often thisexpertise is excluded by a legal discourse which itself is a victim of ‘legal centralism’ (Griffiths 1985).

The reminder is all the more important in that numerical technologies seem self-evident. Are not theseratios given as an objective mirror-image of the health of or the financial risks run by an enterprise?Whereas—and herein lies the beauty of their work—the authors demonstrate that this ‘objectivity ofnumbers’ only serves to mask and obscure a whole process of negotiation between antagonistic socialinterests that intervene on various levels, from conception to application. The ‘invention’ of these ratioscannot be dissociated from actions to impose a certain form of financial capitalism. Even today, they oftensimply externalize compromises reached by the various partners fighting, with the help of experts, over thedeathbed of an enterprise in difficulty. An ex post diagnosis is all the more pertinent in that it serves as aself-fulfilling prophecy. The ‘truth’ of numbers ratifies the negotiation that preceded their elaboration. Itshields and legitimizes confrontation between experts through whom social interest conflicts are resolved.

Though inscribed in a larger project, that of the social history of accountancy techniques, this analysisrepresents an important contribution towards attempts to deconstruct the evidence of the professional modelexamined here in the light of the crisis caused by the opening of borders.

We are brought back to this central theme in the remaining three chapters of Part I, on M&A (merger andacquisition) professionals. In effect, these new juridico-financial practices are, to all intents and purposes,examples of the upheaval and commotion wrought by the internationalization of markets. They are astriking illustration of the determining role of professional strategies in the construction of Europeanregulation, and vice versa. These new rules are not only linked to confrontation between two models ofregulation which reflect, in their turn, two opposing models of capitalism in Europe: a financial capitalism,of which the City considers itself the emblem (Ingham 1984), and an industrial capitalism, sometimescharacterized as the Rhineland model (Albert 1992). They also determine the remodelling of the field ofexpertise between different national producers. For this reason, the stakes in the new regulation of enterpriseconcentration go far beyond the strict province of competition law, just as the regulation of hostiletakeovers involves not only financial law. In fact, the material and symbolic benefits that the professional

INTRODUCTION 7

mercenaries have obtained—or hoped to obtain—from these great financial battles, both legal and self-promoting, have stimulated the need, and very often the means, for a strategy of concentration andrestructuring of law production in the great law firms. In brief, the restructuring and the struggles for powerwhich marked the legal field at the end of the 1980s appear in many respects the corollary of those playedout in the field of enterprise during the great M&A wave.

It is impossible to summarize in a few lines the history of these complex and reverberant events, so we shallsimply underline some of the lessons to be drawn from the arguments sketched out here, focusing on twothemes that are, in our view, related. The first is the legalization of a regulatory device, in this case the Take-over Panel (TOP). It is possible to deal briefly with this as an episode in the much larger process of theAmericanization of the European market in M&As, analysed in Chapter 3. It echoes developments alreadyencountered apropos of international taxation. TOP was at the centre of a self-regulatory device aimed at theimplementation of relatively pliant codes of conduct in the financial battles provoked by takeovers.Strengthened by their experience, this was the code the City authorities proposed when Brussels tried tounify European practices on M&A matters. But it soon became apparent that at the European level it wasimpossible to exclude all judicial review. This was precisely what TOP had tried to avoid, concerned as it wasto circumvent the Bar and thus all risks of American-style litigation. Even though this project has been setaside for the time being, it gives weight to criticisms of the lack of legitimacy of this ‘old boys’ justice’based on discretion, if not secrecy, and is not in the least put out by its lack of adversary procedures.Evidently, the complaints emanate from those who feel excluded from this financial institution ‘run bymerchant bankers for merchant bankers’. As the international growth of the City attracted a number offoreign operators unfamiliar with the usages of this ‘gentleman’s club’—and little too inclined to submit toit without first demanding their rights—a number of lawyers took advantage of the situation to becomespokespersons of this discontent by seeking judicial review against TOP decisions. As a result, although itcontinued to proclaim the merits of an adaptable, because more informal, system of regulation, TOP decidedto fight back by calling increasingly on the legal know-how of lawyers in order to reinforce its legitimacy.

If we stress this episode in the grand technological battle currently raging over European regulation, it isbecause it throws light upon the theme developed in Chapters 4 and 5: the corporate lawyers’ strategy forautonomy. The word strategy is apt, because the conquest of this autonomy is, in part, at the expense ofothers. In this case, it is the merchant bankers who lose—notably their arrangements between themselvesoutside the courts. However, in exchange they gain legitimacy because these secret covenants were alwayssomewhat suspect. A shift in this order was behind the emergence of French ‘business justice’ as describedby Alain Bancaud and Anne Boigeol. The Place de Paris was unable to legitimize a system wherecompromises concluded under the direction of the Ministère des Finances could not easily be appealed. Thecommercial bar and the senior judiciary swiftly grasped the opportunity to enter a highly remunerative andprestigious area from which they had been excluded, even if it meant bending the unwritten rules of ahallowed judicial tradition of total reliance on pure law and a mistrust of matters of power and money(Bancaud 1993). Depicting himself as a specialist in financial affairs rather than a general practitioner ofjustice like his colleagues, this new-style judge conceives of his role as that of a mediator, willing to listento those other specialists, the practitioners in large consultancy firms or in-house lawyers. Thus, this smallelite of business judges breaks away from a professional body whose practices and values are removed fromits own. There again, this severance from one’s peers, even though informal, is not easy. A strategy ofindependence requires a battle on many fronts.

These internal struggles through which a professional group, such as business lawyers, creates itsindependence are undeniable, even though their ferocity remains symbolic. It is to the advantage of theadversaries to make certain concessions in order to preserve the legitimacy of a general device towards

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which everyone contributes—and from which everyone benefits. Thus, as Ralf Rogowski notes inChapter 5 apropos of corporate lawyers, these concurrent strategies of ‘social closure’ are the very oppositeof a fight to the death. He even goes so far as to call them ‘co-evolutionary developments’, becausealliances and complementarities are numerous. As we have seen earlier, it is to the advantage of lawyers andfinanciers to collaborate in stock market regulation procedures: the latter gain legitimacy, the former accessto a previously inaccessible market.

In the same way, it is not in the interest of business-law professionals to sever communications with theirpeers, since their value, for financiers or entrepreneurs, is precisely that they are the bearers of the sociallegitimacy represented by law and justice, due to the universal character of these institutions. In brief, inthese internal struggles within the market in expertise, there is no question of eliminating one’s adversary orcompetitor. At the most—and it is already a lot—each camp hopes to improve its position in thehierarchical ranks of prestige or power.

Indeed, this is probably the main stake in the business lawyers’ strategy for independence. What is lookedfor is less independence as an end in itself than the social recognition it carries. The formation of the groupcannot be dissociated from their collective plan for professional—and social—promotion for which theycould provide the means. It is at this level that inter- and intra-professional competition can be seen. Thesepromotion strategies necessarily strive against each other for supremacy, but that does not mean that thegame ends in a draw. To valorize their position, in the eyes of their peers as well as in those of potentialclients, these practitioners have no other solution than to upgrade the legal tech niques which represent theircapital. Lastly, not only do they produce law, but by ‘legalizing’ financial conflicts, they helpto‘depersonalize’ them by introducing some of those universal values of which they are the guardians…andthe dealers.

PART II:RESHAPING THE PROFESSIONAL FIELD

In Part II, as in Part I, the internationalization process serves to cast light, but here it is structures of thedifferent national legal fields that have been exposed—well as called into question—by the opening ofborders. The notion of a ‘structural dimension’ is taken here in its broadest sense, in that it covers both thedivision and the internal classification of legal labour, and the relations of this professional field toeconomic and political power.

A first group of studies is particularly concerned with the confrontation of different legal cultures withina context of increased international competition. Thus in Chapter 6, John Flood asks whether diversity andthe strong national identity of legal cultures is a handicap for business-law firms when compared with theircloser competitors (more specifically, the big multinational conglomerates, increasingly multiprofessional,such as the Big Six) in a market for advice which is becoming global, or at least ‘regional’. The opening ofborders could stimulate the redefining of territories and hierarchies between both complementary andcompetitive knowledge. His detailed observation of practices leads him to a relatively pessimistic view ofthe future of these professionals of law, whom he describes as ‘a potentially endangered species’. In fact,the gap can only grow larger between business practitioners, ‘who will compete aggressively and not feelbound by the ideological and cultural constraints lawyers impose upon themselves’. For this reason, whileaccountants are coming closer to their ambition of being the ‘monitors of world economic order’ (Montagna1990), the legal profession risks being increasingly marginalized and pushed out of the market for economicand financial advice ‘unless it can transcend national boundaries’. This is far from being the case,particularly in countries of the civil law tradition, where lawyers are closely allied with the state. Even in

INTRODUCTION 9

the Anglo-Saxon world, where market logic is better accepted, the growth of big firms collides with a wholeseries of deontological rules, such as those which forbid conflict of interest. Indeed, the more radicalreformers or ‘legal entrepreneurs’ would like to get rid of these rules that they consider anachronisms. Butthey encounter the hostility of professional organizations where the guardians of the temple maintainrespect for tradition by relying on the support of the small practitioners who continue to exercise their tradein a more conventional manner (Dezalay 1991).

Vittorio Olgiatti tackles the same theme but from a slightly different angle. Indeed, although he toounderlines this strong identification of the legal professions with the national cultures that produced them,he tends to think that this symbiosis, far from disappearing into an increasingly global merchant logic, couldon the contrary be reinforced. It could even make these professionals the ‘guardians of that socio-legaldiversity’ that he considers an essential component of Europe’s patrimony.

The value that he attaches to the diversity of national legal cultures drives him to a conclusion that,although in essence close to John Flood’s, is less pessimistic. Unlike the latter, for whom cultural barrierscan only slow down the ‘ineluctable and irreversible’ process of market globalization, Olgiatti considersthat, at least in the area of law, the American corporate law model can be challenged. He observes that theimplantation of these big firms in Europe is so far limited in number, and that professionals in the OldWorld prefer network systems more in conformity with their traditions. He also notes that, far fromlevelling differences between national legal cultures, European integration in fact acknowledges them byreaffirming the power of national professional organizations in the respective markets: notably in all thatconcerns the accreditation of foreign producers. In brief, according to him, the current situation ischaracterized more by a ‘continuity in change’ than by some ‘legal big bang’. However, he does not denythe tensions introduced by the co-existence of deeply antagonistic professional models, but he attributesthese tensions to the pluralism of normative systems in modern societies (Teubner 1986), a phenomenon thatlong preceded the internationalization of exchange, even if this has intensified it. These two readings of theconfrontation between national legal cultures and an increasingly transnational market in services areessentially complementary. The first is centred around Anglo-American business-law practitioners, lawyersor accountants, whereas the second takes into account the whole Italian legal field where business lawyersremain marginal. One is more pragmatic, whereas the other is more normative. But these differences ofvision and appreciation are in themselves instructive, not only because they reflect the old cleavage betweencivil and common law tradition that, as Flood properly reminds us, determines the attitude of professionalstowards the state and the market, but also because this twofold slant spotlights the fact that stakes—and theprofits—the internationalization of financial markets are not the same when viewed from the City ofLondon and from Italy. Accordingly, the strategies of professionals are necessarily different, depending onwhether they come from the new geographic heart of capitalism (Sassen 1991) or from its peripheries.Professionals of law are directly concerned by this remodelling of the international division of labour.Rivalry between national systems for the production of law has opened new perspectives and overturnedonce-secure positions.

For a better appreciation of the strategic options of these different professional bodies, it is necessary toenumerate what each fears to lose or hopes to gain, as seen from their respective positions in the field ofpolitical and economic power. On this level of analysis, the cultural variable becomes crude. National legalfields assemble a mosaic of individuals and groups that is highly diverse in terms of prestige and social power.And this social diversity only increases with a return to a dual society—and justice (Heinz and Laumann1982; Bancaud and Dezalay 1994). To take just one example, this new international elite of corporatelawyers has little now in common with the marginalized French or Italian petits juges who react with a‘corporatist-populist’ defence.

10 YVES DEZALAY

Again, the shock of internationalization has exposed and revived schisms in the world of learnedprofessionals as well as in the social world, which are as ancient as they are determined by social origins(Bourdieu and de St Martin 1982). The prohibitive fees of the big North American universities, whoseeducation provides access to the market in international law, makes them the preserve of the richeststudents. This internationalization strategy is thus one of the royal roads by which the inheritors of acultured, cosmopolitan bourgeoisie maintain their privileges, at a time when comparatively easier access tohigher education has watered down and increased competition in the field of expertise.

This is one of the main components of internal political confrontation in the professional field that hasbeen amplified by the opening of borders; particularly in Europe, where a major section of the legal elitesees in this ‘return to law’ (Cohen-Tanugi 1985) the possibility of ‘reconquering’ ground lost since the warto state power (Abel-Smith and Stevens 1967). This means confronting not only the rise of statetechnocracy, but also the advancing new fields of knowledge which conform better to the new economicintervention logic that privileges efficiency over respect for formal legal rules. Here again, the culturalvariable fails to explain these complex developments that are so decisive for the understanding of currentstrategies. For this, one would need to hone the analysis and reintroduce that other social and politicaldimension that is far too often absent from professional discourse. This is the subject matter of the next twochapters.

In essence, this game of musical chairs can only be understood in terms of relationship and time. It is thuswith reference to the rise in the number of business management graduates that Michael Hartmanndescribes the erosion of what once was a monopoly by lawyers of positions of power in the big Germanbanks. This loss of influence is all the more visible since they occupy no more than one-sixth ofmanagement positions, compared to a third thirty years ago. Interpretation is delicate. Indeed, one can evokeobjective elements such as the complexity of new financial technologies which demand new professionalswho are better-trained in economic analysis and in dealing with numbers. But that is not enough. Hartmannobserves that, if lawyers have lost out in terms of recruitment, they have managed to maintain theirprivileged status in that, unlike their competitors, half of them still occupy the highest echelons. Thepyramid has been eroded, but from the bottom. A generational issue, true, but what else? Should one deducethat this loss of influence is going to continue, or even accelerate, as young MBAs climb the hierarchicalladder? And how should we interpret it? Should one incriminate the inappropriateness of a legal lorefashioned for judges (Rueschemeyer 1973), still redolent of the old adage, Judex non calculat? Perhaps so,but this technical explanation is insufficient. Even if they do not appear in statistics, the social variableshave to be considered, particularly in countries where, according to Dahrendorf (1969), law faculties werethe traditional mould for the reproduction of an elite which, paradoxically, expressed scorn for the legallearning taught to them. Doubtless because, taking into account its social capital, it requires only a veneer oflegal culture to occupy the most powerful positions in the fields of economy or state. Under theseconditions, is this little piece of social history, which one is tempted to read as an episode in the battlebetween fields of knowledge, not also—or mainly—just one facet in the battle for power between thedifferent factions of the dominant class?

A similar interpretation appears in David Sugarman’s analysis of the complex relations between lawyersand accountants. In this type of profession, social capital and technical competence are tightlyinterconnected. Indeed, it was through their ability to draw up legal documents that Victorian solicitorswheedled their way into the privacy of the dominant classes to become their confidants and men of business.But, from the strength of this position, they practised a number of professions: from bankers, debt collectors,estate agents or managers, to politicians or lobbyists for the more fortunate. One could have said that ‘beneaththe attorney’s wig sleeps half a dozen professionals’ (Reeder 1966). It is from this point that we need to

INTRODUCTION 11

begin our attempts to understand the ambiguity between lawyers and accountants. The distinction was farfrom obvious a hundred years ago. Accountancy was a technique rather than a profession, and solicitors, forthe most part, kept their clients’ accounts in order.

Bankruptcy management, and latterly its prevention, gave accountants the opportunity to becomerecognized as proper professionals with their own field of expertise. They owed it to the contempt of themore ‘noble’ professions for this rather base activity. For a long time accountants lived ‘in the shadow ofthe legal professions’ like poor relations. The gentlemen of law conceded to them these servile, lowly jobswith little attempt to disguise their disdain. Despite the deference they showed to their elders and betters,whose very usages and institutions they went so far as to copy, these newcomers to professional dignityplayed the role of scapegoat. By condemning the appetites of these pseudo-professionals the aristocrats oflaw kept them in their place, but they also called to order those learned professionals too openly seduced bythe charms of deal-making. The legitimacy of law carries its obligations.

Because it originates in these—still very lively—class rivalries, the history of power relationshipsbetween the dominant and the dominated in the professional field are full of fairly ambiguous reactivesituations (Dezalay 1993a). Strategies of systematic expansion and diversification and promotion ofaccountancy know-how are in great part fed by these parvenus in the professional world’s craving forrevenge. It also benefited from the self-sufficiency of professionals who favoured the aristocratic logic ofnumerus clausus (Abel 1988), even if it meant neglecting the new opportunities offered to merchants ofexpertise through the rise of state capitalism (Abel-Smith and Stevens 1967; Weir et al. 1988; Charle 1992).

To analyse the power play and the strategies involved in the social capital reproduction of the dominantclasses, it is necessary to adopt a clear line of thinking. Unfortunately, apart from a few notable exceptions(Larson 1977; Auerbach 1986; Powell 1988), academic studies of the professions tend shortsightedly to takeprofessional ideology literally, as if the ideal of collegiality and the cult of learning automatically excludedsocial determinisms and dominances. Perkin (1989) explains the origins of this blindness extremely well.The professional group is the culmination of a middle-class political project to abolish upper-classprivileges and also to reach beyond antagonisms based on class. By introducing itself as a ‘classless class’(Perkin 1989:391), the intellectual bourgeoisie becomes a legitimate engineer of social mediation andpeace. These standard bearers, meaning the intellectual or the expert, play a central role in this politicalmanoeuvre: they place their competence at the service of the various social interests they wish to represent.But to remain credible, these ‘social engineers’ must go beyond their own social backgrounds in order tobecome ‘free-floating mental operators set apart from their social origins’ (ibid.).

One therefore understands better why learned discourse on professionals remains silent on thesequestions of class. The very credibility of social mediation through these experts is at risk. So the taboo onsocial origins is powerful. And it is all the stronger in that it has been well assimilated by the academicswho themselves are the products and producers of the meritocratic social order (Domhoff 1983).

These thoughts on the place of lawyers within economic power cannot pretend to be more than a vagueoutline—and an invitation to continue research along these new avenues, where nearly everything remainsto be done. Meanwhile, and in preparation for deeper speculation, in the last chapter Sol Picciotto and JoeMcCahery draw up a sort of balance sheet of findings—the best conclusion to this book one could imagine.We are taken back to its central theme: that of a professional rivalry that stimulates the ‘creativity’ ofpractitioners and accelerates the ‘legalization’ of regulation. This hypothesis—a feature of their work—iselaborated from the critical re-readings of consecutive approaches to the sociology of the professions andlegal theories of regulation. It is an attempt to combine doctrinal thinking on the indeterminacy of rules withdevelopments in the sociology of the professions. It is difficult, but all the more commendable in that theystill had to test their hypothesis in practice—in this case, that of the regulation of insider trading. To

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demonstrate that the redefinition of rules and practices not only corresponds to macroeconomic logic but isalso determined by the specific interest of professionals, they had to carefully re-examine jurisprudentialadvances by insisting on the antagonistic and complementary strategies of agents and institutions ofregulation and private-sector practitioners in the light of recent changes in the North American field of legalpractice. The chapter thus summarizes and illustrates hypotheses in the book as a whole; or, more precisely,the avenues of research we have tried to open and those that remain to be explored.

In fact, are not these legal-financial battles that have marked the end of the ‘roaring eighties’ casinocapitalism’ (Strange 1986) merely a new episode in this conflict between parvenus and gentlemen, whichseem one of the invariables of financial market history (Sampson 1989; Chernow 1990; Hobson 1990)? Therivalry between those who are part of the establishment and those excluded from it—but who are ready todo anything in order to get in—strikes most observers (Bruck 1988; Ehrlich and Rehfeld 1989; Lewis 1989;Burough and Helyar 1990). It also exists within the professional world (Lederman 1992). But these ‘youngTurks’ are as close to the poachers as they are to the game-keepers. The desire for social revenge can just aseasily feed the creative imagination of professional mercenaries willing to serve the restructuring offinancial capitalism as the repressive zeal of those who contribute towards it legitimacy (Stewart 1991).

The frontier between these two roles is far from watertight: because more game-keepers turn to poaching,but also because the two contribute, in their fashion, towards a rationalization of financial capitalism that goeshand in hand with expansion (Dezalay 1993b). This is equally valid for all those who believed they werestriving for its ‘moralization’ but were in fact working towards its ‘modernization’. Corruption, underhanddealings —or baksheesh, insider trading, are all so many reminders of an era not so long ago whencapitalism relied essentially on highly personalized relationships (Braudel 1979). This is less true todaywhen intermediaries hide behind know-how and formal technique. The field of expertise tends thus tomerge with the places and the institutions where it—legitimately— exercises economic power. For thisreason, it is closer to the internal battles of the dominant classes. Might it not be time for sociology of theprofessions or of regulation to take off its blinkers and become, once more, a component of a sociology ofpower struggles in the field of knowledge?

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droit des affaires, Paris: Librairie Générale de Droit et de Jurisprudence.—— and Garth, B. (1993) ‘Du charisme a la routine: la transformation du petit cénacle savant de l’arbitrage en un

marché de la off-shore litigation pour les multinationales du droit’, to appear in La Legitimation du pouvoir et dudroit, Actes du Colloque Franco-Allemand des anthropologues du droit.

Domhoff, G. (1983) Who Rules America Now?, Englewood Cliffs, N.J.: Prentice-Hall.Ehrlich, J. and Rehfeld, B. (1989) The New Crowd: The Changing of the Jewish Guard on Wall Street, Boston, Mass.:

Little, Brown.Galanter, M. and Palay, T. (1991) Tournament of Lawyers: The Transformation of the Big Law Firm, Chicago, 111.:

University of Chicago Press.Gordon, R. (1984) ‘The ideal and the actual in the law: fantasies and practices of New York City lawyers, 1870–1910’,

in G.Gawalt (ed.) The New High Priests: Lawyers in Post-Civil War America, Westport, Conn.: Greenwood Press.Granovetter, M. and Swedberg, R. (eds) (1992) The Sociology of Economic Life, Boulder, Col.: Westview Press.Griffiths, J. (1985) ‘Four laws of interaction in circumstances of legal pluralism’, in A.Allott and G.Woodman (eds)

People’s Law and State’s Law, Doordrecht: Fores Publishing.Hancher, L. and Moran, M. (eds) (1989) Capitalism, Culture and Economic Regulation, Oxford: Clarendon Press.Heinz, J. and Laumann, E. (1982) Chicago Lawyers: The Social Structure of the Bar, New York: Russell Sage.Hobson, D. (1990) The Pride of Lucifer, London: Hamish Hamilton.Ingham, G. (1984) Capitalism Divided: The City and Industry in British Social Development, London: Macmillan.

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Larson, M. (1977) The Rise of Professionalism, Berkeley, Cal.: University of California Press.Lederman, L. (1992) Tombstones: A Lawyer’s Tales from the Take-over Decade, New York: Farrar, Strauss & Giroux.Lewis, M. (1989) Liar’s Poker: Two Cities, True Greed, London: Hodder & Stoughton.Martines, L. (1968) Lawyers and Statecraft in Renaissance Florence, Princeton, N.J.: Princeton University Press.McBarnet, D. and Whelan, C. (1992) ‘Legitimate rackets: tax evasion, tax avoidance and the boundaries of legality’,

Journal of Human Justice, Spring 1992.Milgrass, P.R., North, D.C. and Weinfast, B.W. (1990) ‘The role of institutions in the renewal of trade: the law

merchant, private judges and the Champagne fairs’, Economics & Politics, 2: 1–23.Mintz, B. and Schwartz, M. (1985) The Power Structure of American Business, Chicago, 111.: University of Chicago

Press.Montagna, P. (1990) ‘Accounting rationality and financial legitimation’, in S.Zukin and P.DiMaggio (eds) (1990)

Structures of Capital: The Social Organization of the Economy, Cambridge: Cambridge University Press.Moran, M. (1991) The Politics of the Financial Services Revolution, London: Macmillan.North, D.C. (1990) Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge University

Press.Perkin, H. (1989) The Rise of Professional Society: England since 1880, London: Routledge.Powell, M. (1988) From Patrician to Professional Elite, New York: Russel Sage.Powell, W. and DiMaggio P. (eds) (1991) The New Institutionalism in Organizational Analysis, Chicago, 111.:

University of Chicago Press.Reeder, W. J. (1966) Professional Men, London: Methuen.Rueschemeyer, D. (1973) Lawyers and their Society, Cambridge, Mass.: Harvard University Press.Salais, R. and Thévenot, L. (eds) (1986) Le Travail: Marches, régles, conventions, Paris: INSEE/Economica.Sampson, A. (1989) The Midas Touch: Money, people and power from West to East, London: Hodder & Stoughton.Sassen, S. (1991) The Global City, Princeton, N.J.: Princeton University Press.Stewart, J. (1991) Den of Thieves, New York: Simon & Schuster.Strange, S. (1986) Casino Capitalism, Oxford: Basil Blackwell.—— (1988) States and Markets, London: Pinter Publishers.Teubner, G. (1986) Dilemmas of Law in the Welfare State, Berlin: de Gruyter.Trachtman, J.P. (1993) ‘International regulatory competition, externalization, and jurisdiction’, Harvard International

Law Journal, 34(1): 47–103.Trubek, D., Dezalay, Y, Buchanan, R. and Davis, J.R. (1993) Global Restructuring and the Law: The

Internationalization of Legal Fields and the Creation of Transnational Arenas, Working Paper, Global StudiesResearch Program, Madison: University of Wisconsin.

Wade, R. (1990) Governing the Market, Princeton, N.J.: Princeton University Press.Weir, M., Orloff, A. and Skocpol, T. (eds) (1988) The Politics of Social Policy in the United States, Princeton, N.J.:

Princeton University Press.Zukin, S. and DiMaggio, P. (eds) (1990) Structures of Capital: The Social Organization of the Economy, Cambridge:

Cambridge University Press.

INTRODUCTION 15

Part I

Chapter 1The construction of international taxation

Sol Picciotto

INTRODUCTION

No major deal by transnational corporations (TNCs) takes place without consideration of the taximplications and optimal tax arrangements. Indeed, a great many investments and transactions areformulated on the basis of analysis of tax advantages, very often due to anomalies in the interaction ofdifferent tax systems, and lawyers play a key part in devising such transactions and financings. The basicpatterns and strategies for minimizing tax liability of international investments were developed by the largeTNCs themselves, and in-house specialists still play a major strategic role in tax planning for such largecorporations, using local firms of accountants or lawyers where necessary for tax compliance procedures.However, competitive pressures caused the increasingly widespread use and availability of facilities forinternational tax avoidance.

Such devices and services are now marketed by a plethora of professionals. The increased complexity ofthe field, and the trend, especially in the US, towards reliance on more formal rules and procedures havecreated a specialism, dominated so far by Anglo-Saxon firms of lawyers and accountants. In the USespecially, not only do most large law firms supply an international tax specialism, there are severalboutique firms offering international corporate legal services in which tax advice is a major component; andinternational tax has long been a glamorous stage for sole practitioners and consultants of various kinds.Many of the US tax specialists have held high tax policy positions with the US government (and there iseven some reverse flow, at least at the top levels). However, taxation lies on the boundary between thefields of law and finance; hence, accountancy firms have a stronger presence in tax compliance work, andthe rapid globalization of the Big Six accountancy firms has enabled them to offer a broad-ranging serviceto international investors. British solicitors, for example, historically allowed accountants to secure the workof giving tax advice to clients, while the specialist tax Bar was available to give opinions and conductlitigation when necessary. In the process of competitive inter nationalization of corporate legal practicewhich has been taking place (Dezalay 1991) this is one of many factors which gave the US law firms anedge over European lawyers.

With the explosive growth of corporate legal business since the 1960s, the UK commercial solicitors, incommon with other European business law firms, have been attempting to recoup the lost ground. However,they are having difficulty competing with the large international accountancy firms, which have enormoustax departments, on the basis of which they are also offering a multidisciplinary service, giving advice oncorporate law generally (Eburne 1991; Page 1991). The lawyers argue in turn that the accountants’ approachis too orientated to compliance (rooted in their role in negotiation with the Inland Revenue and frequent

recruitment of former tax officials), while in contrast lawyers have greater independence and can offer amore creative approach; certainly, the largely routine work done by the accountants involves less value-added and lower fees. Lawyers can also offer client confidentiality, which may be an important factor if theaccountancy firms’ legal departments are inadequately insulated from the responsibilities to regulators andinvestors which are part of the auditor’s function. The law firms have also developed strong links withtransnational investment banks, whose globalization and financial intermediation role provides a goodcomplement to the former’s nationally rooted legal expertise, especially in devising tax-sparing financingvehicles (Brady 1991). Significantly also, the gathering momentum of European Community co-ordinationof direct corporate taxation since 1990 (Airs 1992) has opened up for law firms a field in which they canmore easily claim a particular expertise, since it relates to other areas of EC law with which lawyers have anestablished familiarity, notably competition law and corporate law harmonization, rather than to the fieldswhich the accountants can more easily contest, such as corporate finance.

Whatever the particular advantages of different professional groups, the ability to provide advice on theinteraction of national tax laws, within the framework established by the network of bilateral tax treaties, isa key element in the competition among transnational firms of professionals. In turn, this competitionprovides a spur to innovation in the structuring of commercial and financial transactions.

Not only do these corporate professionals compete for business in the markets for their services, it isimportant to understand that they themselves help to construct those markets. Their business and corporateclients operate in markets which by their nature are regulated, and professionals play a key role in themediation of such regulation, by structuring their clients’ transactions. Although this is largely anideological process, it is rooted in the cumulative structures of the historically developed processes oforganization of economic relations and their interaction with the state. This chapter aims to trace thehistorical development of international tax ation as a dynamic process of mediated regulation. It will focuson the role played especially by lawyers in the development of the process, through the exploration of theimplications and limits of the rules which underpin it.

Both the construction of the concepts and their application have involved an interaction between lawyersacting for corporate clients and state officials, who are often also lawyers. There has also been anintermingling and interchange of roles: state officials have sought advice or received representations fromprivate lawyers, whether as experienced (though often partial) professionals or acting directly on behalf ofclients; and it is a frequent pattern in most societies for experienced state officials to be recruited by theprivate sector. These interactions have reinforced the ideological community of specialists in internationaltaxation, which has been nurtured by specialist associations, journals and meetings. However, they retain toa degree an advocate’s sense of the role they are cast to play in each case when acting on behalf of a client,whether state or private. There is a symbolic relationship characteristic of regulators and regulated, althoughwith special features resulting from the nature of each particular field of regulation.

THE DEVELOPMENT OF AN INTERNATIONAL TAX FRAMEWORK

This section will examine briefly the historical development of international taxation as a legal field,focusing mainly on British law, but also examining that in other countries as appropriate. The aim is to showthat legal rules developed as part of a general process of economic and social change, which they alsohelped to mould. Also, I stress that a central feature of abstract legal rules is their looseness orindeterminacy (see, further, McCahery and Picciotto, Chapter 10 in this volume). This provides the space forthem to interact with economic and social activity, an interaction which is essentially mediated by lawyers.

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The importance of the differential incidence of national taxation of international activities for thecompetitiveness of transnational corporations (TNCs) is not new, but dates back to the beginning of thetwentieth century, as the developed capitalist states moved from reliance on tariffs and duties to the directtaxation of incomes to finance the welfare-warfare state. The legitimacy of income taxation rests on theliberal principle of equal incidence on all citizens in respect of income from all sources. As such taxationwas introduced by national states, but within a relatively open world economy, its application to incomederived from international transactions or transnationally organized businesses has depended on the scopeof tax jurisdiction asserted by states. This has focused crucially on the definition of the taxable subject, andon the methods developed for allocation between states of income according to source. The keyconcepts and principles underpinning this application emerged from an international debate which began inthe 1920s, involving state officials and professionals representing business, which established both anormative system and a contested terrain of regulation.

The application of income taxes to business income or profits by many countries, and the rise in tax ratesto finance the First World War, led to the institutionalization in many states of a technocratic bureaucracy witha high degree of discretion,1 and the emergence of tax evasion and avoidance. National taxation ofinternationally organized business created a significant arena of contestation, involving both overtly politicaldebates about the scope of taxation, and a process of enforcement and avoidance in the ‘penumbra’ of thekey concepts and rules (see McCahery and Picciotto, Chapter 10 in this volume). In relation to internationaltaxation, this has focused most importantly on the definition of the relevant subjects and the evaluation andallocation of taxable revenue or income between them. Globally orientated business complained from thebeginning of ‘international double taxation’, and this has remained a key issue.

Company residence or citizenship

Great Britain

Such complaints were expressed early in Britain, where income tax was long-established and had, since itsfirst enactment in 1798 and its reintroduction in 1842, applied to the income of all residents from allsources, worldwide. When business began to make increasing use of the corporate form, in the last quarterof the nineteenth century, the question of company ‘residence’ became important. The courts decided thatcompanies were ‘resident’ if controlled from the UK, and could therefore be liable to British taxes onprofits even from business carried on wholly abroad.2 In 1906, they went further and upheld a Revenueassessment on De Beers, a company formed in South Africa and operating mines there, because ‘thedirectors’ meetings in London are the meetings where the real control is always exercised in practically allthe important business of the company except the mining operations’ (De Beers v. Howe 1906). However,there was further ambiguity over the conceptualization of the profits from a business carried on whollyabroad: if this constituted a ‘trade’ carried on by the company, it would be taxable on the ‘arising’ basis, butif it was income from foreign ‘possessions’ it might only be assessed when remitted.3 Mitchell v. EgyptianHotels (1914) appeared to decide that the company was only liable on a ‘trade’ if it was carried on at leastpartly in the UK; but a majority of the judges took the view that the same facts that established ‘residence’implied that part of the trade was in the UK. Despite this fundamental confusion in the legal position,caused especially by the various misunderstandings and disagreements in the opinions of the diverse judgesin the Court of Appeal and House of Lords in the Egyptian Hotels case, this important legal principle wasnot further clarified by test case or statute.4

THE CONSTRUCTION OF INTERNATIONAL TAXATION 19

The concept of company ‘residence’ remains a key one in British tax law, yet it has never been given astatutory definition. Key elements of ambiguity as to its scope have provided a flexibility which appears tohave suited both the Inland Revenue and corporate tax planners, at least during the period of internationaleconomic expansion in the 1950s and 1960s. Provided a business entity was properly managed whollyoutside the UK, it could be used to shelter foreign earnings.5 In 1951 the Revenue’s powers were reinforcedby broad statutory provisions requiring a company to obtain prior permission to transfer its residenceabroad, transfer any part of its business to a non-resident, and even to issue a debenture (create a debt)through a non-resident company over which it had control.6 These powers were used to try to regulate thetaxation of retained earnings from foreign operations of British-based company groups or TNCs, and tonegotiate an acceptable rate of taxable remittances, by granting consents subject to conditions orundertakings. It appears that a common condition was to require the repatriation of a specified proportion ofthe profits accumulated overseas, such as 50–60 per cent, although due to the secretive and flexible natureof the procedure, the details are known only to those involved (Simon 1983–: para. D 4.112; Ashton 1981:119). However, the specifics of the statute offered avoidance opportunities: for example an ‘off-the-shelf’company which had no trade or business could start a UK branch and later become non-resident withoutconsent; and such a company could also be set up by a directly owned non-resident subsidiary of a UKcompany (Dewhurst 1984). The criminal sanctions imposed by the section required proof of intent: but inpractice company officers having taken authoritative legal advice could argue that they honestly believed nobreach was involved, and could not be convicted without contrary evidence. No prosecution was brought inthe four decades of life of the provision (ibid.).

Although the Revenue tried to cling on to a broad (and vague) rule of company residence, within which itcould reach informal accommodations with taxpayers’ advisers, by the 1970s this became increasinglyuntenable. On the one hand, the rule became easily and widely avoided, since ‘control’ was generally takento mean the place where the key board meetings were held, and was therefore easy to manipulate. Not onlycould this affect the tax liability of foreign subsidiaries of British TNCs, but also foreign-residentcompanies could be formed with substantial business in the UK, avoiding liability to advance corporationtax, as well as corporation tax on overseas business and investment income and realized capital gains.Conversely, board meetings could be held in the UK if it was advantageous to import the losses ofunprofitable subsidiaries via the group relief provisions. On the other hand, a broad approach to residence,which would not rely only on the location of board meetings, might not be upheld in the courts, since itsresults would be too sweeping. It might suit the Revenue to include in principle all unremitted income offoreign subsidiaries; but this could widen the net too far, for it could include, for example, foreignsubsidiaries of non-British TNCs with regional headquarters in the UK, an increasingly frequent anddesirable pattern following Britain’s entry into the EC.7

It seems that both changes in the patterns of international investment, as well as the increasinglyaggressive use for tax avoidance of ambiguities in the rule, undermined the existing regulatory framework.Proposals were put forward in 1981 for a statutory definition of company residence based on the placewhere ‘the management of the company’s business as a whole was conducted’, but were attacked as toovague and broad. Instead, the government in 1984 enacted measures, in line with similar provisionsintroduced by other OECD countries, taxing the deemed foreign income of controlled foreign corporations(CFCs: see below), and further came into line with other states in 1988 by providing that any companyincorporated in the UK is deemed resident there for tax purposes (FA 1988, s. 66). However, the test ofcentral management and control has not yet been replaced, and this, as well as the requirement of approvalfor the issue of debentures by foreign subsidiaries, remains as a fall-back for the Revenue: thus, for example,

20 SOL PICCIOTTO

a tax adviser has warned that foreign companies formed for investment in UK real estate (to avoid capitalgains tax) may be treated as UK resident (Yerbury 1991:33).

Germany

Similar issues arose in Germany, where the Corporate Tax Law introduced in 1920 introduced the combinedtest of the ‘seat’ of a company or its place of top management.8 Thus, companies effectively managed fromGermany but incorporated abroad (often to avoid high German tax rates on their foreign business) could betaxed in Germany on their business profits;9 and the Tax Administration Law of 1934 explicitly providedthat a foreign subsidiary whose business was integrated with that of its German parent company should beregarded as managed and therefore resident in Germany.10 However, the ‘place of top management’ test didnot include control of investment decisions, but focused on actual business management; and majorityownership was not necessarily top management, even if the majority shareholder was informed andconsulted about important investment decisions.11 The rule ‘required a complete financial and organizedintegration’, and the courts finally held that it meant that the parent company must itself be carrying on abusiness of the same type as that of its dependent ‘organ’ and with which it was integrated.12 Thus, theGerman residence rule did not apply to a foreign holding company, and in practice became ‘essentiallyelective’ (Landwehrmann 1974:249).

Rapid growth in the use of foreign intermediary companies in the 1960s to shelter the income of foreignsubsidiaries led to political pressures, and the government produced a report on international avoidance (theSteueroasenbericht, or Tax Oases report, of 1964), and then enacted an administrative decree based on thegeneral anti-avoidance provisions of the Tax Administration Law. However, the trend of court decisionswas to restrict the scope of these provisions, which cast doubts on the validity of the decree. Hence, thegovernment enacted an International Tax Law in 1972, modelled on the US Subpart F provisions of 1962,permitting taxation of the receipts of certain types of foreign base companies as the deemed income of theirGerman owners.

France and the USA

In other countries the concept of the taxable subject developed differently, resulting both from the differentsocial and political roots of the income tax and the influence of business lobbies on the legislature. Thus, inFrance the tax on business and commercial profits introduced in 1917 was one of a range of schedular taxeson different types of revenue, considered to be separate from and parallel to the personal individual incometax; although companies were taxed on their interest and dividend income from securities (considered asmovable property) whether the debtor was in France or abroad. In the USA, the federal income taxintroduced in 1917 applied to US citizens and companies incorporated in the US. This had far-reachingimplications, since it meant that US TNCs operating through subsidiaries formed abroad could escape UStaxation on foreign retained earnings until remitted. However, even a company formed outside the US was(and is) liable on income from business ‘effectively connected’ with the US, and the US source of incomerules have consequently been an important focus of tax enforcement.13

The tax treaty system and the emergence of international tax planning

Complaints by business against the unfairness and burden on their competitiveness of ‘international doubletaxation’ led to varied political responses. In Belgium, when the courts held in 1902 that the tax on a trade or

THE CONSTRUCTION OF INTERNATIONAL TAXATION 21

industry could apply to the global income of a company carrying on business partly abroad, it immediatelyled to business pressures to exempt foreign-source income; although this failed, the law was changed tohalve the tax rate applied to profits earned by foreign establishments (ICC 1921). Similarly, the complaintsby British firms which grew as tax rates increased and other countries introduced income taxes, led to anarrangement introduced in 1916 within the British Empire to allow the deduction from the rate of UK tax ofthe rate of Dominion or colonial tax on the same revenue, up to half of the UK tax rate; but the RoyalCommission of 1919–20 supported the Revenue view that broader co-ordination must be internationallyagreed. The US corporation tax applied to the worldwide earnings of a US company (though not to itssubsidiaries incorporated abroad, as mentioned above); complaints from US firms that this made them lesscompetitive in foreign markets led to the introduction in 1920 of the foreign tax credit, which was alsoallowed against the underlying profits from which remitted dividends were paid from overseas subsidaries.

Pressures by business were orchestrated as an international campaign particularly through theInternational Chamber of Commerce, which was given observer status with the League of Nations, andwhich has continued to play a key role in bringing together and articulating business and professionalopinion on this and other similar matters. The League referred the matter to its Finance Committee, buthopes of a comprehensive international agreement were dashed because differences between national taxsystems were too great. The best that could be achieved (following a major international conference in 1928)was agreement on model bilateral tax treaties, to be used as a basis for negotiation between states. Theseallocated tax rights, allowing states to tax business profits provided they were earned within their territorythrough a ‘permanent establishment’, and to tax residents on their world-wide income, provided they eitherexempted business profits taxed abroad or gave a credit for foreign taxes paid. Although not a member ofthe League, the US participated in its Fiscal Committee, set up after 1928 on the recommendation of a USlawyer, Mitchell Carroll, who had carried out studies of European tax law for the Commerce departmentand then moved to the State Department and became the American representative on that Committee (seebelow).

The model tax treaty provided a flexible basis for minimal co-ordination of the application of nationaltaxes to international activities. Although relatively slow progress was made in the negotiation of bilateraltax treaties in the 1930s (about sixty were concluded), the US-UK treaty negotiated in 1944–5 laid the basisfor the post-war treaty network. Both Britain and the US actively engaged in negotiation and the network oftreaties spread. After the UN failed, due to political conflicts, to resume the work of the League in modernizingthe model, the initiative was taken by the OEEC/ OECD. However, the USA and the UK, as leading capital-exporting countries, rejected pressures both from business and from developing countries and other capital-importing countries to allow total exemption of taxes on foreign-earned profits, since their Treasuries fearedit would encourage competitive lowering of taxes and stimulate capital export. However, under the laws ofboth countries it was possible to defer home country taxation of foreign retained earnings, provided theywere earned by foreign subsidiaries (in the case of British TNCs, if they were controlled outside the UK).14

This encouraged a rapid post-war growth of foreign direct investments, which took place largely on thebasis of reinvested foreign earnings and foreign borrowings.

This was the context for the institutionalization of international tax avoidance or ‘planning’. Already inthe inter-war period the imperfect and haphazard co-ordination of international taxation had created bothsurprising anomalies and sudden vast increases in tax liability, leading to a sense of injustice, as well asloopholes which were quickly exploited, both in the structuring of international business and for the taxsheltering of private and family wealth. The continuation of high wartime marginal tax rates provided anincentive, and the authorities were slow to develop countermeasures, despite occasional publicity about taxdodging. For example, in the early 1920s the UK Inland Revenue, following publicity given to the case of

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Sir Robert Houston, found that many private investment companies had been formed in the Channel Islandsunder nominee ownership; but attempts to persuade or compel the islands under the British Crown to acceptrestrictions on non-resident ownership of companies and co-operation in enforcement of taxes failed, largelydue to objections from the business lobby.15 In the US, Congress passed legislation against foreign personalholding companies in 1934, which was tightened up in 1937. This followed Treasury evidence to a jointCongressional Committee on Tax Evasion and Avoidance set up by President Roosevelt, showing a rapidgrowth of US-owned holding companies in the Bahamas (sixty-four companies set up in 1935–6), Panama,Newfoundland and other low-tax jurisdictions.

The complex political, moral and economic, as well as legal, issues raised by the issue of tax jurisdictionwere shown in the cause célèbre of the Vestey family (owners, amongst other businesses, of the Dewhurstchain of butchers’ shops). The Vestey brothers had left the UK in 1915 and moved the control of their businessto Argentina, to avoid the consequences of the British rule on residence of companies. William Vestey wasone of the businessmen who pleaded to the Royal Commission in 1919 for measures against internationaldouble taxation, stating that, while his tax position in Argentina suited him admirably, he would prefer tocome back to Britain to live, work and die. He also wrote to the Prime Minister, Lloyd George, stating thatif the brothers could be assured that they would pay only the same rate of tax as the American Beef Trust paidon similar business, they would immediately return. Failing to receive such assurances, they took legaladvice from 1919 to 1921, as a result of which they established a family trust in Paris. Returning to London,they leased all their properties, cattle lands and freezing works in various countries to a UK company,Union Cold Storage, stipulating that the rents should be payable to the Paris trustees. The trust was set up sothat its income should be used for the benefit of their family members (but not themselves); the trust deedalso gave the Vestey brothers power to give directions to the trustees as to the investment of the trust fund,although subject to such directions the trustees were given unrestricted powers.

In the meantime, the Revenue had put through Parliament in 1936 and 1938 very broad provisions whichaimed to prevent a UK resident from continuing to enjoy income by transferring assets to a foreigncompany or trust and receiving from it loans, capital payments or other benefits. However, the terms of thestatute were extremely widely drafted, especially the notion of ‘power to enjoy’ income derived by the UKresident as a result of the asset transfer. To be fully effective against any possible circumvention, theprovisions aimed to include any beneficiaries and to tax the whole of the income sheltered (potentiallyincluding all the income of the transferee whether or not derived from the transferred assets), even if notactually paid over to the resident beneficiary. This gave the Revenue very broad powers; the provisons werelater denounced in the standard monograph on the subject by an eminent QC and tax Counsel as creating a‘preposterous state of affairs’ which could only be made tolerable by the Revenue’s exercise of ‘discretionas to whom, and how and how much income to assess’, a discretion so wide as to amount to a ‘suspensionof the rule of law’ (Sumption 1982:116, 138). Following the death of Lord William Vestey, the InlandRevenue assessed his executors and his brother Edmund for the years 1937–41 for a total of £4 million, inrespect of the receipts of the Paris trust. These assessments were upheld by the judges until the case reachedthe House of Lords in 1949. Evershed LJ in the Court of Appeal considered that the power to give thetrustees directions gave the brothers effective control over the revenues produced from the assets, and thatthis was a benefit which amounted to a ‘power to enjoy’ income (Vestey’s Executors v. IRC 1949:69). TheHouse of Lords disagreed, on the grounds that under English trust law the trust funds were to be applied forthe benefit of the beneficiaries; the brothers’ power to give directions gave them no more than a right todirect the trustees to give them a loan on commercial terms, which would not amount to a payment orapplication of the income for their benefit as contemplated by the statute (Lord Simonds: 83; Lord Reid:121). In any case, the power to direct the investments was given to them jointly, while the statute referred

THE CONSTRUCTION OF INTERNATIONAL TAXATION 23

plainly to the power to enjoy of a person, in the singular.16 Thirty years later the Vestey trust gained an evenmore decisive victory when the House of Lords confined the scope of the anti-avoidance provisions of thestatute to the actual transferor and not other beneficiaries (Vestey v. IRC 1979).17

Business justified international avoidance in terms of the inadequate arrangements for co-ordination ofnational taxes on international business and for prevention of international double taxation. For example, inpressing the government for a US-UK tax treaty in 1944, British firms with US subsidiaries said that due tothe large US withholding tax on dividends they had been forced in the 1930s to repatriate their profits by‘unsatisfactory expedients’ such as over-invoicing.18 The development of the treaty network shiftedattention to the inadequacy of the foreign tax credit and the exploitation of tax deferral. By setting upintermediary companies in convenient locations, TNCs could minimize their global tax liability on retainedearnings. Taxable profits of operating subsidiaries could be reduced by high deductions of interest (thincapitalization), and tax-deductible payments to related firms for technology, insurance, shipping, marketingand managerial services; by routing such payments through intermediaries located in convenient treatycountries, to base companies or holding companies in low-tax ‘havens’, the firm’s overall tax liability couldbe minimized.

Tax havens and transfer pricing

An important element in international avoidance has been the development of jurisdictions offering ‘off-shore’facilities. These are not confined to the ‘classical’ tax havens, which offer low or no taxes, no foreignexchange controls for non-residents, and a high degree of bank and company secrecy. Many countries haveeither deliberately offered specific advantages to attract particular types of investment (for example, TheNetherlands, Ireland, Singapore), or could be implicitly used for such due to peculiarities in the interactionof their laws with other countries. For example, the British rule taxing resident companies was for sometime exploited by foreigners forming UK companies controlled from abroad (this was reputedly popularamong Italian dentists). In addition to tax advantages, offshore jurisdictions offered freedom from bankingand other regulations, which led to their rapid development from the early 1960s. This was initially toleratedby central banks and other regulatory authorities, as a means of providing international finance without thebalance of payments problems caused by hot-money flows. Equally, big business and its professionaladvisers could justify their use of tax haven intermediary companies as providing an efficient means ofraising and allocating investment finance, justified by the limited toleration of tax deferral.

There was an awareness, however, of the need to negotiate the limits of such toleration. For example, aprofessional symposium in the late 1950s included a discussion comparing a Bahamas-Curaçao (nowNetherlands Antilles) set-up as more ‘respectable’ than one based on Panama or Liberia (Tax Institute 1960:211–12). Where an arrangement overstepped the limits of tolerability, the tax authorities could take actionunder the broad, discretionary rules which had been developed either by case-law or statute. In addition tothe general rules and anti-avoidance provisions on company residence mentioned above, most national lawsrecognized the possibility that ‘sham’ transactions could be disregarded, although this was consideredpossible only in extreme cases. For example, in the US, in a case where the taxpayer, a resident alien, hadcompletely failed to keep books clearly reflecting his income, the Tax Court agreed to disregard foreigncorporations set up by him and to treat moneys received by them as received for the taxpayer’s use andbenefit, which entitled the Revenue to compute his income (Factor v. CIR (1960). Another key case in theUS Tax Court involved ‘back-to-back’ financing: promissory notes of a US company to a Bahamianaffiliate had been transferred to a newly formed Honduran affiliate in exchange for its own notes bearing thesame interest rate (Aiken Industries Inc. v. Commr. 1971). The court held that the Bahamian company was

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not entitled to treaty relief from withholding tax on the interest since it was not the ‘recipient’ of theinterest. However, it is difficult to ignore the existence as a separate entity of an intermediary company ifthe transaction does not directly pass-through: for example, where it receives dividends, it is hard to treat itas a mere nominee if it has no legal obligation to pass on revenue received to a beneficial owner (PerryR.Bass v. Commr. 1968).

Regulation based on bargaining within the framework of broad discretionary rules can be functional ifthere is sufficient understanding and acceptance of parameters between the players, that is, if there is arelatively small universe of ‘repeat players’, perhaps socially homogenous or operating within a sharedprofessional ideology. It becomes dysfunctional if the underlying legitimizing principles are called intoquestion, for example by broader public debate, or by the arrival of newcomers into the arena. Competitionfrom newcomers can result either from demand by clients for a more aggressive approach to advice aboutregulatory avoidance (due to increased competition in the markets in which those clients are engaged), orfrom renewed competition among the professionals or professional groups offering such advice; althoughthese demand and supply factors of course interact. The limits of bargained tolerance then become lessclear, and recourse to authoritative adjudication by courts is unpredictable due to the vagueness of theoverarching general rules. This frequently leads to the development of a much more specific framework ofrules, whether as administrative rules or guidelines, or as formal law. But such attempts to establish aclearer, more specific and explicit delineation of the limits of acceptability depend on the existence of anadequate legitimizing perspective. Specific ‘bright line’ rules are also less flexible, and more open toavoidance strategies. Hence, a regulatory framework based on specific rules can equally become unstable,prompting recourse by the regulator to the underlying broader and more sweeping rules. However, once aregulatory field has been defined by specific rules as well as broad principles, it is rare for the detailed rulesmerely to be swept away or disregarded: rather, they are re-evaluated and replaced. Thus, there is a generaltendency towards juridification, the enactment of more rules and regulations to define and structure thelimits of economic transactions, although always based on the reconsideration and redefinition of theunderlying broad liberal principles.

Attempts to establish a more specific set of internationally agreed rules to limit international taxavoidance have been made in relation to the taxation of income accruing to foreign subsidiaries (defined ascontrolled foreign corporations, or CFCs); and in defining rules for transfer pricing between affiliatedcorporations. Taxation of CFC income on an accrual basis was first introduced by the US in the Subpart Fprovisions of 1962. The effective exemption from US taxation of the income of foreign subsidiaries unlessremitted (discussed above) came to have an increasing significance as foreign direct investment by US TNCsgrew rapidly in the 1950s (Surrey 1956:827). Proponents of foreign investment argued for completeexemption, and several legislative proposals to this effect were made in the 1950s; but closer study showedthat the bulk of such investment was carried out by a small number of large corporations and mostly fromretained earnings, so that the most that could be politically justified was the limited deferral sanctionedunder existing rules.19 Congress rejected Kennedy Administration proposals to end deferral, but enacted theSubpart F provisions, which taxes the US shareholders of a CFC on their share of certain undistributedprofits, broadly within the category of ‘passive’ income (although this is defined by specific provisions ofthe statute and regulations). Paradoxically, however, the result was effectively to legitimize tax deferralwithin the parameters defined in Subpart F (which became the focus of subsequent lobbying and amendment),and to stimulate further the use of tax haven intermediary companies.

As public attention became focussed on the use made of tax havens, not only by ‘respectable’ businessbut by a variety of tax evaders including organized crime, political pressures grew to take action. Technicalanalysis also showed that the opportunities for tax arbitrage and evasion were distorting international

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investment flows. Provisions similar to those of the US have subsequently been introduced by most of theOECD countries: Canada (1971), Germany (1972), Japan (1978), France (1980), the UK (1984), NewZealand (1988) and Australia (1989).20 These define a CFC, in various ways, as an entity formed in a low-tax country and substantially owned by residents of the taxing state; and they deem the shareholders to beliable to tax on its ‘passive’ income. The effect is to introduce more precise rules defining when a foreignsubsidiary may be taxable, and on which of its unremitted income. The ownership limits for a CFC createavoidance potential; and the need to define ‘passive income’ legitimizes other activities as validly carriedout in low-tax havens (for example, transportation). It is significant that relatively little tax revenue has beenproduced in most of these states by these provisions.21 The move to CFC taxation was not directly co-ordinated internationally, although the OECD Fiscal Committee subsequently issued a report justifying itand discussing its limits (OECD 1987:II).

In contrast, the principles of transfer price evaluation have been discussed at length, first in the League ofNations Fiscal Committee, and more recently in that of the OECD. The League commissioned a majorstudy, financed by the Rockefeller Foundation, of the tax treatment in thirty-five countries of the allocationof international business income, co-ordinated by Mitchell Carroll. In the course of this study, Carrollvisited some twenty-six countries and met officials and business contacts made through the ICC. Themassive report Carroll produced (League of Nations, 1932, 1933) showed that national administrationsmostly assessed local branches and subsidiaries on the basis of their separate accounts, but asserted powersto adjust those accounts if they considered there had been ‘diversion’ of profits due to under—or over-pricing of transactions with related entities. Various criteria were used for such adjustments, including acomparison of profits or return on assets of the local entity with both other similar firms and as a proportionof the group of which it formed a part. However, it was considered impracticable to establish aninternational machinery or even criteria for a global method of assessment and allocation. The outcome wastherefore broad agreement on the ‘arm’s length principle’: that is, that the accounts of branches orsubsidiaries could be adjusted to ensure that their profits were those that would have accrued if theconditions between them had been those of independent enterprises dealing at arm’s length; this wasincluded in the model tax treaty, and became the corner-stone of transfer price treatment. The arm’s lengthrule is a classic example of a general principle; it provided legitimation for the allocation of costs andprofits between branches and subsidiaries of a TNC based on non-discrimination in comparison with purelynational firms. However, each state must have (and was given) the power to scrutinize and if necessaryadjust intra-firm prices; so the arm’s length rule merely postpones the need to agree on the basis for inter-state allocation. Rather than tackle the issue directly by trying to obtain international agreement for a globalapproach and a formula for apportionment, the arm’s length principle entailed relying on nationallegitimation processes, backed up by an administrative process for ad hoc resolution of problem cases bybargaining between the national officials and professional representatives of business.

This arrangement broke down when, as with tax havens, the issue of transfer pricing also becamepoliticized during the 1960s, as part of a more generalized debate about the power of ‘the multinationals’. Hereagain the US took the lead, again with pressures in Congress in 1962 that the Treasury and IRS should moreactively police the transfer pricing rules and make proposals for more specific regulations. Indeed, stricterenforcement had already begun, and business itself was anxious that the statutory powers of s. 482 of theTax Code should be spelled out in detailed rules. Eventually, regulations were agreed in 1968, and haveformed the basis not only for US practice, but also of an attempt to establish an internationally agreed set ofrules. This is clearly important, since unless there is co-ordination between states making such adjustments,double taxation will result. An evaluation of these efforts is not possible here (see Picciotto 1992: ch. 8).Briefly, the exertions of the OECD Fiscal Committee, the main body co-ordinating this process, have

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produced only a series of discursive reports. Not only has it proved impossible to agree specific rules, it hasbecome clear that, since what is at stake is essentially the definition and allocation of the tax base ofinternationally integrated corporate groups, the issue requires an international legitimation process.

The arm’s length principle, in combination with the other main principles of the model tax treatyoriginating in the pre-war debates, had resulted in establishing a normative legal framework for allocationof tax rights, the legitimation for which was left to national political mechanisms. The arm’s lengthprinciple has become ‘the hostage of the bilateral treaty network’ (Vann 1991:105), and the tax treatysystem itself has become inflexible. This implies a need to politicize the issues, to establish a newlegitimation basis for a more explicit allocation regime. However, national officials as well as businessrepresentatives and tax advisers are extremely reluctant to see this take place, since it would undermine theexisting processes of negotiated accommodation. Instead, there is an increasingly specialized and technicaldiscussion, largely dominated by US lawyers, since it is the US procedures and rules22 which are the mostelaborate, and which have the most cogency due to the importance of their application both to outwardinvestment by US TNCs and inward investment, rapidly growing in recent years, by foreign TNCs into theUS.

THE DYNAMICS AND IDEOLOGY OF INTERNATIONAL TAX PLANNING

When the question of ‘international double taxation’ first came into the public arena, it was treated as aproblem in the sphere of public finance, primarily the province of economists. Thus, the League of Nationsinitially set up a committee of experts, consisting of four eminent economists (Bruins, Einaudi, Seligmanand Stamp) whose report discussed tax allegiance, arguing that modern taxation was based on the ability topay which gave primary tax rights to the state of residence, but involved also other elements of allegiance(for example, the location of an activity) attributable to the state of source of the income. Before they hadreported, however, the issue had also been linked to that of capital flight and tax evasion, and a secondCommittee had been set up, of ‘technical experts’, consisting of government officials from Treasury orRevenue departments. This development was viewed with some suspicion by business representatives, whopointed to the overriding importance of facilitating free international capital movements; and theInternational Chamber of Commerce at its 1922 Congress condemned ‘all proposals attacking the freedomof exchange markets or the secrecy of banking operations’, although several members of the ICC’s FiscalCommission thought that the problem of evasion should not be ducked (ICC 1925). The Technical Experts(who became the Fiscal Committee) linked the proposed arrangements for prevention of internationaldouble taxation to the prevention of fiscal evasion also, and proposed provisions for mutual administrativeassistance in assessment and collection of tax. They emphasized that the combating of fraud would be for thegeneral good; but also acknowledged that it was important to avoid the appearance that the internationalarrangements for administrative assistance entailed ‘an extension beyond national frontiers of an organisedsystem of fiscal inquisition’ or an ‘organised plan of attack on the taxpayer’ (League of Nations 1927,1928). Ironically, it was precisely in such terms that, over sixty years later, a multilateral convention foradministrative assistance in taxation, drawn up through the OECD and the Council of Europe, wasdenounced by business groups and representatives. Largely due to this type of opposition, internationaladministrative co-operation in enforcement and collection of taxes has been minimal, and has taken asecretive and discretionary form.

As it became clear that international taxation was not just a policy issue which could be resolved by acomprehensive intergovernmental agreement, but opened up a whole field of administration and regulation,it became the province of officials on behalf of government, and of lawyers and accountants on behalf of

THE CONSTRUCTION OF INTERNATIONAL TAXATION 27

private clients. For the structuring of their networks of foreign companies and trusts, businessmen consultedlawyers, especially in centres such as New York and London where corporate legal practice had alreadybecome established since the late nineteenth century. Lawyers began to become involved also in the officialdebates and discussions, when bodies representing business were consulted, notably the ICC. The principlesand issues raised by international taxation became widely debated from the 1920s, increasingly in legal-technical terms. Two of the Experts on the first committee set up by the League of Nations to consider thematter, although themselves economists, were invited to give lectures at the prestigious Hague Academy ofInternational Law (Seligman 1927; Einaudi 1928).

Mitchell Carroll

One of the key figures in the development of international tax arrangements was Mitchell Carroll, who hasalready been mentioned. Carroll was in many ways characteristic of the US cosmopolitan liberal stratum ofbankers and lawyers of the 1920s and 1930s (van der Pijl 1984), yet at the same time he was an unusualfigure. In a memoir published in his eightieth year (Carroll 1978) he gave a highly personal account of hislife and work. After graduating from Johns Hopkins University in 1920 he chose to go to Paris to studyinternational law and French law, and also used his time in Europe to learn Spanish and German as well asFrench, and to obtain law degrees in both France (licence) and Germany (JD, Bonn). Returning toWashington, D.C., he was employed briefly in the law office of William C.Dennis specializing ininternational law, and then worked for the Department of Commerce while studying for his US law degreeat George Washington University. He had already decided to focus on the field of ‘international law ofimportance to corporations’, and from his contract with American businessmen he concluded that, withinthis, ‘the most lively subject was the foreign taxes on American business’ (Carroll 1978:25). He preparedpamphlets for the Department of Commerce on the taxation of American business in a number of Europeancountries, combining research visits to those countries with developing business and political contacts; forexample, he attended the 1925 Brussels Congress of the International Chamber of Commerce on behalf ofthe Zinc Institute. On a visit to Geneva (where he had spent a summer as a student) he learned from theLeague of Nations secretariat that the State Department had not replied to an invitation for the US toparticipate in the Committee of Technical Experts studying double taxation and fiscal avoidance (due to thepolitical opposition in Congress to the League). In Washington he gathered political and business support forsuch participation, and subsequently accompanied Professor Adams, the economic adviser to the Treasury,to the important meetings in 1927 and 1928, which resulted in the first model tax treaties. In 1929–30 hebecame involved with negotiations with the French government, following complaints from American firmswith French subsidiaries who had been subjected to French taxation on dividends distributed in the US, inthe same proportion that their assets in France bore to total assets. The outcome was the path-breaking US-French tax treaty.23

Carroll’s apotheosis came in 1931, when the League’s Fiscal Committee asked him to conduct acomparative study of taxation of international business. It was funded by a $90,000 grant from theRockefeller Foundation, and Carroll was to visit as many as possible of the thirty-five countries to whichthe Committee had sent a questionnaire, and discuss the compilation of the national responses by localofficials. While in Geneva he received an invitation to a ball given by the Assembly of the League, andhappened to be introduced to a young widow:

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I invited her to the ball and she was such a delightful partner that I decided to ask her to marry me. Ihad travelled alone round Europe again and again, and on my trip for the League I concluded she wassent by good fortune to convert incidentally my tax survey into a lune de miel.

(Carroll 1978:43)

They were indeed married a few months later and duly accomplished their international tax honeymoon(partly in his new wife’s ‘big Buick coupé’). They covered the US and Canada; Europe from Dublin toAthens; Egypt and India (‘we paused at Agra and beheld the stupendously beautiful Taj Mahal in the light ofa February full moon. Taxes seemed immaterial in such splendor’); and went through much of south-eastAsia (including Bali) to Japan. According to Carroll’s account, the Japanese officials were extremelycourteous and polite but quite unresponsive, and he himself prepared the Japanese report, based on inquiriesat the US embassy and among US firms. Returning home, via Hawaii, Mexico and Cuba, he spent thefollowing spring and summer synthesizing the report, which was indeed a seminal document, especially inestablishing the ‘arm’s length’ principle for evaluation of intra-firm transfer prices (League of Nations 1932,1933; see Picciotto 1992: ch. 1.5).

From 1933 Carroll practised as a lawyer in New York, where the contacts and knowledge he had gainedproved invaluable in negotiating solutions to difficult international tax problems for various TNCs, andacted as lobbyist or advocate for business groups, supporting tax treaties, defending tax relief arrangementssuch as the foreign tax credit, and helping to devise new ones such as the Western Hemisphere TradeCorporation. In the meantime, he had succeeded Professor Adams in 1934 as the US member of theLeague’s Fiscal Committee,24 and in fact chaired the Committee from 1938 to 1946, bequeathing from its worka report containing a consolidated version of the model tax treaties with an explanatory Commentary, whichformed the basis of the rapid post-war growth of a network of double tax treaties. He also helped to foundthe International Fiscal Association, and in 1939 was elected its first President, which he remained until1971. As Carroll puts it, the IFA has provided a major forum for ‘an exchange of ideas contributed by alltypes of fiscal advisers, officials, corporate executives, lawyers, accountants, professors, and students of theinternational aspects of taxation’ (ibid.: 88), although undoubtedly the dominant voice has been that of theprivate professionals. Carroll explains that he was able to accept nomination as its president while servingas chairman of the League committee ‘Because I was a private citizen and no conflict was involved—bothorganizations being dedicated to promoting the same objective’ (ibid.: 90). For some thirty years he seemsto have followed a pattern of crossing to Europe by Italian or French boat, and visiting clients en route tothe venue of the annual IFA conference, where he enlivened his presidential address by reciting taxvariations on student parodies of familiar verses by Lamartine, Heine, Lorenzo de’i Medici, Cervantes andVirgil.25 He also chaired the International and Comparative Law committee of the American BarAssociation at the time of the Dumbarton Oaks and San Francisco meetings to found the United Nations(while also acting as consultant to the State Department on international tax), and organized meetings invarious mid-West cities to explain the proposals and try to develop a more internationalist perspectiveamong rank-and-file ABA members.

Carroll was clearly an old-style ‘gentleman lawyer’, whose tax practice appears to have consisted ofhelping to resolve major anomalies and difficulties experienced by large TNCs, such as Unilever, MorganGuaranty Trust and ITT. The notable examples of such cases which he himself recounts generally involvedinterceding directly with governments, including persuading negotiators to include provisions in pendingtreaties to resolve the issue in question (ibid.: 113–15). He speaks of his role as that of intervening on behalfof his clients in order to put a rational solution to the state officials, if necessary finding a practical formulathat could bypass the rigid bureaucratic application of a rule which had produced the unreasonable or

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anomalous decision which required rectification. While one clearly cannot take the cases he mentions asbeing necessarily representative of his daily work, given the period in which he practised and his culturalstyle it is hard to imagine him operating in one of today’s bureaucratized law firms working on tax-drivendeals such as double-dip leasing or complex currency/interest-rate swaps. Nevertheless, this is the world whichhe helped to create, both ideologically and in consequence of the regulatory arrangements which he helpedto devise.

Mediating between business and the state

Carroll’s career demonstrates in particular the key role of the professional in mediating between privateinterests and public policy expressed through the state. The apparently objective and independent status ofthe professional allows a person such as Carroll to act simultaneously as a ‘consultant’ for the StateDepartment, a ‘national expert’ on the League’s Fiscal Committee, and a private practitioner advocating theinterests of business firms. This role is underpinned by the important, or even dominating, role ofprofessionals in the ideological activities of associations, both those which are explicitly organizations ofbusiness groups, such as the ICC, as well as the more broadly based specialist institutions such as the IFA.Their national associations, international committees and periodic international assemblies bring togetherthe specialists, both in-house corporate officers and private professionals (whether lawyers or accountants),for discussion meetings, education sessions and mainly informal lobbying. Conducted in technical terms,the dominant concern of most of the discussions is the minimization of the tax burden on business.Although academics and even government officials are involved, at least in the specialist organizations, it isgenerally in a subordinate or even servile role.

Nevertheless, although public officials and private practitioners may share a common technicalvocabulary and ideology, they maintain a sense of the different interests they represent. The symbioticassociation of government officials and corporate lawyers has the characteristics of any poacher-gamekeeperrelation, but with special features due to the specifics of the regulated field involved. A primary advantageof private practitioners is their control of information, both of the latest techniques and of their clients’transactions. This can be used to keep a jump ahead of the enforcers in the development of new manoeuvres;but perhaps more important, it means that the state officials must undertake some level of consultation andeven negotiation in introducing new rules or taking an enforcement initiative, to ensure that it does not haveunforeseen undesirable consequences and will work effectively. There is an underlying common interest ina stable and functioning regulatory environment, which is facilitated by the existence of various forums forthe development of a shared professional ideology: meetings, associations, journals. Movement ofindividuals is also common, although normally the career trajectory is from the government to the privatesector. This again reinforces the private practitioner’s domination of knowledge production.

State officials acting as regulators or rule-enforcers have the advantages of access to state power, toinitiate enforcement action, or the promulgation of new rules, referred to as the monopolization oflegitimate symbolic violence by Bourdieu (1986:3). While this gives them a power of initiative in thepolitical field, the political processes of legitimation also constitute a contested arena, in which those witheconomic power have considerable political influence too. Moreover, there is an important interactionbetween the political and legal arenas, since political action takes the form of the enforcement orpromulgation of rules. Hence, as mentioned above, there is an important common interest in preventingunpredictable undesirable effects and ensuring functional operability. It is here that lawyers are involved, informulating proposals for legislative amendments, briefing papers and other technical-legal roles essentialto political lobbying.

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Another important advantage of the private professionals is their national opportunism. State officials aretied to a specific national state bureaucracy and hampered by its often rigid hierarchies, divisions ofpolitical and administrative competences. and strict protocol; and although intergovern mental statestructures have been important and should not be under-estimated,26 they are restricted by the stillessentially national orientation of legitimation processes, sometimes referred to as national ‘sovereignty’.Instructively, means have been found of developing more functional processes of co-ordination of stateadministration, usually through semi-formal channels circumventing some of the limitations ofintergovernmental diplomacy. Private parties, however, both business enterprises and their professionaladvisers, are able not only to exploit the various disjunctures of national state policies and instrumentalities,but most importantly, to develop these disjunctures to their advantage.

This is perhaps the central lesson of the extended example I have provided, of international taxation. Theambiguities of the key central rules (relating to the definition of the legal subject of taxation and theallocation of revenues between subjects) create an arena of contested legitimation, also due to nationaldifferences and disjunctures. A common theme in the ideology used to justify international tax avoidance,for example by making use of tax havens, is that the problem lies not with the havens’ (lack of) regulations,but in the inappropriate, ineffective or unfair character of the regulations being avoided. Thus, LuigiEinaudi, who was one of the economists who authored the report for the League of Nations in 1923, arguedthat the existence of haven states puts pressure on others whose taxes are badly administered to make theirtaxation fairer (Einaudi 1928: 35–6). It was much later, as outlined above, that international tax planningdeveloped the techniques which enabled TNCs to minimize their global tax liability on retained earnings.Their defenders or apologists argued that this was a legitimate measure to average international tax rates, orreduce them as far as possible to the lowest rather than the highest rates (Bracewell-Milnes 1980). Mostcommonly, the tax avoidance or ‘tax planning’ functions of practitioners is ideologically legitimized by aconspiratorial, deprecatory humour about the evil of taxes.27

Finally, the professionals did not merely take advantage of existing disjunctures or inadequacies ofinterstate co-ordination: they have themselves played an active role in developing them. They frequentlyoffer, or are called upon for, help in designing the legal and administrative facilites of ‘off-shore’jurisdictions: for example, a British tax lawyer amended the trusts law of the Cayman Islands in 1967 to avoidchanges in the ‘power to enjoy’ rules enacted in British law; while in 1976 the same islands reinforced theirbank secrecy laws on American advice following the decision of the US district court in the Field case(1976). One of the main motivating factors for states which have developed convenient legal andadministrative regimes for use as ‘havens’ has been the importance of fomenting or developing a ‘financialservices sector’. The justification in terms of job-creation is generally rather thin, in quantitative terms; butthe benefits are undoubtedly substantial for the professional sector, often aided in this aim by benefits (notalways legitimate) which it can offer to helpful politicians.

NOTES

1 For example, in the United States, in administering wartime taxation of ‘excess profits’: Brownlee (1989:1617–18).

2 Calcutta Jute Mills v. Nicolson; Cesena Sulphur v. Nicholson (1876). However, tax rates were low, and since theincome tax was a single tax, companies were permitted to deduct at source the tax due on dividends paid to (andtaxed as the income of) shareholders and credit the amounts against their own liability; the only potential loserswere foreign-resident shareholders who were thereby obliged to pay UK taxes. But in the 1876 cases the Britishcourt said (with an imperial arrogance which is hard to imagine today) that if foreigners wished to place their money

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in London, they ‘must pay the cost of it’. In contrast, in 1984 Britain (in a joint move with the US) introduced anexemption for non-residents from withholding tax at source for interest on quoted Euro-bonds. Although thisfacilitates evasion by such non-residents of their home-country tax, it was considered necessary if London and NewYork were to continue to compete as international finance centres with offshore havens.

3 Income from a trade is Case I of Schedule D, income from securities is Case IV, and possessions Case V; mostincome falling within the latter two become taxable on the arising basis after 1914.

4 The issue is still of interest and the subject of legal reconstruction: see Sheridan (1990); Booth (1986).5 Thus, the Revenue lost an attempt to tax the entertainer David Frost who in 1967 set up a foreign partnership with

a Bahamian company to exploit interests in television and film business outside the UK (mainly his participationin television programmes in the USA); the courts rejected the view that the company was a mere sham to avoid taxon Frost’s global earnings as a professional, since the company and partnership were properly managed andcontrolled in the Bahamas and their trade was wholly abroad: Newstead v. Frost (1980); until 1974 income derivedby a UK resident person from the carrying on of a trade, profession or vocation abroad was taxable under Case Vonly on remittance: ICTA 1970, s. 122 (2)(b) repealed by FA 1974, s. 23.

6 These become ICTA 1970, s. 482, and an important vestige still remains in ICTA 1988, s. 765. The Revenue issuedrules for general consents, and applications for special consent were made to the department of the Chief Inspector(Company Residence). Applications, except in straightforward cases, were referred to an outside advisory panel,sitting in private (although allowing the attendance of the applicant’s representatives), whose task was to weighthe advantages to the applicant against the prospective loss of revenue and foreign exchange, and to recommendto the Chancellor whether it would be in the national interest for permission to be granted (Simon 1983–, para.D4.119).

7 The position was further complicated by tax treaties, since in cases where a company is treated as resident by bothtreaty partners, the treaty definition of residence applies. Britain’s older treaties defined residence as where thebusiness was ‘managed and controlled’, while later treaties used the test in the OECD model, of ‘place of effectivemanagement’. Although for a while the UK view was that the two terms were synonymous, the Revenuesubsequently accepted that in the light of interpretations in other OECD countries, a difference existed (seeStatement of Practice 6/83, reissued as amended as SP 1/90).

8 The seat is the registered head office, which for a company formed under German law must be somewhere inGermany. The tax statutes of the various German states preceding this law, dating back to the Prussian Income TaxLaw of 1891 which established the liability of corporations to income tax, were based only on the company’s seat(Weber-Fas 1968:218).

9 Ibid.: 240, provides a translation of some of the main decisions of the German tax courts on this provision; see alsoWeber-Fas (1973).

10 Steueranpassungsgesetz s. 15, Reichsgesetzblatt 1934–I, p. 928.11 Reichsfinanzhof Decision III 135/39 of 11 July 1939, translated in Weber-Fas (1968:246).12 Thus, in a case where the parent company co-ordinated four subsidiaries which operated railways, supplying them

with rolling stock, and generally managing their financial, legal, investment and administrative activities, itsoperations were held to constitute representation of the group to the outside world, and thus of a different type fromthe actual business carried on by the affiliates themselves (Decision of the Reichsfinanzhof of 1 April 1941, I290/40: [1942] Reichssteuer-blatt p. 947).

13 Major changes were made in the 1980s to taxation of business carried on in the US through corporations formedabroad (often in tax havens such as the Netherlands Antilles), culminating in changes to the source of income rulesand a new ‘branch tax’ introduced by the Tax Reform Act 1986.

14 Both countries also enacted tax concessions for foreign investment: in the US the Western Hemisphere TradeCorporation, although enacted in 1942 to encourage foreign investment, was instead more used for the unintendedpurpose of exports (Surrey 1956:832–8); despite strong arguments for its abolition, Congress-found that this wouldupset established patterns of trade, and instead widened the exemption to create the Domestic International SalesCorporation (DISC) in 1971, and later the Foreign Sales Corporation (FSC). The UK from 1956 to 1965 providedexemption for the special category of Overseas Trade Corporations.

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15 See Johns (1983:85); Pocock (1975:62–7); Public Record Office file IR 40/ 7463.16 This loophole was partly blocked by Finance Act 1969, s. 33.17 Although the position was substantially restored legislatively in 1981 (Finance Act 1981, ss. 45–6, now ICTA 1988,

ss. 739–41) the liability of beneficiaries other than transferors became limited to the benefits actually received andnot the entire income from the transferred assets (Sumption 1982: ch. 7).

18 Representations made to the Foreign Office, and used to overcome Treasury objections to the US tax treaty (PublicRecord Office file FO371/38588). The US IRS since 1928 (Revenue Act, s. 45) had had powers to adjust suchtransfer prices to prevent this type of evasion which, judging by this evidence, was less than fully effective.

19 Exemption was argued by the IDAB’s Rockefeller Report Partners in Progress of 1951, and the EisenhowerAdministration put proposals to Congress in 1953–4. However, economists have generally argued that deferraldistorts investment decisions (Alworth 1988), although studies for the US Treasury pointed out that it is difficultto isolate the advantage for investment abroad without consideration of the lower effective marginal tax rateproduced by other subsidies on domestic investment (Hufbauer and Foster 1977).

20 For a detailed comparison of the measures of the first six, see Arnold (1986).21 See Picciotto (1992: ch. 7) for a more detailed evaluation.22 Such as the new proposals for s. 482 regulations, published in early 1992, six years after the amendment to s. 482

in the 1986 Tax Reform Act on which they are based, and following four years of debate of the famous White Paperof 1988 (US Treasury 1988).

23 This was drafted in 1930 (Carroll, being the only participant in the negotiations who spoke both English and French,played a key mediating role) but not signed immediately due to French business pressures; according to Carroll,the Counsellor in the US Paris embassy obtained the signature of the French Minister of Finance in 1932, in exchangefor a US favour which the latter had requested (Carroll 1978:41). The treaty was not ratified by France until 1934,after the US Congress had passed a provision authorizing retaliation against residents of countries imposingdiscriminatory or extraterritorial taxes.

24 Although the US was not a member of the League, since this was a committee of experts it was able to nominatean individual, who was then appointed by the League to the Committee.

25 For example, his ‘Odyssey of Five Decades in Developing International Tax Law’ begins:

Of payers and imposers of taxes I singWho fight ‘evils’ of double taxationBy limiting tax to one place and one timeTo obviate confiscation.

26 For example, political scientists who deride the political limitations of the League of Nations usually ignore itsimportant role in tax matters, discussed above.

27 To take a typical example, Carroll (1978:97) remarks that the 1950 Congress of the IFA ‘was held in the ideal cityfor discussing tax problems arising out of devaluations, namely, Monte Carlo, which imposed no income tax’.

REFERENCES

Airs, G.J. (1992) ‘EEC direct tax measures’, in Tolley’s Tax Planning, Croyden: Tolley Publishing.Alworth, Julian S. (1988) The Finance, Investment and Taxation Decisions of Multinationals, Oxford: Basil Blackwell.Arnold, Brian J. (1985) ‘The taxation of controlled foreign corporations: defining and designating tax havens’, British Tax

Review, 286–305; 362–76.—— (1986) The Taxation of Foreign Controlled Corporations: An International Comparison, Toronto: Canadian Tax

Foundation.Ashton, R.K. (1981) Anti-avoidance Legislation, London: Butterworths.Booth, Neil D. (1986) Residence, Domicile and UK Taxation, London: Butterworths.

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Bourdieu, Pierre (1986) ‘La force du droit: elements pour une socioligie du champ juridique’, Actes de la recherche ensciences sociales, no. 64: 3–19.

Bracewell-Milnes, B. (1980) The Economics of International Tax Avoidance: Political power versus economic law,Deventer: Kluwer.

Brady, S. (1991) ‘The Banks’ new money machine’, Euromoney, December: 27.Brownlee, W.Elliot (1989) ‘Taxation for a strong and virtuous republic’, Tax Notes, 25 December: 1613–20.Carroll, Mitchell B. (1978) Global Perspectives of an International Tax Lawyer, Hicksville, N.Y.: Exposition Press.Dewhurst (1984) ‘Getting the measure of s. 482’, British Tax Review, 282.Dezalay, Yves (1991) ‘Marchands de droit: L’expansion du modèle “americain” et la construction d’un ordre juridique

transnational’, Travaux de recherche, no. 3, CNRS, Centre de Recherche Interdisciplinaire de Vaucresson.Eburne, Andrew (1991) ‘Accountants and lawyers heading for a showdown’, International Financial Law Review,

May, 15–18.Einaudi, Luigi (1928) ‘La cooperation internationale en matière fiscale’, Académie de Droit International, La Haye,

Receuil des Cours, 25:1–123.Hufbauer, Gary and Foster, David (1977) ‘US taxation of the undistributed income of controlled foreign corporations’,

in US Treasury, Essays in International Taxation, Washington, D.C.: US Government Printing Office.ICC (International Chamber of Commerce) (1921) Double Taxation: Report of Select Committee to First Congress,

Brochure no. 11, Paris: ICC.(1925) Report of 3rd Congress (Brussels), Group Meetings. Paris: ICC.Johns R.A. (1983) Tax Havens and Offshore Finance: A Study of Transnational Economic Development, London:

Frances Pinter.Landwehrmann, Friedrich (1974) ‘Legislative development of international corporate taxation in Germany: lessons for

the United States’, Harvard International Law Journal 15: 238–97.League of Nations (1923) Economic and Financial Committee. Report on Double Taxation Submitted to the Financial

Committee, 5 April. Document EFS.73.F.19.—— (1927) Double Taxation and Tax Evasion. Report by the Committee of Techni-cal Experts, April. Document C.

216.M.85. 1927II.—— (1928) Double Taxation and Tax Evasion. Report by the General Meeting of Governmental Experts on Double

Taxation and Fiscal Evasion, Geneva. October. Document C.562. M.178. 192811.—— (1932) Taxation of Foreign and National Enterprises, vol. 1: France, Germany, Spain, the UK and the USA, Doc.

no. C.73.M.38, 1932II A 3, Geneva: League of Nations.—— (1933) Taxation of Foreign and National Enterprises, vols 2 and 3; and Methods of Allocating Taxable Income,

vol. 4, Doc. no. C.425.M.217 1933II A 18, Geneva: League of Nations.OECD. Committee on Fiscal Affairs (1987) International Tax Avoidance and Evasion: Four Related Studies, Issues in

International Taxation, no. 1, I: Tax Havens: Measures to Prevent Abuse by Taxpayers; II: Double TaxationConventions and the Use of Base Companies; III: Double Taxation Conventions and the Use of ConduitCompanies; IV: Taxation and the Abuse of Bank Secrecy, Paris: OECD.

Page, Nigel (1991) ‘Taxing times: quality vs quantity?’ Legal Business Magazine, July/August: 18–24.Picciotto, Sol (1992) International Business Taxation, London: Weidenfeld and Nicolson.Pocock, H.R.S. (1975) The Memoirs of Lord Coutanche: A Jerseyman Looks Back, London and Chichester: Phillimore.Seligman, Edwin R.A. (1927) ‘La double imposition et la cooperation fiscale’, Académie de Droit International de la

Haye, Receuil des Cours, 20: 463–603.Sheridan, Denis (1990) ‘The residence of companies for taxation purposes’, British Tax Review, 78–112.Simon (1983–) Simon’s Taxes, rev. 3rd edn (loose-leaf, with updating service), London: Butterworth.Sumption, A. (1982) Taxation of Overseas Income and Gains, 4th edn, London: Butterworth.Surrey, S.S. (1956) ‘Current issues in the taxation of corporate foreign investment’, Columbia Law Review, 56: 815.Tax Institute (1960) Taxation and Operations Abroad, symposium conducted at the Tax Institute, Princeton, New

Jersey.US Treasury Department (1988). ‘A study of intercompany pricing’, discussion draft (the White Paper).

34 SOL PICCIOTTO

van der Pijl, Kees (1984) The Making of an Atlantic Ruling Class, London: Verso.Vann, R.J. (1991) ‘A model tax treaty for the Asian-Pacific region?’, Bulletin for International Fiscal Documentation,

99–111; 151–63.Weber-Fas, Rudolf (1968) ‘Corporate residence rules for international tax jurisdiction: a study of American and German

law’, Harvard Journal on Legislation, 5: 175–251.(1973) Internationale Steurrechtssprechung. Die Entscheidungen des Reichsfinanzhofs und Bundesfinanzhofs zum

Recht der Deutschen Doppelsteuerungsabkommen, Cologne: Carl Heymanns Verlag.Yerbury, Paul D. (1991) ‘Tax developments: United Kingdom’, International Business Lawyer, January: 32.

TABLE OF CASES CITED

Aiken Industries Inc. v. Commissioner (1971) 56 T.C. 925.Calcutta Jute Mills v Nicholson; Cesena Sulphur v. Nicholson (1876) 1 T.C. 83, 88.De Beers v. Howe [1906] A.C. 455.Factor v. CIR (1960) 281 F 2d 100; cert.den. (1961) 364 U.S. 933.In re Grand Jury Proceedings, US v. Field (1976) 532 F. 2d. 404.Newstead v. Frost [1980] 1 W.L.R. 135. H.L.Perry R. Bass v. Commissioner (1968) 50 T.C. 595.Vestey v. IRC [1979] 2 All E.R. 225; affd. [1979] 3 All E.R. 976.Vestey’s Executors v. IRC (1949) 31 TC 1.

THE CONSTRUCTION OF INTERNATIONAL TAXATION 35

Chapter 2Calculating corporate failure

Peter Miller and Michael Power1

Corporate failure has neither the objectivity nor the immutability often attributed to it. Of course, it ispossible to measure and chart the volume or rate of corporate failures, and this can be taken as an indicationof recovery or decline for the economy as a whole. Moreover, the failure of individual companies clearlycan have devastating consequences for individuals, families, and even entire towns and regions. But,important as these dimensions of corporate failure are, it is more than a given statistical event or personalexperience. The intense criticisms of the financial reporting function that often follow major corporatefailures frequently miss the point, in so far as such criticisms appeal to corporate profitability and assetstrength as an underlying economic reality that has been hidden from view. The moment of corporate failureis more complex than such ‘realist’ appeals would suggest. For corporate failure is itself constituted out ofan assemblage of calculative technologies, expert claims and modes of judgement. Accounting does notfunction here as a mirror that reflects an underlying economic reality, one that law has only to acknowledgeand regulate. Rather, the calculative technologies of accounting provide financial norms around whichcomplex processes of negotiation of domains and outcomes can take place.

The calculation of corporate failure has a significance for liberal societies that goes beyond theconstitution of a domain to be governed and a technology that makes this possible. Such societies mustdevise a balance of arrangements in which companies can be allowed to fail according to the rules of themarket game, while there must also exist orderly and equitable arrangements for the regulation andsatisfaction of residual claims on the failed entity. The philosophy of ‘level playing fields’ demands suitablearrangements for dealing with injured players:

…it is essential to free market competition that only the fittest survive and that the unfit and theunlucky fail… Equally, it is important that bankruptcy law be used sparingly to recover as much aspossible for creditors where an individual is genuinely beyond redemption, and not be available foraggressive creditors to oppress an individual in temporary difficulties over a modern debt.

(Clarke 1986:140)

Despite the varied state preoccupations with corporate failure, the precise conditions of entry to,performance in and exit from the corporate domain highlight a general problem for liberal mentalities ofgovernment: how to administer activities made possible by complex interrelationships between differentorders of claimant in such a way that economic and social life is not unduly damaged by the workings of themarket, and yet to do so without giving rise to a limitless expansion of the domain of political intervention.That is, a governmental concern with corporate failure focuses attention on the issue of how to enact aprinciple of limitation that can be applied to governmental actions, such that things will occur for the best,in conformity with the rationality of government. As Michel Foucault has rather elliptically expressed it, ‘if

one governed too much, one did not govern at all’ (Foucault 1986:242). For government has to deal withcomplex and independent realities such as society and the economy that have their own laws andmechanisms which cannot be completely penetrated by regulatory mechanisms. Not only is it unnecessaryto seek to govern too much, since economic processes contain their own intrinsic mechanisms of regulation,but it is harmful in so far as it is likely to give rise to effects other than those desired (Burchell 1991:126).2

The calculative expertise of accountancy operates today as a way of seeking to resolve this problem ofliberal government. The recognition of a realm of potentially ‘private’ knowledge, one that government isobliged to acknowledge in its own interests, opens up a space for the calculative technologies ofaccountancy to occupy. A principle of limitation of the domain of political intervention can be reconciled,by calculative expertise, with a recognition of the decisive political significance of formally privateactivities. Calculative expertise is constituted as an art of government of the economy within a problematicof government that makes the finitude of the state’s power to act an immediate consequence of thelimitation of its power to know (Gordon 1991:16). It is into this opening between governmental rationalitiesand economic knowledge that accountancy has inserted itself as a way of objectifying and intervening in anaspect of economic life that is intrinsic to liberal modes of government.

This dual requirement of a general limitation of governmental intervention, together with an obligation togovern, is none the less a particularly difficult challenge for liberal rationalities of government (Miller andRose 1990). For corporate failure sharply highlights this dilemma and gives rise to a whole series ofpotential problematizations of liberal rationalities. Here, the harshness of an economy left to the play offormally private forces is most vividly exposed. Here also, logics other than those of the market aredemanded and sometimes brought into play, whether these be government subsidies, indirect governmentsupport for regions and industries, supra-national mechanisms, state-centred systems of welfare andinsurance, and much else besides. In cases of corporate failure, and especially at those moments when thesebecome more numerous, the boundaries and limits of liberal modalities of government are given clearestpractical expression, albeit in a variety of ways.3 And pragmatic difficulties can rise in the administration ofcorporate failure, for instance when there is public criticism over the fee levels of insolvency practitioners,the agents of regulation of corporate failure in the UK, due to the contrast between the fate of ‘innocent’depositors and investors and the earnings of these financial experts.4

Corporate failure is thus a particularly acute problem for liberal mentalities of government, in so far asmechanisms are required for administering the collapse of contractual relations, yet these mechanisms haveto remain firmly in the domain of the ‘private’ economy (Castel 1976). It is here that calculative expertisefinds its true vocation. In the UK, the ascendancy of the know-how of the accountant expressed not simplythe rationality of the enterprise (Montagna 1990) but also a particular rationality of government, one inwhich the figure of the expert, operating ‘beyond good and evil’ and formally separate from the state, hascome to play such a valuable role (Rose and Miller 1992). In certifying, adjudicating and intervening ininstances of corporate failure, the calculative expertise of accountancy has sought to remove such eventsfrom the controversial and conflicted terrain of politics, and to place them firmly on the calm yet beguilingterritory of truth; calm because the products of accounting calculations have the aura of objectivity,beguiling because the truths of accounting are subject to market forces like any other commodity.

Corporate failure is constituted and administered within and through the complex of interrelations formedbetween these competing demands and aspirations, and on a territory made up through competition andconflict between agents, opinions and know-how. We need to be attentive to this ‘pragmatic’ dimension ofthe domain of corporate failure (Boltanski and Thevenot 1991). We need to address the devices andmechanisms through which particular agents construct and impose an order upon an otherwiseindecipherable flux of events, as well as the discursive realm within which are set out the ideals and

CALCULATING CORPORATE FAILURE 37

aspirations of particular ways of governing. Corporate failure has no existence independent of thisassemblage of ideas and interventions, and of the territories within which it is enacted. Whilst theadministration of such territories and the events that populate them take varying occupational forms indifferent countries, particularly in terms of the relative functions of lawyers and accountants, it is not thedemarcations between formally separated and legitimated bodies of expertise that is of central importance.5Rather, it is the interplay between calculative technologies, expert authority and judgement, and politicalrationality that is decisive in the administration of corporate failure.

For the specific calculative technologies of accountancy have no natural locale, they can operate just asreadily within the territory of the accountant, the lawyer or other hybrid domains of corporate expertise.Moreover, failure as much as success can be constructed by the ‘creative’ technologies of accountancy,thereby defining the terms in which claimants on the resources of the enterprise can articulate and pursuetheir interests. By examining the roles of specific calculative technologies with an assemblage of diversecomponents, we can begin to understand pronouncements of corporate failure as a particular moment withinthe liberal government of economic life.

The calculation of corporate failure can be analysed in terms of three principal moments. First, itconcerns the strategies for financial representation of corporate performance prior to failure, and the searchfor adequate definitions of success and failure within the economic system. Second, it is a question of thearrangements for those companies which, having been pronounced as failed, enter an administrative systemfor the efficient satisfaction of claimants’ rights on the assets of the business. These two moments are linkedby a ‘politics of knowledge’ in which the rules of exit from the economy are constructed and linked toinstitutional arrangements for dealing with failed companies. There is a third, hybrid case in which acompany that is unable to pay its debts is subject to rescue and reconstruction prior to the machinery foradministering corporate failure being brought into play. Since the actors in this market for corporatediagnosis and cure overlap in significant ways with insolvency practice, corporate failure cannot beadequately understood without consideration of this third case, and of the various forms of expertise thatsurround it. As a way of illustrating these different moments of corporate failure, let us consider first, bymeans of an example, the negotiability of corporate failure.

THE NEGOTIABILITY OF CORPORATE FAILURE

The negotiability of corporate failure is illustrated clearly by the recent case of Brent Walker PLC in the UK.This example confirms the well-known adage that if a person owes the bank £1,000 then that person is introuble, but if the amount is £1,000,000 then it is the bank that has a problem.6 To put the point another way,scale has a significant bearing upon the incentive structures within which the calculation of corporate failuretakes place. Such calculations are likely to bear a complex relation to the attitudes, expectations and actionsof the claimants on a ‘failing’ company’s assets.

Brent Walker expanded rapidly in the corporate environment of the 1980s via a series of acquisitions, thelargest being the bookmakers William Hill. This growth was founded upon a complex network of bankloans. In autumn 1990, difficulties in servicing these loans became apparent and, as the company was‘technically insolvent’ in the sense of liabilities exceeding assets, the possibility of receivership, wherebysome of the major banks would seek to recover their security, was likely. However, two of the businesses inthe Brent Walker group, the pubs and betting offices, were trading profitably and this created the ‘window’through which an escape from receivership might be possible.

The complexity of the various creditors of Brent Walker, with whom any rescheduling and restructuringof debt would need to be agreed simultaneously, was potentially prohibitive for any such rescue plan. There

38 PETER MILLER AND MICHAEL POWER

were nearly sixty main bank lenders with different levels of exposure and security on the loans. Thisnetwork had arisen during a period when banks were competing internationally to lend money at theexpense, so it is argued, of more considered assessments of the security for such loans. Indeed, the level ofcorporate collapses in the UK in the early 1990s has been accompanied by extensive criticisms of banklending policies, triggering well-worn debates on the role of the mechanical as opposed to the discretionarydimensions of lending policy. Indeed, the first moment of calculating corporate failure described above isconstituted by a network of institutions, and their demands for rational and routine forms of ‘creditknowledge’ as a basis for financing economic expansion.

The rescue of Brent Walker has been described as the ‘largest in UK corporate history’ involvingcomplex negotiations with creditors whose perceived position depended upon the likely actions of others.7Calculation played a central role in this elaborate brokerage: ‘Throughout the process, banks werecalculating whether they would be better off approving a refinancing or calling in a receiver.’8 Therestructuring was conducted for each claimant against background calculations of likely gains fromreceivership as compared with the option of rescue and some form of dilution of the strength of existingclaims. In this respect, the most sensitive group of claimants were the large bondholders who were facedwith the choice of initiating receivership or converting secured debt into some form of equity interest.Because the cost-benefit calculations of each bank necessarily included expectations about the behaviour ofother banks, teams of corporate advisors sought to advise, mediate and crystallize their actionssimultaneously. Calculation and negotiation were intimately related in the reconstruction of these financialclaims.9

The idea that corporate failure, far from being an objective state of affairs, is constructed within anetwork of economic calculations, expert interventions and negotiation may appear counterintuitive. But theexample of Brent Walker provides clear evidence of this. For in the UK contest, corporate rescue emergesat the threshold of legal arrangements for insolvency, and of a market that is conventionally seen todetermine the ‘reality’ of corporate survival. In such an arena, accounting functions as part of a strategy forpersuading creditors to realign their interests. It is in this intermediate space at the gateway to insolvencylaw that accountants as expert ‘calculators’ compete in the market for corporate advice with lawyers,consultants and other specialists, a market characterized increasingly by narrow professional attention to thefacilitation of transactions regardless of broader social purposes (Dezalay 1990). Here, the calculativetechnologies of accountancy trigger legal processes, and provide the knowledge of those processes that lawcomes to administer after the event.

Regarding the first moment of corporate failure described above, the financial representations prior to theconstitution of failure are varied, dispersed, and not solely the domain of the professional accountant. Whilefinancial statements are an important centre of gravity for this activity, secondary calculations havedeveloped and been widely institutionalized in the form of analyses of significant ratios. In this domainaccounting numbers, if not accountants themselves, play a role in the emergence of credit analysis and otherbodies of analytical knowledge. The prediction of corporate failure is the more or less explicit ideal of suchcalculative technologies. In the next section we consider the emergence and institutionalization of thiscalculative technology of ratio analysis as a basis for defining the moment of corporate failure. We arguethat the hopes invested in ratio analysis as a quasi-scientific predictive technology obscure the fact that suchratios become internalized by corporate stakeholders and form an important basis upon which perceptionsof health and sickness are made. Furthermore, ratio analysis is a form of abstract knowledge in Abbott’s(1988) sense, and has not generated or been incorporated within the relatively bounded enclosures that sooften characterize the intensification and defence of the powers of particular bodies of expertise (Rose andMiller 1992:188). Ratio analysis has operated within diverse professional territories, and has been mobilized

CALCULATING CORPORATE FAILURE 39

in diverse strategies for the government of economic life. Thus there have been very specificinstitutionalizations of ratios for regulatory purposes. For example, in the regime for defining andcontrolling the ‘capital adequacy’ of financial institutions, accounting numbers feed into ratio calculationsas norms which define matters such as solvency. We consider this example further below.

Once the moment of failure has been pronounced and certified it may, but not always as the example of BrentWalker shows, enter the second phase of administrative arrangements. In contrast to the first moment, thesearrangements are normally closely regulated by law. However, control of this administrative process isvaried; in the UK it is dominated by the insolvency practices of the ‘Big Six’ firms of accountants whoseactivities straddle both the legally created market for insolvency administration and the extra-legal marketfor corporate rescue. In the former, creativity is a breach of regulatory duty, in the latter it is a competitivenecessity. In the next section we briefly consider the nature of these arrangements, not only as the expert‘certification’ of events, but also in a broader sense as the basis for the governance of a particular momentof economic life. By coming within the legal machinery for insolvency management, the failure of acompany is ‘authorized’, and further calculative technologies are set in motion under the control ofinsolvency practitioners. The role of these practitioners is a complex one within a liberal economic system,for it is a contradictory mixture of regulatory agent for the state and private sector entrepreneur.

The calculation of corporate failure requires and inspires a vast and heterogeneous labour ofaccumulation and tabulation of numbers. Events and phenomena are transformed into information of a typesuitable for linking diverse economic claimants to regulatory programmes. Just as the point of failure of thehuman body is reciprocally linked to a medical expertise that has sought constantly to know and define, aswell as pronounce, the ‘moment of death’, so too is the failure of the corporate body a comparable matter ofcalculative expertise. Indeed, in the publication of documents such as Company Pathology by County NatWestin 1991, and the associated use of terms such as ‘company doctor’, the parallels in vocabulary are obvious.From this point of view, the insolvency practitioner has as distinctive an occupational position as themortician but with the important exception that resurrection is, in unusual cases, a possibility. Indeed, to theextent that insolvency practitioners do not simply represent ‘financial distress’ but enact a complexdiagnostic chain (Abbot 1988:44) then they are more akin to arbiters of life and death itself. But where thepossibility of a return trip exists, the fees of the ferryman can be very high.

MAKING CORPORATE FAILURE CALCULABLE

The Insolvency Act 1986 is the most recent statutory attempt to represent and intervene in the matter ofcorporate failure in the United Kingdom. With this piece of legislation we appear to have reached firmground with the following definition of insolvency:

‘insolvency’, in relation to a company includes the approval of a voluntary arrangement under Part 1,the making of an administration order or the appointment of an administrative receiver.

(Section 247[1], Insolvency Act 1986)

But this legal definition of insolvency is a procedural matter, rather than one that takes us to the heart ofinsolvency as an economic event. It sets out the formal procedures available for the administration ofinsolvent companies, yet it fails to define or refer to the economic substance of insolvency or company failure.It offers no assessment or judgement on such a crucial question as company health. Rather, by appeal to theformality of legal process, it creates a legal space within which such matters can be negotiated. Insubstance, the administration of failure remains dependent on extra-legal representations of insolvency. For

40 PETER MILLER AND MICHAEL POWER

example, before the court can make an order which temporarily freezes creditor rights and prevents acompany being put into liquidation, experts such as accountants will be instrumental in persuading it thatsuch an order will promote its survival or the more advantageous realization of the assets. The matrix ofrules, rights and duties that law elaborates comes into play only after a relevant claimant party hassuccessfully appealed to and invoked its procedural mechanisms.

It is important to examine the different institutional pressures for the regulation of insolvency that varyfrom one country to another, leading either to the ‘bureaucratic rationalization of rule’ (Rueschemeyer1989) or to the moral regulation of markets (Halliday and Carruthers 1990). It is important also to considerthe cultural variation in the ways in which accountants, on the basis of their position in a particular system ofprofessional knowledge, are able to transform their abstract technological resources into jurisdictionalcontrol of such tasks (Abbott 1988). For, as we shall see, this can act as an important corrective to theparochialism of much Anglo-American scholarship in the rise of the professions.

But in the concern to rectify a parochialism that is both theoretical and empirical, the significance ofthese ‘turf’ squabbles and rivalries needs to be set in the broader context of social arrangements which linkchains of calculative technologies to the administration of failed companies (Dezalay 1991). For it isthrough such chains of calculation that the legal regulation of insolvency has come to be dependent on extra-legal bodies of expertise. Accountancy provides the basis for these calculative technologies which arelargely external to the complex procedural rules of insolvency law. Before corporate failure can beinternalized within the legal system, it has first to be represented and calculated as an economic event bymeans of the calculative technologies of accountancy.

It is the calculative preconditions for the legal regulation of insolvency that concern us in this section ofthe essay. Although we consider the question of professional control of the market for insolvency servicesbelow, there is more to an understanding of recent changes in this area than a tracing of the variousproposals, counter-proposals and rivalries between diverse bodies, whether these be viewed as driven by‘state sponsorship’ or ‘professional co-optation’ (Halliday and Carruthers 1990). There is also more tounderstanding these calculative preconditions than accounting understood as financial reporting. For thediagnosis of corporate health and failure has become indissociable in certain national contexts from thecalculative technology of ratio analysis. Ratio analysis provides a way of thinking about and calculatingevents that promises to distil the complex and disparate nature of a corporation into an economic essence. Itis part of the ‘symbolic field’ within which corporate actions can be made visible to a wide range ofconstituencies (Bourdieu 1977, 1990a, 1990b). Certainly, businesses failed before the advent of ratioanalysis, but the emergence of ratio analysis has transformed the nature of corporate failure and opened it upto a new regime of judgement and assessment.

Ratio analysis has a history of its own that is distinct from such processes as the professionalization ofaccountants in the UK, one that has developed in close association with insolvency work. Ratio analysisemerged in the United States in the 1890s, where the concerns on the part of banks and other creditinstitutions to demonstrate the solvency of borrowers demanded a new knowledge of corporate health (Dev1974; Horrigan 1968). The growing institutional distance and impersonality between capital providers andbusinesses, as compared with continental Europe, contributed to the dissemination of a new body ofanalytical knowledge capable of acting at great distances (Miller 1991; Miller and Rose 1990). Forms ofratio analysis emerged and became established as a basis for providing a particular visibility to the temporalstructure of financial flows in distant organizations.

The ‘short term’ became an object of calculation and concern, and accounting classifications such as‘current assets’ provided intermediate levels of aggregation for further calculative purposes. Performanceand liquidity ratios were developed that held out the seductive promise that the ability of a company to meet

CALCULATING CORPORATE FAILURE 41

debts as they fall due might be distilled into a single figure or, more likely, a hierarchical cluster of figures(Miller 1992). Today, ratios have become self-evident ways of representing and calculating the condition ofa company both for external credit and for internal monitoring and control purposes. The latter function hasits origins in the hierarchy of ratios developed by the du Pont Company in which systematic interrelationrather than single figure dependency created a new ‘science’ of managerial knowledge in the organizationof analytical components (Horrigan 1968:286).

A system of ratios that sought to provide ‘indicators of the status of fundamental relationships within thebusiness’ was first elaborated in the early 1920s (Bliss 1923). The novelty of this quantifying aspiration isindicated by the criticisms that it provoked. Thus Gilman (1925) argued that ratio analysis, and thecomputation of industry norms in particular, diverted analytical attention from a more comprehensive viewof the corporation. However, the quantifiers won out over those who called for particularisticunderstandings of corporations. Institutional innovation was an important aspect of this rise of thequantifying ideal. Thus the National Credit Office was established in the 1930s, and the newly formedSecurities and Exchange Commission, which influenced both the supply and content of financialstatements, also began to publish ratio data of its own.

The promise of a calculative expertise that would predict corporate failure and make possible scientificcontrol of the enterprise was not unilaterally endorsed. A number of studies appeared in the 1930s in theUnited States that sought to explore or challenge the ‘efficiency’ of ratios in these respects. More recentprediction studies, such as Beaver et al. (1968), have their origins in this earlier programmatic optimism inthe function of ratios. But whilst the more hopeful promoters of definitively predictive ratios were to bedisappointed, largely due to growing preoccupations with the methodology of these studies, certain ratiosbegan to assume a centrality in the calculative network that had developed around the phenomenon ofcorporate failure. For example, from the solvency focus of US banks in the late nineteenth century emergedthe stipulation that ‘quick assets’ were the only basis for loans and that the debt limit of a borrower wasexceeded when liabilities were greater than 50 per cent of quick assets (Dev 1974: 62). In addition, therationale for a 2:1 ratio between current assets and current liabilities, as Dev points out, was that companieswere considered more from a liquidation angle than as ‘going concerns’ (ibid.: 62).

Ratio analysis thus emerged as a key link or relay in a chain of calculative operations carried out indiverse institutional sites by distant economic actors. Despite, or perhaps because of, its parasiticrelationship to financial accounting, ratio analysis made possible new ways of acting upon enterprises. Ithelped to foster a particular conception of time horizons, and an exclusively financial way of knowingcorporations, one that did not require detailed understanding of financial statements. It was through ratioanalysis that the concerns and actions of disparate agencies, such as the Federal Reserve, the SEC andmarket analysts, were able to be linked together as ‘users’ of financial accounts, and that secondarycalculations could be brought into play.10 The origins of the problem of ‘short termism’ in finance marketsis undoubtedly linked to the development of these calculative bodies of periodic knowledge, and theirconstitutive implications for the routine assessment of ‘performance’.

Once ‘performance’ ratios can be calculated, performance can be known relative to institutionalized timehorizons. Such time horizons may differ according to cultural patterns of financing arrangements,macroeconomic management strategies, and the structural settings in which the interests of claimants uponthe corporation can be expressed. But caution is needed here with respect to traditional images of thedifferences between German and US corporate financing cultures. It is not so much that the supposedlymore intimate and long-term relationship between German banks and small businesses dispenses with theneed for ratios. Rather, by comparison with the USA, such ratios occupy different institutional arenas andpublic spaces, and develop within different networks of ways of knowing and acting upon the corporation.

42 PETER MILLER AND MICHAEL POWER

Indeed, one may contrast regulatory optimism concerning impersonal scientific bases for the control ofcorporate life with those that emphasize the virtues of personal contact.11

The calculative technology of ratio analysis can function differently according to the different locales andnetworks within which it is inserted. But the relations between such a calculative technology and theinstitutional settings in which it operates are not those of exteriority. Ratio analysis not only answers to thedemands of particular agencies, but helps to constitute the type of relations that can be established betweeneconomic actors. Moreover, in so far as calculations carried out in one locale are linked to calculationscarried out elsewhere, we need to attend to the whole chain of calculations within which ratio analysis isembedded. For example, changes in the format of financial statements need to be understood as driven in partby an SEC programme for collecting industry-wide ratios (Horrigan 1968).

Calculative expertise thus comes to link the individual enterprise with wider governmental concerns forrational economic management. In turn, the knowledge that ratios provide can act as important inputs intoregulatory demands for improved financial reporting. The development of ratio analysis in the United Statesneeds to be understood in relation to the emergence of credit institutions with a broad portfolio of clientswhose affairs they would seek to diagnose at a distance. Attempts to represent the financial position of amultiplicity of clients in a distilled, visualizable and comparable form by means of ratio analysis providedinformational relays between formally distinct economic entities.

But ratio analysis not only answered the demands of a particular situation, it also helped to foster andmaintain arm’s-length relationships between credit institutions and their clients, and between governmentand individual corporations by the particular way in which it claimed to know the economic situation ofcompanies. What ratio analysis lost through the absence of close contact and appreciation of the underlyingaccounting constituents of a ratio, it gained by providing in a single number, or cluster of numbers, aneconomic essence that could be displayed and compared in charts, graphs and tables, and that promised todistil the performance of a company into a single figure.

It was around this quantifying ideal embodied in ratio analysis that a certain regulatory optimism and adistinct occupational trajectory emerged. For ratio analysis did not require expert knowledge of double-entry book-keeping. Ratio analysis would provide, or so it was hoped, the foundations of a ‘predictive’ and‘scientific’ technology for credit purposes. As with so many other attempts to represent and act upon thefinancial condition of an enterprise, this quantifying aspiration was an integral component of a liberal modeof seeking to govern economic life (Miller 1991; Miller and Rose 1990). For the ‘rules’ of a new ‘creditbarometrics’ (Wall 1919) that were formulated by 1905 were driven by the passage of the Federal Income TaxCode and the formation of the Federal Reserve Board in 1914. The demand for ratios should thus beunderstood not as the outworking of an independently constituted market, but as itself formed out ofgovernment concerns to intervene via intermediary mechanisms at a macroeconomic Federal level, and topromote a new systematicity in banking knowledge via the mechanisms of the Federal Reserve. Ratios,unlike the financial statements upon which they depend, thus provided an ideal means for both representingeconomic processes and intervening in them.

The calculative technologies of ratio analysis established themselves as economic norms, rather than asrigid ‘rules’ to be applied without regard to particular circumstances. Definitive scientific prediction gaveway to expert judgement. Spheres of discretion and debate opened up around such norms. Within this spacethe ‘facts’ of corporate ‘health’ could be negotiated by the interested parties, and out of this a more general‘accounting jurisprudence’ emerged to address the adequacy of ratios as the basis for financial analysis.Thus it was argued that the 2:1 minimum standard was not appropriate for all businesses. Other relationswere appealed to as likely to throw light on this ratio, in particular with regard to the ‘quality and not merelythe quantity of the current ratio’ (cited in Dev 1974:62). The possibility that ratios might mislead as well as

CALCULATING CORPORATE FAILURE 43

illuminate was suggested, and the ability of static ratios to provide a visibility to cash flows was questioned.But such debate and dissent is precisely what gives vitality to such a domain of quantification. For it keepsopen the hope and the aspiration that one might refine and modify such calculative norms so as to better capturean elusive economic essence. The ideal of prediction was thus indelibly imprinted on the credit analysts’imagination. Criticisms over the mechanical utilization of calculative routines are not restricted to ratioanalysis. They are to be heard equally in relation to the use of variance analysis as well as in relation todiscounting techniques used for investment appraisal. Indeed, the very conception of economic viability isthe site of debate and struggle, not only over personal livelihood and the economic survival of entireregions, but over the calculative technologies themselves, especially where these have become ‘official’modes of economic representation (Cooper and Hopper 1988). But, as the Brent Walker case illustrates, thisdoes not limit the ability of such technologies to operate as norms around which decisions can be made anddisputes organized. Indeed, it is precisely by opening up such spheres of judgement, proposals and counter-proposals that calculative technologies come to act as reference points and economic norms. They play sucha role when they are departed from just as much as when they are adhered to.

Such financial norms also make possible, and come to be linked up to, further calculations. The claims toscience are closely bound to a particular density of calculative knowledge in which the complexity ofinternal linkages and the relation to the possibility of insolvency creates a new expert domain for analysis.Bodies such as business schools and credit agencies began to collect such data and to disseminate it.12

Businesses and lenders increasingly appealed to such norms which began to be embodied in creditagreements and started to become a condition of obtaining credit. Average ratios for public utilities werecalculated, as were average industry ratios, which quickly became norms for credit assessment. Accepted asexpressing fundamental relationships for assessing corporate viability, the very notions of insolvency andsolvency became inseparable from such calculations. Just as cost was a category that had to be constructedrather than discovered (Hopwood 1987; Miller and O’Leary 1987), so too with financial analysis moregenerally (Hines 1988).

Ratio analysis, as it developed in the USA, is a regulative norm that suffuses not just perceptions ofcorporate failure, but of corporate health also. As time progressed, the ratios themselves moved beyondtheir role as external ‘measures’ of corporate health, and became constitutive aspects of the corporatedomain. As Watts and Zimmerman have remarked:

One reason accounting data might be useful in predicting bankruptcy is that bond indentures andlending agreements often use ratios to restrict managers’ actions…. Breach of a covenant involvingaccounting ratios, however, does not necessarily lead to bankruptcy. Hence, there is no mechanicalassociation between accounting ratios and bankruptcies because defaults are defined using thoseratios.

(Watts and Zimmerman 1986:113)

Governing by numbers, in the form of ratio analysis, is thus more than a response to an immediate demand.Economic life is itself constituted in a particular fashion out of the aspiration that ratio analysis wouldprovide a calculative knowledge of corporate affairs. Ratio analysis functions as a kind of socialepistemology that helps to shape wider perceptions of corporate failure. In recent years, thisinstitutionalization of ratios has taken on new forms, most notably within specialist regimes for theregulation of corporate life. This is illustrated clearly by the debates about the implementation of ‘capitaladequacy’ rules for banks. In this instance, industry-specific ratios are intended to define prudent, but nottoo restrictive, solvency margins which can then be mobilized for regulatory purposes. Following the 1974

44 PETER MILLER AND MICHAEL POWER

banking crisis, the Bank of England engaged in a detailed study of liquidity requirements and the basis forthe measurement of capital. It also sponsored initiatives to establish a committee of bank supervisors underthe auspices of the Bank for International Settlements (BIS), commonly referred to as the Basle Committee.This committee sought to provide acommon capital framework to secure the soundness of the internationalbanking system in which measures of ‘capital adequacy’ could be refined.

Whilst the details of the capital adequacy regime are beyond the scope of our present argument, it isimportant to note that the calculation of capital adequacy involves ‘risk-weighted’ adjustments toaccounting-based figures for assets, which then enter a further calculation of the relationship between assetsand liabilities. These regulatory developments have occurred outside a formal legal framework, therebyfurther strengthening the potential role of ratios as calculative norms that set the terms of private standard-setting regimes. Whilst these ratios are likely to be reinternalized by the law, obtaining statutory force inEurope through the Solvency Ratio Directive and the Own Funds Directive, their function in the markets fornormativity (Teubner 1992) is one that derives from the calculative technology they provide for knowingand intervening in economic life. It is this capacity of ratios to provide a normative knowledge of corporateaffairs that is the key to understanding their mobility across institutional and professional boundaries.

‘Solvency’ ratios have also given rise to a secondary market for creative accounting. Initially, this seemsto have been directed towards increasing the capital (the numerator of the capital/asset ratio) of financialinstitutions by the use of such devices as convertible debt instruments.13 More recently, there has also beencreativity on the asset (denominator) side, for example by attempts to transfer one asset ‘off balance sheet’in exchange for a risk-free asset such as cash (securitization). The institutionalization of ratios in these wayshas a reciprocal effect on the market for advisory services, particularly accounting. While ratios haveemerged from the calculative regime of financial reporting, their significance as norms creates incentivesfor creativity in the data base from which such ratios have been derived.

Ratio analysis is thus one component in a complex chain of calculations, institutions and forms ofjudgement. Far from being simply a convenient shorthand, ratio analysis bears a complex, even dialectical,relation to financial accounting practices. Where these two calculative apparatuses differ is in theirsusceptibility to control by specific bodies of expertise (Abbott 1988). While accountants have more or lessclosely controlled the process of financial reporting and audit,14 the analysis and the use of ratios has beendispersed into a wide variety of organizational settings. Ratio analysis has the property of being an abstractbody of knowledge in Abbott’s sense, one that is jurisdictionally mobile because it involves both too littleand too much expert inference; too little because ratio techniques can be easily routinized; too muchbecause ratios have become embedded in very specialized and industry-specific purposes. It is this capacityof being amenable to routine yet dedicated applications that has enabled ratios to be used in such diverseoccupational territories. The characteristics of stability, mobility and combinability (Latour 1987) aredeveloped to such an extent in ratio analysis that this calculative technology can function equally well in avariety of institutional settings.

To summarize, we have examined the complex development of ratio analysis as a tool for calculating thesuccess and failure of corporations.

By virtue of the distinctive position it occupies within the market for capital flows, ratio analysis needs tobe understood as having a different institutional trajectory from that of financial reporting. Thedevelopment and use of ratios in the context of transformations in the US economy at the turn of the centuryprovides a contrast, at least in quantity if not in quality, between that country and continental Europe, andreminds us that we cannot consider such ratios as merely technical artefacts. Rather, ratios need to beunderstood as specific cultural products. Accordingly, to the extent that corporate failure is constituted bysuch ‘impersonal’ networks as ratio-based analysis, it too is less an objective fact and more a matter of

CALCULATING CORPORATE FAILURE 45

culturally specific arrangements for relating debtors and creditors, for sharing risk between the state and theprivate sector, and for managing the spatial and temporal horizon of corporate activity. Such arrangementsgive rise to, and are constituted by, expert services for their discharge. It is here, at the point wherecalculative norms intersect with expert judgement and professional competition in the market for insolvencyservices that the phenomenon of corporate failure is fabricated. It is to these issues of professionalcompetition that we now turn in considering the second moment of corporate failure, the administrativearrangements for failed companies.

CALCULATIVE EXPERTISE AND THE GOVERNMENT OF CORPORATEFAILURE

A familiar narrative tells of the rise of the accountancy profession in Britain during the nineteenth centuryon the back of successive waves of bankruptcies. This narrative stands in need of modification or extension.Rather than locating such a development solely on the plane of a collective mobilization project that can becalled professionalization (Willmott 1986), or viewing such a process as linked to the insertion ofaccounting into a position of decision-making within the global function of capital (Montagna 1990) and themarket for corporate takeovers (Espeland and Hirsch 1990), it is on the plane of shifts in rationalities andtechnologies of government, and the role of particular bodies of expertise within these, that it should beunderstood. Or, in Abbott’s (1988) terms, we need to consider the array of ‘tasks’ represented by accountingin conjunction with the aspirations to a settled ‘jurisdiction’. The tensions implicit in a liberal modality ofgoverning corporate failure took a particular form in the United Kingdom. While the techniques ofaccountancy had been known for centuries, ‘professionalization’, as we would ordinarily regard it, onlybegan in Scotland as a branch of the legal profession and in England in response to laws requiring the auditof newly created joint stock companies. In particular, English accountants emerged as an ‘amalgam ofsolicitors, bankers, and others who had shared during the middle nineteenth century the jurisdiction ofbankruptcy and receivership’ (Abbot 1988:74). UK accountancy emerged as a body of expertise within theorbit of corporate failure in a number of stages during the mid-nineteenth century. The Bankruptcy Act of1831 paved the way for an increase of accounting work by making the final discharge conditional upon afavourable report on the accounts by an ‘official assignee’. The 1844 Companies Act went considerablyfurther, in ending the requirement of parliamentary sanction for the incorporation of a joint stock companywith limited liability. This was to considerably enlarge the terrain of calculation, negotiation and,ultimately, dispute in the case of corporate failure. The 1844 Act, by providing for the appointment ofauditors and the proper keeping of accounts, represented an intensification of the regulation of corporatehealth by disclosure. Thus, accounting’s jurisdiction emerged from a series of critical socio-legal andorganizational changes; the creation of the joint stock company to mobilize family capital and, as aconsequence of the unregulated growth of such entities, the need for experts in law and money to wind uptheir affairs (Abbot 1988:94).

It was the Companies Act of 1862 that came to be called ‘the accountant’s friend’ (Brown 1905:318), andof which Stacey remarked: ‘Perhaps no other professional community, living upon the fruits of trade,commerce and industry, has benefited to the same degree as did accountancy from the enactment of theCompanies Act in 1862’ (Stacey 1954:37). The Companies Act 1862 established the position of officialliquidator in an arena that was initially one of competition ‘between new and established professions’(Edwards 1989:262–3). In particular, there was concern among lawyers that ‘the whole affairs inbankruptcy have been handed over to an ignorant set of men called accountants’. There was widespreadsuspicion that individuals calling themselves accountants at this time were merely doing so in order to get

46 PETER MILLER AND MICHAEL POWER

this work on behalf of creditors. Whatever the motivations, the passing of this Act immediately madepossible an expansion of the calculative expertise of accountancy, even though other activities such asauditing were not to be rendered compulsory until 1900, and even though this was not to pass formally intothe hands of accountants until the Companies Act of 1948.

The ascendancy of accountancy in the UK is therefore intimately linked to its role as an expertise ofcorporate failure (Armstrong 1987; Edwards 1989). Making money out of the misfortunes of others is notjust a recent trait of accountancy expertise. Reference to liquidations and bankruptcy work were prominentin petitions for Royal Charter by aspiring professional bodies. By contrast, claims to expertise in auditingwere very much an afterthought, and were not central to the portfolio of claimed competencies of accountantsin the mid-nineteenth century. The UK profession emerged on a wave of state-sponsored tasks, generated inthe wake of criticisms of the accounting function itself. Indeed, paradoxically it is the failings ofaccountancy which are responsible for its professionalization. The paradox is lessened in the context of aliberal state increasingly dependent on the calculative functions of accounting which it is not in a position toprovide itself. Accounting emerges within a complex dialectic, a politics of success and failure, withinwhich each perceived failure becomes a condition of the further intensification of accounting rather than itsabandonment.

The recent experience of the UK illustrates the complexities of state-sponsored transformation ofinsolvency practice. For example, the formation of the Insolvency Practitioners Association in the UK in theearly 1970s, a specialist body established as a voluntary trade association without entry requirements orminimal standards of technical competence, can be interpreted both as a problem and a cure for liberalforms of government. Unable and unwilling to engage in direct service provision itself, state regulatoryinitiatives must inevitably appeal to existing associations of expertise via such processes as licensing. Thus,the Insolvency Act 1986 requires that insolvency practitioners be licensed, but the details of the necessaryattributes and competences, a mixture of ethical and technical competence, is delegated to bodies seekingauthority to license practitioners under the Act.15 However, not all insolvency practitioners were membersof the IPA and, as a loose association of practitioners with varying primary professional allegiances, it wasunable to establish a monopoly over the licensing process. The Institute of Chartered Accountants inEngland and Wales (ICAEW) obtained authorization under the Insolvency Act 1986 and established its owninsolvency practitioners committee (IPC) within the ICAEW in addition to the IPA. Other establishedbodies, the Institute of Chartered Accountants in Scotland and the Chartered Association of CertifiedAccountants, also obtained authorization to license insolvency practitioners. For an accountant member ofsuch bodies, it no longer makes sense to obtain authority to practise indirectly via the IPA when this can beobtained directly through one of the professional accounting bodies. There can be little doubt that theInsolvency Act 1986 was a stimulus to existing professional bodies to create internal associations to rivalthe weaker IPA.

Thus state initiatives in this case caused the existing and fragmented accounting profession to claimrecognition for licensing. But, given the small number of practitioners affected, it soon became evident thatsome form of co-operation was necessary for co-ordinated liaison on such matters as examinations ofprofessional competence (Turton 1988). Thus, a new hybrid organization has been created—the Society ofPractitioners of Insolvency (SPI)—under the auspices of which joint examinations of competence will beadministered.16 Hence, while the IPC, IPA, and other bodies continue to function for licensing purposes, theSPI functions at a different level for accreditation and, it seems, as a vehicle for more effective lobbying ofthe state (Singleton-Green 1990).

Inter-professional competition has not been entirely eradicated by the creation of an umbrellaorganization. Rather, it is no longer possible to conduct such competition in terms of exclusive claims to

CALCULATING CORPORATE FAILURE 47

knowledge and experience. Thus while the IPC and the IPA may compete in the market for memberships,the SPI functions as an overall co-ordinating body. How-ever, the ICAEW, via the IPC, regulates theconduct of examinations and can build upon its experience and resource base in, for example, thedevelopment of technical guidance notes for insolvency practitioners. This makes the IPC the effectivecentre for gravity for the codification of insolvency know-how, a position of power which mirrors ICAEWcontrol of the Consultative Committee of Accountancy Bodies (CCAB), an umbrella organization similar tothe SPI (Willmott 1986:573).

Hence, state regulatory initiatives do not simply ‘map’ onto existing configurations of expertise but mayhave the unintended effect of promoting new forms of organization and associations at the expense of thosewhich already exist. While the Insolvency Act 1986 has been recognized as a ‘major factor in theconsolidation of best practice’ (Singleton-Green 1990), this cannot simply be understood at the level ofcalculative technology but also concerns the terms of establishing and strengthening jurisdictions overpractices.

This negotiation of domain in the United Kingdom contrasts markedly with developments in the USAwhere the historical conditions of demand for accountants were different, embodying a greater emphasis onthe attestation function:

The dispersion of American society and capital weakened personal and familistic capitalmobilization, forcing an early reliance on public stock and investment. American stockholders andfinanciers, often far from the objects of their investment, had an enormous need for reliableinformation….

(Abbott 1988:227)

The new jurisdiction over the attestation of capital is distinct from the UK accountant’s roots in insolvencywork. For the US practitioner there were not the same opportunities for ‘counter-cyclical’ work as therewere for his or her UK counterpart. Indeed, insolvency work was much more marginal in the professionaldomain, conducted by a distinct body of legal practitioners, as compared with the UK. Only in the wake ofan emerging market for restructuring did the large investment banks begin to displace this network ofinsolvency boutiques.17 The same conditions of capital mobilization which generated a demand for ratiocalculations (and also an intensive state demand for statistical knowledge) gave US accounting a differentjurisdictional trajectory from its older UK origins (Miranti 1986) in which insolvency practice was certainlya more marginal activity for accountants and lawyers.

In France, too, insolvency practice was much less of a mainstream activity in comparison with the state-sponsored elite professions. Receiver-ship was defined as a non-monopoly within French legal work, incontrast to many other areas where the state was active in defining and promoting professional work(Abbott 1988:160–1). Like morticians, there was even an element of stigma. The analogy is apt, for theTribunal de commerce was more of a morgue than a hospital, a place to which one took the casualties ofindustrial restructuring (Dezalay 1989). But the legislative reforms of January 1985 transformed both thenotion of corporate failure and the terrain on which it was to be constituted. With this law was produced anew articulation of juridical and calculative know-how. Within this new territory, whilst the juge consulaireappears to be the primary beneficiary, calculative expertise also has a considerably enhanced role to play.For it is through such expertise that is enacted the shift from a concern with ‘failed enterprises’ to‘enterprises in difficulty’.

With this shift is opened up the possibility of transforming the conception and the practice of corporatefailure. A principle of negotiation between the different partners in an enterprise replaces a judicial process

48 PETER MILLER AND MICHAEL POWER

centred on a hierarchy of claims of creditors. The enterprise in question is one for which a reorganizationplan, one set out according to a calculative knowledge of an economic unity, is to be formulated accordingto the canons of modern management. The legitimacy and neutrality of judicial procedures is thus itself tobe secured by an appeal to the objectivity of the calculative expertise on which such a plan is based. Legalexpertise sanctions negotiations that take place according to the calculations that can be produced of afailing enterprise. The juridical order thus finds itself in a curious position: both dependent on calculativeexpertise, as well as arbiter of its deployment in cases of conflict. This aggiornamento of the legalmachinery illustrates its capacity to regenerate itself in response both to the increasing number of corporatefailures, and in reply to the criticisms of judicial disinterest and incompetence in commercial matters. But this‘modernization’ has a sting in its tail, for its helps to promote a market for precisely that calculativeexpertise to which legal judgement has to defer.

In these different ways, the calculative technologies of accountancy come to be woven into theconception and practice of corporate failure. Far from seeking to demonstrate the primacy of one body ofexpertise over another, it is this interweaving of calculative expertise within the functioning of the legalmachinery and mentality that is decisive (Miller and Power 1991). There is an historical specificity to thosemoments when law appears to recognize limits to its present way of functioning, and when it seeks toredefine its boundaries and its relationships with other bodies of expertise such as psychiatry to accounting.At such moments one can speak of a form of auto-regulation of certain domains, a legal pluralism (Teubner1992) which emerges in the play between different bodies of expertise.

To understand variation from country to country in the ways in which corporate failure is constituted andadministered, we need to distinguish calculation from calculators; we need to differentiate specific tasksfrom the occupational forms in which they subsist; and we need to focus on the alliances and relaysestablished between distinct forms of expertise, the new ways of thinking and acting upon corporate failurethat emerge in the interstices between expertises. An interdisciplinarity at the level of ‘know-how’, and atthe level of the technologies through which agents intervene and act, challenges traditional demarcationsbetween occupations (Dezalay 1992).

Internal fragmentations within both accounting and the law have in turn created opportunities forspecialized cross-border alliances in areas such as tax and corporate finance (Freedman and Power 1991).Such relationships do not so much cross professional territories as create new ones. Whereas corporatefailure in the UK is an event that is registered initially ‘outside’ the law, within a territory constituted as‘economic’, it is internalized by law for administrative purposes, according to particular conceptions ofappropriate ways to govern the economy. Accountants thus act here as mediators between the economic andthe legal domains. In other countries their function is less pronounced, and their calculative skills areorchestrated in a position of subordination to the authority of legal expertise. Even the creation ofspecialized ‘faculties’ by the ICAEW has an ambivalent role. For this has attempted on the one hand tosecure the position of accountants in specialized markets, while on the other hand undermining the ethos ofthe generalist, an ethical resource which has been crucial to the articulation of the self-image of accountancyas a ‘profession’.

Despite these pressures for fragmentation, the calculative expertise of accounting offers the possibility ofa specific modality of regulation. It constructs distinctive patterns of information for regulating domains andactivities, and in the process transforms those domains. The relation between these regulatory patterns ‘frombelow’ and the law ‘from above’ is complex and disputed. Teubner (1985, 1987a, 1987b, 1987c) refers tosuch developments as processes of ‘juridification’, an historically specific proceduralization of law linked totransformations in the welfare state. This is supplemented by more pluralistic conceptions of local legalprocess, and the self-generation of procedural norms in global markets (Teubner 1992).

CALCULATING CORPORATE FAILURE 49

But we need to grasp also the transformative capacities of those calculative technologies that havedeveloped typically within the territory of the accountant. Such technologies have developed in relation toattempts to regulate particular forms of the economic domain in congruence with particular governmentalrationalities (for example, orderly markets for capital provision), and by drawing on specific bodies ofadministrative knowledge. Accountancy provides ways of representing and intervening in economicprocesses and events by recognizing their solidity and complexity qua economic phenomena that possesstheir own distinctive characteristics, regularities and possibilities of disturbance.

The ascendancy of accounting expertise in the administration of corporate failure in the UK is thus notsimply a matter of gaining legitimated and legally sanctioned control of a certain terrain. It is also importantthat accountancy provides a complex of ‘creative’ technologies or tasks for intervening in corporate failureand perceiving it as an economic event, one that can be diagnosed, adjudicated and even predicted ineconomic terms. It is this ability of accountancy to represent and make corporate failure calculable thatexplains much of its ability to sustain, and have legitimated, its claims to such a territory. For at the samemoment, ratio analysis has distilled the ‘essence’ of corporate success and failure into an ever-wideningvariety of settings. In particular, we need to recognize the role of co-ordinator which may draw creativelyupon different specific expertises without threatening jurisdictional control over the management of theprocess. In the UK, largely due to their close link with insolvency work in the nineteenth century,accountants have managed to occupy the substantive role of orchestrator even as the knowledge base ofinsolvency practice has demanded ever greater levels of legal knowledge. The latter has been satisfied by amixture of outright delegation to subordinated legal experts, and a gradual process of internalization inwhich the knowledge base of insolvency practice has become re-legalized without diluting the jurisdictionalposition of accountants. Hence, the relation between tasks, technologies and jurisdictions is complex and fluid.As accountants have shown, it is not always the case that routine tasks cannot become the basis of settledjurisdictions for professional work. So it is necessary to pay careful attention to the nature of the tasksthemselves in the context of the specific manner in which they are mobilized and institutionalized. Whileratio analysis has been widely dispersed, other ‘routine’ calculative practices such as procedures for assetrealization, have been more tightly allied to insolvency administrative procedures. In turn, positions inadjacent and overlapping markets for corporate reconstruction and advice have provided additionaljurisdictional protections for insolvency practitioners.

CONCLUSION

Rather than view corporate failure as a given event that comes to be regulated either through professionalco-optation or state sponsorship, the phenomenon of failure needs to be located on the plane of rationalitiesad technologies of government. A focus on the calculative technologies (Miller and Rose 1990) or tasks(Abbot 1988) provided by accounting, and their ability to provide a way of representing and acting upon theeconomic realm in accordance with its own regularities and mechanisms, makes possible an understandingof the different operations of accounting at crucial points in the life of the enterprise.

We have drawn attention to the constitution of the domain of corporate failure, and to the rationalities ofgovernment in relation to which calculative technologies, such as ratio analysis, are called upon to operate.This focus provides an institutional basis upon which to explore the different trajectories of accountingexpertise in countries as varied as Britain and Germany. The concept of expertise, understood as a set oftechnologies and legitimated claims to competence, forces one to attend to the various proto-typicalpractices which emerge from relatively stable professional territories and are mobilized in new ways outsidethem. From this point of view, a profession is simply a special occupational case of settlement in a fluid

50 PETER MILLER AND MICHAEL POWER

assemblage of know-how, of markets for particular tasks, and of strategies for jurisdictional control of suchmarkets which are interrelated in varying ways with particular state projects.

Complex relations of dependency come to be formed between particular bodies of expertise, dependencieswhich are registered in partnerships of increasing durability, and which will establish new lines ofoccupational development. In this chapter, we have suggested how, in an historically specific context, lawencounters certain limits in seeking to regulate the economic domain of insolvency. As we have shown, thisdomain is one that has already been constituted in part by the calculative technologies of accountancy. Such‘limits’ are indissociable from the complex of historically specific rationalities and technologies ofgovernment that set out the objects, objectives and limits of government.

Accountancy is much more than a passive agent of legal administration in relation to the objective factsof corporate failure. Accountancy occupies a particular position within the regulation of corporate failure byvirtue of the calculative technologies which it has generated, and which constitute the very field that the lawseeks to regulate. Ratio analysis, as a means for representing and intervening in corporate health as well asin corporate failure, helps to constitute this domain of economic knowledge of the enterprise. A particularmodality of expert administration of corporate life thus become possible, even though the occupationallocales within which this takes place may vary from one country to another.

NOTES

1 An earlier version of this paper was presented to the European Working Group on Corporate Professionals,Vaucresson, 10–11 June 1991. The authors are grateful for the helpful comments of Anthony Hopwood.

2 Cf. also A.O.Hirschman, The Passions and the Interests, Princeton, N.J.: Princeton University Press, 1977.3 In the UK during the early 1990s the collapse of many small businesses has been linked to direct criticisms and

scrutiny of the lending policies of the clearing banks. Thus banks are implicated in corporate failure. See, forexample ‘When bankers talk mumbo jumbo’, Financial Times, 14 April 1992. There was also considerabledebate on the subject of special tax breaks and other interventions for Lloyds of London names who had sufferedunusually large losses. Cf. ‘Names hope for taxation relief’, Financial Times, 18 June 1991.

4 See, ‘To the liquidators the spoils’, Independent, 15 January 1992; ‘The undertakers’, Evening Standard, 22January 1992; ‘Touche shunned over BCCI bill’ and The bucks stop here’, Independent on Sunday, 26 January1992.

5 It should be stressed that when we talk about the ‘administration’ of corporate failure this is intended in a generalsense to cover the full range of insolvency procedures required by law, and not the narrow sense ofadministration established in the UK Insolvency Act 1986.

6 The recent problems with Olympia and York also demonstrate this clearly. See ‘Olympia & York on the brink’,Financial Times, 15 May, 1992; ‘The Olympia & York insolvency’, Financial Times, 16 May 1992.

7 See ‘Miraculous restructuring of Brent Walker is finalised’, Financial Times, 31 March 1992.8 See The impossible can be done at once, but miracles take longer’, Financial Times, 16 April 1992.9 See ‘Receivership threat to Brent Walker’, Financial Times, 9 September 1991; ‘Brent Walker bondholders back

new rescue’ Financial Times, 9 September 1991; ‘Brent Walker bondholders refuse to back refinancing’,Financial Times, 10 September 1991; ‘Crisis deepens at Brent Walker’, Financial Times, 11 September 1991;‘Brent Walker near to deal on bonds’, Financial Times, 8 October 1991; ‘Brent Walker set to unveil restructuring’,Financial Times, 18 November 1991; ‘Brent Walker venture unravelled’, Financial Times, 18 March 1992;‘Brent Walker rescue moves a step nearer’, Financial Times, 23 March 1992; ‘Last bank signs terms of BrentWalker restructure’, Financial Times, 28 March 1992.

10 It is partly through their perceived mechanical dependence on ratios, ignorant of the underlying creativity ofaccounts, that criticisms of analysts have been articulated recently in the UK. See D.Gwilliam, ‘Polly Peck—where

CALCULATING CORPORATE FAILURE 51

were the analysts?’, Accountancy, January 1991:25; A.Sugden, ‘A lesson in company pathology’, Accountancy,October 1991:32.

11 It could be suggested that where a closer relationship between financial reporting and credit assessmentrequirements exists, then the institutional development of ratio analysis as a distinctive function is less likely.Thus, in Germany where accounts have developed under a much stronger creditor orientation than elsewhereratio analysis did not need to develop in the manner in which it did in the USA. In general, therefore, there is aclose relationship between the emergence of ratio analysis, the aspirations of credit ‘science’ and the institutionalarrangements for corporate financing.

12 Dev (1974:66) notes that the Harvard Business School and the credit agency Robert Morris Associates bothstarted to collect annual ratio data in 1923. The Bureau of Business Research, University of Illinois, published anumber of bulletins in the 1920s and 1930s giving average ratios for several public utilities.

13 And also ‘swaps’. Cf. ‘Citicorp moves to lift capital ratios with swap offer’, Financial Times, 13 May 1992.14 This is clearly an exaggeration, given the internally fragmented nature of the accounting profession (Willmott

1986) and the rise of the accounting content of company law. But it is suitable to provide a contrast with the evengreater dispersion of ratio based activities.

15 We do not examine the details of the development of the Insolvency Act 1986 (see Clarke 1986:140 for adiscussion of the dilution of the Cork Committee proposals) but it is worth bearing in mind the extendedregulatory functions created for insolvency practitioners by the concepts of ‘fraudulent’ and ‘wrongful trading’.In addition, the Company Directors Disqualification Act 1986 effectively gives insolvency practitioners a leadingrole in the prosecution of directors, a role which has not been entirely successful (Wheeler 1991), due in part toconflict of interest but also to the culture of insolvency practice for which this policing role is largely new. Hence,in formalizing the jurisdiction of insolvency practitioners the state also attempted to graft new functions on toexisting practices, a process which has met with some resistance.

16 From 1 April 1990, practitioners seeking authorization under the Insolvency Act 1986 must pass the JointInsolvency Examination Board Examinations.

17 These specific conditions of emergence within a market for reconstruction rather than insolvency also parallel thegreater reconstructive emphasis of Chapter 11 arrangements as compared with Corporate VoluntaryArrangements under the Insolvency Act 1986. ‘In the US…the notion that corporate casualties should berehabilitated is deeply engrained.’ See ‘Why Chapter 11 does not tell quite the whole story’, Financial Times, 8May 1991; ‘More than one way to respond to insolvency’, Financial Times, 21 November 1991.

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Castel, R. (1976) L’Ordre psychiatrique, Paris: Editions de Minuit.Clarke, M. (1986) Regulating the City: Competition, Scandal and Reform, Milton Keynes: Open University Press.Cooper, D. and Hopper, T. (1988) Debating Coal Closures: Economic Calculation in the Coal Dispute, 1984–5,

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769–91.Gilman, S. (1925) Analyzing Financial Statements, New York: Ronald Press.Gordon, C. (1991) ‘Governmental rationality: an introduction’, in G.Burchell, C.Gordon and P.Miller (eds), The

Foucault Effect: Studies in Governmentality, Hemel Hempstead, Herts.: Harvester-Wheatsheaf.Hacking,—I. (1986) ‘Making up people’, in T.C.Heller, M.Sosna and D.Wellbery (eds), Reconstructing Individualism,

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major accountancy bodies in the UK’, Accounting, Organizations and Society, 11 (6): 555–80.

54 PETER MILLER AND MICHAEL POWER

Chapter 3Technological warfare

The Battle to Control the Mergers and Acquisitions Market in Europe

Yves Dezalay*

(Translated from French by Brian Cleeve)

Any analysis of the international transplantation of the rules that govern economic activity will generallysuccumb to the one of two conflicting biases. On the one hand, some see it guided by legalistic reasons: thesearch for ‘better’ rules. On the other hand, others argue that dominant economic powers infiltrate andtransform weaker systems. Both tend to minimize their differences by suggesting that there is a certaindegree of legal and institutional convergence that reflects and reinforces the socio-economic one. Thetransformation is therefore almost mechanical and can proceed only in one direction.

However, even a superficial examination of the international scene shows that the very importance of theconflicts in progress makes the outcome uncertain. Too much is at stake in the redefining of the rules whichgovern business development for this redefinition to be left to chance, whether that chance is guided bylegalistic or economic forces.

It must also be recognized that the proponents of the two conflicting theories have a personal interest inthe matter. They are not simply analysts. They are actors in the drama. They are helping to create the ruleswhich they are defining. And if they define in one way rather than another, they will benefit from what theyhelp to create. They are like the medieval clerks who, by their legal expertise, made themselvesindispensable to their kings.

They wear several hats: as producers of learned discourses; as impartial experts serving the public weal;and as ‘merchants of regulatory know-how’ if not to the highest bidder then at a very high price. Cananyone imagine a better example of the relationship between law and economics than these ‘businessprofessionals’ who personify the interweaving of market, state and academia? They are courtiers, bowingnow to politics, now to business, now to both at once; and then to the occult mystery of ‘law’, whethersocial or economic. And as Thompson (1975) reminds us, that element of mystery is vital. The law cannotsupport the claims of a dominant class to rule unless it seems to be—and actually sometimes is— impartial.

All this is born out by examining the emergence of an American style mergers and acquisitions (M&A)market in Europe and its attendant regulation. Before describing the context within which this regulationemerged, this chapter will consider the principal actors who have contributed to this significant drama; first,those Wall Street lawyers and bankers who manufactured these new technologies; and second, their exportto Europe, particularly via Germany. It will concentrate on the period leading up to the implementation ofthe European Communities regulation on mergers.

* An earlier and longer version of this paper, which summarizes the first findings of a research project on the regulationof the M&A market in Europe, funded by the French Ministry of Research, has been published under the title “Lesprofessionnels des affaires et la regulation internationale du marché des entreprises’, Revue politiques et managementpublic. September 1991, no. 3.

TECHNOLOGIES DETERMINED BY THE STAKES OF THE PROFESSIONALFIELD

The specific advantage of mergers and acquisitions as a field of study derives from the importance andmultiplicity of the stakes, which can be observed at several levels. First of all, the level of politics: in presentingthe new institution for the regulation of competition the French Minister of Finance recalled that M&Aplayed a central role in redefining the world of economic activity. He concluded that such a heavyresponsibility belonged almost by definition to the domain of political authority. In fact, if the project tocreate a European rule on concentration has taken nearly fourteen years to come to fruition, it is becausestates are naturally reluctant to surrender what they see as one of the principal instruments of their economicpolitics and power (Fairburn and Kay 1989; Woolcock 1990).

Paradoxically, their partial surrender under Community pressure comes at a moment when the tide ofmergers and takeovers is accelerating, particularly in the international field (Prot and de Rosen 1990:25). Itis becoming more urgent to intervene because the existing state regulations are becoming less and lessadequate, and they contradict each other. The idea of ‘national champions’ is difficult to accept at theEuropean level (Dumez and Jeunemaître 1991). It is therefore on new juridical-political foundations that anew system of regulating business must be built; a system that Brussels is putting forward as a matter ofgreat urgency, itself under pressure from the business community, which longs to see clarified the rulesgoverning ‘external growth’, simply because such growth is ever more central to its strategies.

The second level of analysis is better known; it is the one most frequently dealt with in the professionalliterature where the different regulations are set out in detail to show businessmen how to integrate theminto their plans. The readership aimed at is directors and managers of major enter prises (Euromoney 1990).Having restored their financial margins after the heavy losses of the 1970s, they must favour externalgrowth to ensure a position of strength in an enlarged and more competitive market. In this practicalliterature, which is predominantly a ‘sales pitch’, the authors remind their readers—and, they hope, futureclients—that in this greater market only a few major operators will survive. All these ambitions, whichreinforce one another, form the great motivating force of European construction. The practitioners who urge,under the pretence of rationality, the formula of ‘one-stop shopping’ for the regulation of mergers, see in itthe chance to extend the market for their own expertise across the whole Continent. It is no accident that themajor takeovers encourage discussion on European rules and directives. More than all the rest, these rulesare born out of actual events and practice.

These practices need to be analysed in a broad and comprehensive fashion. For example, the decisions tomerge or to acquire new business entities are taken by the directors according to their analysis of the marketand their strategic choices. But the shaping of their plans and often the carrying out of these plans is done byspecialists who are employed within the company or from a firm of consultants. This is even more true ininternational operations, where the complexity of the regulations is very great and where the future partnerscan hardly rely on complicity (with each other or with influential officials) to resolve the differences (anddifficulties) which inevitably arise. Multinational consultancies consider themselves to be specialists inmediating such difficulties: their accumulated experience allows them to weigh the choice of juridical andfinancial methods, the progress of negotiations and sometimes even the selection of the future partner (orprey). Their influence and their area of manoeuvre are considerable. To understand how they work it isnecessary to analyse their position within their professional field. Obviously the fees represent a powerfulmotivation; particularly for those kinds of operation that are reputed to be ‘cost insensitive’. It is nothowever the only one: these experts know very well that their professional authority constitutes theirsymbolic capital. Their prosperity as consultants depends on their ability to construct and to gainrecognition for their expertise.

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To understand the emergence of all these juridical-financial technologies which shape and make possiblethese strategies of ‘external growth’, it is not sufficient to say that they answer a need. Key inventions forthe development of the M&A market—such as leveraged buy out or ‘poison pills’1—bring into play rules ofthe game which are independent of the economic field, such as those which subordinate hierarchy andprestige to the mastery of a specific technique. This holds good for the autonomy of these professionalfields: it is at this price that this particular category of ‘men of affairs’ distinguishes itself from mere go-betweens, in order to gain the authority and social advantages which are the privileges of the expert.

To the degree that these new rules on mergers and takeovers validate or disqualify these types ofexpertise born out of professional practice, they affect not only the strategies of the entrepreneurs, thedegree of independence and the power relations between states; they are inseparable from the dynamic ofthe professional fields in which these new technologies have seen the light of day. In effect, they do notsimply furnish the terms and the protagonists of the debate; the multiplication of learned internationalmeetings favours the emergence of a professional consensus concerning transnational solutions toregulatory problems.

If these arguments are sufficient justification for departing from the professional arena in order to analysethe multiple stakes and prizes created by the European regulation of the M&A market, they do not justifyconcentrating on this analysis alone, which is the failing of some sociologists who specialize so narrowlythat they limit their interest and analyses to their clients and their problems. On the contrary, the preciseimportance of these business lawyers arises from the fact that they stand at the crossroads where politics,law and economics meet. Their strategies in the field of law are determined by the structure of the field ofeconomic power which defines the social resources they can mobilize, and vice versa.

It is convenient to begin this rapid overview of the actors in the European debate on the regulation of theM&A market by looking across the Atlantic, not because of a taste for paradox, but because it is there thatmost of the technologies involved have been invented, as much by business practitioners as by theregulators. Arguing from their own experience, the Wall Street professionals have gained a leading positionin the European arena. Their influence goes far beyond their numerical importance. First, by being copied:European consultants imitate their Wall Street predecessors. But still more because of the sanction of theirsuccess: the legal solutions towards which Community law is tending—particularly concerning mergercontrol or judicial tactics in takeover battles—are all inspired by a practice which the Wall Street expertsunderstand and master better than anyone else because they invented it. From many aspects therefore it is the‘North American legal model’ which is in the process of imposing itself in the world of European business,as previously happened in Great Britain, where the growth of the City’s invisible trade accompanies—andaccelerates—industrial decline.

WALL STREET AND THE INVENTION OF A NEW EXPERTISE

Most commentators rightly underline the pre-existence of North American experience in mergers andacquisitions. They are traditionally two of the chosen means for reshaping American industry. Likebankruptcy, this activity is cyclical: the great waves of M&A, like those of 1898–1904, of the 1930s or atthe end of the 1960s which marked the end of post-Second World War prosperity, have had the mostprofound effects on the economic landscape. The return of such a wave of M&A in the 1980s both reaffirmsthis fact and adds a new element. For the first time, ‘blue chip’ companies are threatened; restructuring is nolonger confined to the absorption of more or less bankrupt small and medium-size businesses by greatconglomerates using this means to widen their interests or increase their share of the market. The number ofacquisitions in 1988 is half that of 1969, but the average value of the transactions is ten times greater (Prot

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and de Rosen 1990:55). We are entering the era of ‘mega-deals’. In their turn, the great conglomerates arethemselves becoming vulnerable. This is notably the case with those created in the previous wave oftakeovers. New predators are slicing them up, slimming them down and selling them off piece by piece.

Contrary to the most widely held opinion, this new situation cannot be explained solely by the appearanceon the scene of such famous corporate raiders as Carl Icahn or T.Boone Pickens (Bruck 1988). The high profileof these famous ‘soldiers of fortune’ must not make us forget the role played by their troops: the ‘experts ingrey flannel suits’. Without the work and inventiveness shown by these lawyers, accountants and investmentbankers, the raiders would undoubtedly have remained in the wings of the economic theatre like the‘vultures’ that swarm in every crisis period to undertake the menial tasks of capital restructuring. Theiropportunity arose from being able to rely on the sophisticated abilities of brilliant and ambitious young menrich only in university degrees. The loyalty of these mercenaries was guaranteed by their ambition and theresentment felt by these middle-class experts, who were often newly arrived immigrants, against the ‘oldguard’ who alone had access to the great Wall Street law firms (Bruck 1988:331).

It is impossible to understand the impact and the effect of this new wave of financial restructuring unlessthe sociological characteristics of the different protagonists is taken into account (Brooks 1988:76, 104). Itsaggressive nature and sophisticated technology is fed by the class rivalry between the gentlemen of thebusiness world, over-reliant on the power of the ‘old boy network’ to bother about investing in techniques,and the educated upstarts, excluded from the Establishment, who can only hope to make their way byaggressive use of their knowledge. Pushed into areas disdained by their older-established rivals (areas suchas bankruptcy, hostile takeovers, junk bonds and pension funds), these experts in narrow fields have becomespecialists in technologies that were previously despised (such as proxy battles, judicial ‘guerrilla warfare’,tax and financial engineering) which they try to revalue by exploiting all their potentialities or by applyingthem to new fields (Nora 1987:88). Like gun-powder in ancient China, all these techniques were known buttheir use was strictly limited and controlled by the hierarchical structures of the different professions. Onlyby joining together could they create an explosive mixture, capable of threatening even the best-establishedenterprises. The power of the technology used in hostile takeovers derives from the fact that these legal-financial battles are fought out simultaneously on several levels and they create a reconstruction oftechnical know-how.

This is why, to explain this phenomenon, the feelings of exclusion and revenge which drive a great manyof these new professional mercenaries must be taken into account (Sampson 1989:47): the similarities intheir social progress help to explain the ties of professional collaboration which have been created in thisnew field between financiers, lawyers and accountants or tax experts. Whatever their initial speciality, theyall insist on their ability to operate as multidisciplinary teams and to keep the ball in constant play (Johnston1986:33–4). The strength of these new networks derives from the social homogeneity of their members. It isno accident that all, or nearly all, the ‘M&A stars’ found in most of the great battles, such as Milken,Wasserstein, Flom, Lipton…pride themselves on being the first generation of professionals to emerge fromthe “ghetto of the garment industry”’ (Bruck 1988:205). The solidity—and hence the strength—of thispolitical alliance is nourished by its social cohesion. The ideology of these newcomers (Ehrlich and Rehfeld1989), who declare openly that they are at war with the Establishment, is in line with that of the newpredators who present themselves as the champions of small shareholders against the unfair privileges of theindustrial grandees. Effectively, the shareholders of the target companies, whose value increases by aboutone-third when raided, are the major gainers from these transactions. The intermediaries also profit sincetheir gains are proportionate to the amounts at stake. It matters little that these ‘small shareholders’ are no morethan a myth in a financial market now dominated by institutional investors (such as the pension funds)holding between 40 per cent and 60 per cent (even 70 per cent of certain large enterprises; cf. Prot and de

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Rosen 1990: 66) of the shares traded on Wall Street. There is again a certain populist ideology that acts asthe bond in this heteroclite alliance at the centre of the new wave of M&A against the Establishment of theblue chip corporations.

This reversal of fortunes has been short-lived; the reaction of the dominant groups was not long incoming. The efficiency of these new techniques has invited imitators at the same time as it has contributedto the rapid advance of its creators. The great law firms and financial houses of Wall Street have quicklyunderstood the advantage they can draw from these new weapons, whether to sell to their clients, forhandsome fees, the most sophisticated means of defence, or to provide them, for even more exorbitantsums, with weapons with which to attack their rivals.

The first hostile takeover launched by one of the great investment banks on Wall Street (Morgan Stanley)dates from 1974; but it was from the 1980s onward that the craft of M&A became a real industry, relying onintensive research and financial analysis, the systematic prospecting for ‘targets’ or potential ‘hunters’, andfierce competition between the different ‘stables’ to involve themselves in the great deals or to lead the hitparade published regularly by the specialist press. The investment banks, the establishment (‘white shoe’)law firms, and even a certain number of consultancies from that point had departments specializing in M&A.These services employ up to several dozen highly paid specialists who consider themselves—and areconsidered—the elite of their professional world. This is not solely because of their enormous salaries—which are in line with the profits they obtain for their respective firms—but because this specialization andintense competition generates ‘a frenzied process of innovation. They refine increasingly the technology ofthe hostile takeover…. The techniques of defense are progressively improved along with the growingviolence of attacks’ (Nora 1987:189). Moving on from passive defence (principally the different forms of‘poison pills’ or ‘golden parachutes’), active defence is increasingly seen by means of mergers orrecapitalization which in one way or another oblige the defender ‘to do to himself what one is trying toavoid allowing the raider to do to him: to restructure’ (ibid.: 190). The highest sophistication is to profitfrom the raider’s attack to mount a counterattack oneself (a method called ‘pacman’); or, better still, tocome to the rescue of the target under the honourable disguise of a ‘white knight’, which allows one todevour it with its willing consent. As the use of financial techniques such as MBO (management buy-out),junk bonds, bridge loans or mezzanine financing allow one to launch attacks with no more than 10 per centof one’s own money, take-overs are put within the reach of anyone—or almost anyone—and, however big,no corporation or conglomerate is any longer safe from these attacks. Every company head feels himself tobe prey or hunter, if not both at once. Because of this Wall Street mind-set, a mixture of aggressiveentrepreneurialism and technological sophistication is penetrating the business world step by step, where itis replacing a less-formal culture (Macaulay 1963), more concerned for its continuation—in which areinscribed its strategies and its web of relationships—than for immediate financial profits.

The extension of a ‘raid psychosis’—with its reverse, the development of a raider mentality amongstcompany directors—is the good fortune of lawyers. As the abundance of capital and the sophistication offinancial technologies open up almost unlimited possibilities, the law and the courts are becoming the favouredbattlefield for these takeovers, both for defence and attack. From the opening of hostilities, both hunter andprey mobilize armies of lawyers and start litigation in all possible courts. For the one as much as for theother, winning in court counts less than acquiring tactical advantage: to intimidate and demoralize theopponent or to ruin his public image in order to force him to negotiate; to gain time in order to find newsolutions. The lawyers are all the more skilful at employing these guerrilla tactics because they operatesometimes as attackers and sometimes as defenders. No one knows better the weaknesses of a system ofdefence or of attack than its inventor or the inventor’s closest competitor. The more sophisticated thesesystems, the more indispensable these highly specialized legal hired guns become.

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The ambiguities of the law and the complexity of a federal judicial system increases their room formanoeuvre considerably, making all sorts of delaying tactics possible. The virulence of politicalconfrontations concerning takeovers makes every legislative and even every legal decision uncertain. Recentevents have brought into the light of day the fragility of over-indebted enterprises in the aftermath of aleveraged buy-out (LBO) and a number of stock exchange scandals culminating in the collapse of Drexeland the unravelling of the networks contrived by Milken which had created the strength of the junkbondmarket. This seems to weight the political scales in favour of the anti-raider camp—an alliance of theindustrial grandees of the business round table, the unions and local politicians who are concerned aboutfactory closures and the draconian slimming-down of workforces, and a small number of professionals, suchas Felix Rohatyn and Marty Lipton, who, having helped to launch this phenomenon, are now made uneasyby its excesses. In contrast, the Wall Street professionals remain, for the most part, opposed to anyintervention by Congress aimed at dissuading hostile takeovers. Without these, they say, a stock exchangealready sickly is in danger of real collapse. They rely also on the support of bodies like the SEC (Securitiesand Exchange Commission) which remain impregnated by a neo-liberal creed in regard to the ability of thefinancial market to regulate itself and the effectiveness of takeover as a counterweight to the power andindependence of company directors.

Whatever the issue of this conflict of interests, the M&A market has more or less cleaned itself up. Theincreasing scarcity of junk bonds is making financial raids much more difficult to mount; at the same time,the wave of restructuring to which they have contributed is bringing about the disappearance of theirfavourite prey, the giant conglomerates built up in the late 1960s. In short, the big industrial operators—American or multinational—find themselves masters of the field, free to reutilize for their own plans thetechnologies invented for the raiders.

The slowing-down of the internal North American market is accelerating a process of internationalizationthat was already well underway. Europe appears as a marvellous new playing field for the ‘magicians oftakeover’ eager to export their know-how.

THE EMERGENCE OF A EUROPEAN M&A MARKET

To compensate for the relative exhaustion of their home market, the Wall Street professionals are turningtowards a Europe that they are inclined to consider as their ‘New Frontier’. Their optimism is increased by apoll conducted by Peat Marwick, according to which 62 per cent of European companies say that they areseriously considering a merger or an acquisition in Europe. They are also convinced that they are far betterequipped to exploit this potential market than their European look-alikes and rivals; first, by reason of thereputation and contacts they enjoy among the leaders of the major enterprises; and next, because theybelieve that they alone command the financial, human and technological resources demanded by complextransnational deals. Cosily installed in their protected markets, the European financiers and lawyers haverarely put a nose beyond their own frontiers. This is because they are seriously handicapped by the smallsize of their firms, and by national jealousies and peculiarities, whereas the self-promoting argument of theNorth American consultancies emphasizes their experience of a continent-wide market and of dealsinvolving a multiplicity of courts. Some of them do not hesitate to add that their method of organization isparticularly well adapted to the needs of M&A which demand the rapid mobilization of a team ofspecialists, juggling with international assessments and tax systems, as much at ease in negotiations as inthe arcana of company law and who are, above all, willing to work themselves to exhaustion and beyond.All these qualities, according to them, are those of North American lawyers rather than of their European

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counterparts. Even if the latter do get a move on, their handicap remains that of the newcomer in a marketwhere long establishment is one of the supporting pillars of supremacy.

On this level American lawyers possess a serious advantage. The recent attacks by the M&A ‘youngTurks’ against the grandees of Wall Street have served only to re-establish the authority of the ‘white shoe’law firms (Smigel 1964); an authority which goes back sufficiently far to be ‘naturalized’ and consolidatedin legitimate institutions such as the antitrust laws. These ‘law factories’ are in fact contemporaries of thefirst great wave of mergers and industrial concentrations of which they were one of the essential tools. Thiscontribution to the process which gave birth to monopoly capitalism was the origin of a lasting prosperity;first, by reason of the close links forged on this occasion with the great financial operators who they guidedthrough the maze of anti-trust legislation; and then, because the symbolic capital of know-how and juridicalinstruments built up at this period constitutes, to this day, a key element in the toolbox they market.

It is on this foundation that they have set up shop in the European capitals where they hope to reproducethe success that forms the basis of their fortune. They used to impose themselves as go-betweens or brokersbetween politics and the demands of the different factions in the business world. In this effort, they followthe double-role strategy that has served them so well in Washington. First, they offer, discreetly andbenevolently, their technical advice to a new bureaucracy that is all the more receptive because it is facedwith an immense task—that of designing, and then of imposing, a regulatory system that must apply to awhole continent; while at the same time it lacks any experience and has to establish its authority in the faceof claims by state or professional organizations, each jealous of its own small kingdom. Simultaneously, thesemultinational firms of expertise guide their clients through the maze of rules that they themselves knowbetter than anyone else because they participated in their creation and development.

Is this optimism exaggerated, characteristic of the almost imperial arrogance of a professional group sosure of the superiority of its own juridical-political system over other systems that it dismisses too facilelyas archaic? Perhaps not. The great strength of this legal expansionism is to advance under cover ofinstitutions arrayed in the bright colours of progress and efficiency, but which also ratify the strategicadvance of those who conceived them. It is under the banner of anti-trust legislation that these modernmissionaries—landed by the plane-load at Brussels airport—preach their doctrines to recreate a religion thathas served them and their clients so well across the Atlantic for almost a century: that of the defence ofliberty against the hydra-headed monster of state intervention.

The unification of the ‘Europe of affairs’ is surely the equivalent of the great railway building that at theend of the nineteenth century introduced two of the most characteristic institutions of North Americanmonopoly capitalism: the large law firms of Wall Street, which put their technical knowledge and theirpolitical legitimacy at the service of ‘robber barons’ such as J.P.Morgan; the Sherman Act, forerunner of amethod of regulating mergers and concentrations that made the judge the umpire of a political balancing actbetween the appetites of the great Wall Street financiers and the fears of a middle class of smallbusinesspeople, whose populist ideology expressed the fierce determination to defend social andcommercial structures menaced with extinction (Sklaar 1988). Paradoxically, in posing as strict defendersof the concept of market competition faced by a federal government inclined to favour the new arguments interms of rationalization and economic efficiency, the judges of the Supreme Court were not acting solely inaccord with a professional ideology and social background that predisposed them to become the defendersof the ‘little man’ against the monopolies; they also contributed to the institutionalization of the power of WallStreet law firms as intermediaries, as necessary as they were legitimate, in the field of business restructuring.The complexity and severity of the legal mechanisms made these firms indispensable to the financiers whoemployed them; they also allowed them to manifest a certain independence with clients whose powertempted them always to reduce these lawyers to the level of employees, if not hired guns (Gordon 1984).

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Even if such a scenario is not improbable in a European situation, a similar result cannot be obtainedwithout effort. For that reason the large Wall Street houses spare neither their time nor their resources. Theymultiply seminars and meetings in which these New York prima donnas explain the subtleties of the M&Agame to a selected audience of business leaders, high officials and aspiring professionals. They distribute avast number of brochures and newsletters among their potential clients that set out to explain and dissect thelatest developments in law and politics that may affect practice on one side or other of the Atlantic. Finally,these experts, always overworked and whose time is worth gold, never hesitate to devote hour upon hour toactivities that appear gratuitous, such as the production of articles, even of books, falling midway betweenlearned commentaries and promotional literature; in the same spirit, they cultivate their image amongjournalists: it is a matter of becoming known outside the narrow field of the initiated. This is the purposeserved not only by the general financial press but also by the new ‘trade publications’ specializing ingeneral corporate legal practice or more narrowly focused on M&A, which are a kind of Who’s Who,constantly revised, where the titles of nobility are the number and magnitude of deals brought to a happyconclusion, with particular mention of the inventors of any new and especially ingenious method of attack ordefence.

All these non-profit-making—or not immediately so—activities are really investments designed to createa European M&A market or, to be more precise, to open it up and reshape it to ensure its homogeneity andthe pre-eminence within it of this new kind of expertise. In fact these firms never advance into completelyvirgin territory. Mergers and acquisitions were not unknown in Europe before their arrival. There aselsewhere, cartels, the swallowing up of less successful rivals and vertical concentration are inherent incapitalism. They are, like bankruptcies, one of the principal instruments of the circulation of capital. Butthis phenomenon took on a wholly new dimension from 1985 onwards. While the number of suchtransactions decreased in the USA, it doubled in Europe between 1985 and 1988. The rupture is even moresevere if one considers only those transnational operations which increased their value tenfold during thesame period (Prot and de Rosen 1990:22). The United States and the United Kingdom remain the favouriteareas for M&A, but European companies are, given the commitment to a single European market,discovering the opportunity presented by external growth.

There is nothing exceptional about these rapid fluctuations. The M&A market is cyclical in nature. Thegreat waves of ‘merger mania’ (1890–5, 1930–5, 1967–72) mark the end of periods of expansion. Outsidethese periods of intense reconstruction, this kind of activity once again becomes marginal, not solelybecause of the reduced stakes but because it ceases to be a full-time activity for the professionals engaged init. Just as Mr Jourdain ‘made prose’, a small number of merchant bankers, politicians and high officialscarried out M&A without knowing it, or rather, without feeling the need to make it known. Again, outsidethese periods of frenetic activity where the importance of the stakes led to a certain degree of visibility, thishigh-profile mediation activity was better carried out in the wings of the economic scene. The chiefoperators were private institutions such as Morgan Grenfell, the Deutsche Bank and Lazard (Ferris 1984:137). Where governments involved themselves in the game, as did the French Ministry of Finances and,although in a more punctilious manner, the Industrial Reorganization Corporation, nevertheless it remaineddiscreet, if not secret. Each of these national territories had its own rules— usually unwritten. The lawyers,like the journalists, were only invited to hear the bans read. Where there were disagreements it would havebeen unheard of to call in a judge or to appeal to public opinion. The workings of these closed markets,reserved to its initiates, was at the opposite pole to the American system where the press published detailsof the ferocious battles between various groups. Competition had to be discreet in this private club, wherethings were arranged by the ‘gentlemen members’. In every way it could only have a limited impact, giventhe very weak fluidity of this market. It was a far cry from the ‘beauty contests’ introduced by the yuppies

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of Wall Street. The power of these old-style intermediaries was drawn from a web of long-standingrelationships (Bourdieu 1989:516). Restructurings that led to good results contributed to the redefinition andreaffirmation of their respective spheres of influence. The limited number of initiates allowed these‘mediators of business’ to work in the shadows and to enjoy at least a relative serenity. Because they limitedthe risks, these power groups escaped the infernal rhythm that characterizes the modern atmosphere ofM&A because it has been invaded by newcomers who do not feel themselves in the least bound by any‘gentlemen’s agreements’.

The cyclical character of this activity favours the renewal of the game’s rules at the same time as there isa change of players. By definition, the almost ‘domestic’ (Boltanski and Thevenot 1987) method ofregulation that we described cannot function in a large market. The narrowness and the personalizedcharacter of the networks of trust and influence which support these practices prevent any rapid adaptationto a booming demand. To construct supple and effective mechanisms of regulation requires time. It is thisinertia of traditional structures which in times of crisis leaves the field open to intruders. These modern carpet-baggers cannot depend on the same resources as those whose places they mean to take. Their whole efforttherefore aims at creating new rules that are more favourable to technical rather than to gentlemanlymethods.

It is for this reason that the debate stimulated by the modern type of M&A takes on at times the furiousnature of a war of religion. The differences of opinion about the opportunities presented by these newjuridical-financial technologies in fact conceal a confrontation between two power cultures: the one foundedon long existence and close ties between its members, the other simply on competitiveness and skill.Against the ‘aristocracy of business’, anxious to preserve a moral code and ‘good manners’—which alsoeffectively protect its market against the ‘barbarians’ —there is opposed a meritocracy determined to makeits techniques and its ‘workaholic ethic’ prevail, denouncing archaic methods, amateurism and the ‘palstogether’ mentality of the Establishment. ‘It is the computer versus the business lunch.’ Françoise Chirot(1988) describes this contrast very vividly:

Lazard are the champions of this intimacy between finance and industry which is indispensable to thiskind of marriage. There is nothing like dining regularly and informally with the bosses of largecompanies in order to get some feeling about their strategies and offer them at the right time the very‘affair’ they were dreaming of. Only long-existing relationships confer this privilege. Newcomers tothis business are obliged to use more pragmatic methods. ‘We are not “grands seigneurs”, so we relyon techniques’, pleads Simon Luel, a Credit Lyonnais Director.

It is these newcomers who create the success of the American method whose great merit is that it can be easilycopied: much more so than the old boy network. These imitators acclimatize those techniques and facilitatetheir institutionalization. Instead of running the risk of being denounced as the expression of a dominanteconomy, these technologies make themselves invaluable by seeming to be the means by which a somewhatsclerotic professional culture can regenerate itself from within. This process of homologation of an expertiseof which they are the inventors confirms the seniority and supremacy of these North American pioneers. Togive themselves prestige, the local disciples boast about the professionalism of their Wall Street ‘professors’that they contrast with the archaism of the Continental establishment. Preceded by this aura, the ‘highpriests’ of this new professional culture gain entry by the front door into the European market to cream offthe most prestigious and profitable deals. The same journalist who described the contrast between ‘the secretkings of Paris’ and the modern M&A workaholics goes on to point out out that these latter are still ‘far fromhaving the professionalism and sophistication of the American originals whom they imitate and envy.’

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The diffusion of juridical practices from a dominant economy can all the more easily give the impressionof mimicry because the same logic— that of the challenging of orthodoxy by the young Turks—is at worksimultaneously in different juridical cultures. The most ambitious or the most highly motivated of the localprofessionals are eager to imitate the techniques and expertise of their foreign opponents. Thus theyaccelerate the internationalization and the penetration of their own market without any need for thedominant economy to resort to a sort of ‘gunboat policy’.

The power of the American model derives also from the competition which sets against one another thevarious centres of power that until now have shared out the European territory. Who will carry the day here?If the logic of international division of labour prevails, it is clear that London would have good reason to claimcontrol of the European M&A market. The power of its financial market, the concentration of resources andskills, the extent and long existence of its network of international relations: all pre-destine it to play acentral role in reshaping European industry. Everything points in this direction, except the reluctance of theother European capitals—and of the national elites—to be content with a subordinate role. In playing on thelegal formalism of EEC mechanisms, the countries of Continental Europe are putting in place new judicialmodes of regulating the M&A market which threaten the self-regulation of the City, the basis of itsindependence and authority. Under these conditions, it can only bow to necessity by changing over toAmerican regulatory practice. This is not without internal difficulties and skirmishes; but to the greatersatisfaction of the US law mega-firms, and perhaps still more to that of their British counterparts, therapidly growing firms of City solicitors who see in this breaking of moulds a favourable opportunity toshake off to some degree the condescension of the merchant bankers, at the same time as they see anexceptional chance to consolidate their advance vis-à-vis their continental rivals in the European legalmarket.

To give a more concrete description of the interplay of these forces gathered round the creation of newCommunity institutions in which new geographies of power are taking shape, we need to analyse twoneighbouring and complementary areas which still preserve their specific character: that of the control ofmergers and that of regulations governing takeovers.

THE ANTI-TRUST ‘MISSIONARIES’ AND THE COLONIZATION OFCOMPETITION LAW

The emergence of European competition law illustrates very well this close interweaving betweenprofessional practices and law-making. It also witnesses the complexity of the paths via which juridicaldevices are imported. We have already seen that American firms arrive in Brussels in the firm expectation ofexploiting their expertise in anti-trust regulations. Effectively, in choosing a mechanism of this type toregulate the M&A market the Community authorities give value to an expertise in which these firms areunequalled and they also help to open up to them the European market of M&A. In so far as the law canprovide arguments for defending oneself against a hostile takeover, this type of legal competence becomesone of the criteria by which the defender—or the attacker— chooses their counsel. Nevertheless, one shouldnot be satisfied with too simplistic an explanation, or think in terms of a conspiracy. It would be pointless totrace the more or less hidden influence that these multinational law firms have exercised, or sought toexercise, in the process of elaborating these rules; not because lobbying does not exist in Brussels—after allthese same firms claim it as one of the skills they intend to use—but more simply, because in the event it isnot necessary. It is in very openly exercising their metier of defending their clients’ interests before theLuxembourg Court that these American lawyers have pressed the cause of a European competition law,which is also their own cause. In requesting European judges to intervene and prevent an attempted takeover

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—a tactic currently used across the Atlantic to gain time (Tomasic 1990)—they have given the Commissionbureaucrats the means they were looking for to give life to projects which until then had lain dormant intheir files… since 1973. The legal verdicts offered the possibility of putting pressure on states reluctant tosurrender any authority. Paradoxically these rules have been applied before being promulgated. Law hasbeen born out of practice.

Brussels’ initial projects encountered a united front of opposition. Countries where a mechanism forcontrolling competition already existed were ill-disposed to abandon it in favour of Brussels. Others—notablyFrance —preferred to argue in terms of industrial policy. When Peter Sutherland wanted to re-establishthese projects on the agenda, he relied on decisions by the Luxembourg Court which opened the door to controlby the Commission in all matters of concentration on the basis of articles 85 and 86 of the Treaty of Rome.Very cleverly this Irish barrister knows how to ensnare large companies in his plans; he has made themrealize that without an appropriate system of regulation he intends to use to maximum effect theopportunities offered by the Court. Such a sword of Damocles is not at all attractive to business leaders inview of the advent of the Single Market. They are therefore not simply content to urge the Commission togo ahead; they are also putting pressure on their respective governments to institute as soon as possible asystem of ‘one-stop shopping’ control based on clear criteria. All the way along the large law firms haveplayed a decisive if discreet role. If they intervened, it was for the benefit of their clients. Were theirinterests not the same? Before the judge they plead in favour of an extended application of articles 85 and86 to a type of transaction that the authors of the Treaty of Rome could not have foreseen. In parallel, infront of the political and bureaucratic authorities, they emphasize how much the present legal confusion anduncertainty makes the adoption of new regulations a matter of urgency. But in all these cases, they aresimply playing their classic roles of advocates and competition law experts. Moreover, these proceedingsand, in a more general manner, all the interventions in which their interests and those of the clients coincidewith the Commission’s, have allowed these American law firms to create a growing familiarity with thefunctionaries of the Competition Directorate. In this way they are progressively confirmed as the idealintermediaries for company directors who wish to negotiate a preliminary agreement on any project for amerger or an acquisition. To the degree that they have ‘the ear of the Commission’ they can predict withsome degree of certainty what will be acceptable and what will not. More exactly, they are in a position to givetheir clients advice on how to put together an acceptable proposal.

The analysis of the relationship between professional practice and the law-making process would not becomplete without an examination of the key role played by the Bundeskartelamt and, more generally, by theGerman competition law specialists (Holzapfel 1988). This influence, moreover, is not in opposition to thatof the US law firms; it complements it in giving it a complexion of political legitimacy. All through thenegotiations the German representatives have argued that Community control of mergers should take intoaccount only competition criteria. They have vehemently denounced any temptation to allow any otherconsideration of social or industrial policy, insisting that it would open the door to endless politicalpressures and quarrels in which Community control would risk becoming bogged down forever. Theirinfluence has been even greater in regard to the practical implementation of these new regulations. TheBundeskartelamt (BK), with its 230 officials, represents the principal reservoir of skill and experience oncompetition regulation at the European level. Its British counterpart, the Monopolies and MergersCommission (MMC) has no more than thirty part-time members, most of whom are at the end of theircareers, if not retired. Only the Department of Trade and Industry (DTI) and the Office of Fair Trading(OFT) possess full-time inspectors; and a recent Parliamentary report found them to be understaffed. Inthese circumstances, the influence of ex-members of the BK, who were already in significant numbers inBrussels (Hermann 1989:245), can only increase with the constitution of the Merger Task Force. The highly

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legalistic style of German anti-trust practice has a good chance of being reproduced at Community level. Thiswill not displease the many US law firms setting up shop in Brussels to exploit what they are already sure isa profitable arena.

By a curious turn of history, the Germans, who strongly protested against the imposition of anti-trustlegalisation by the American occupation authorities—legislation intended to prevent the re-establishment ofthe powerful industrial cartels of the Nazi period—today find themselves the godfathers of these regulationsin the European field. Beyond its anecdotal character, this phenomenon of diffusion suggests threecomments of a more fundamental kind.

The BK has succeeded in its implantation in Germany by presenting itself as the ‘iron fist’ of theMittelstand in the face of the voracious appetites of the large industrial companies. As has happened in theUSA (see above) the success of legal practitioners in the area of competition derives from the fact that theanti-trust law was the result of a political compromise, leaving lawyers and judges with the responsibility tomanage collectively social antagonisms which the legislators cannot—or do not wish—to resolve. Theambiguity of the law allows the lawyers to play their favourite public role as ‘defenders of the little managainst the bully’, while at the same time selling their services to the ‘bullies’ to protect them against thevery rules which they helped to codify. This multiplicity of contradictory roles cannot be explained simplyas a kind of professional propensity to schizophrenia (Gordon 1984). It must be seen as the product ofsocial diversity within the professional field, reinforced—if also hidden by the dynamic of professionalcareers. Regulatory bureaucracies, in Europe as in the USA (Spangler 1986) serve as a gateway to socialand professional advance for young people richer in diplomas than in family influence. This type ofrecruitment is in conformity with their ideology as defender of small and medium-size companies against‘Big Capital’. The legalism and technology on which this authority builds its position also serves as apassport for these professional newcomers who will eventually use in private practice the know-how and thecontacts acquired during their period with the regulatory agencies.

These similarities help to explain why the anti-trust ‘transplant’ has taken so well in the German body. Itis not enough, however, to explain the international expansion of this legal mechanism. Thus, barely has theCommunity endowed itself with a European competition law than certain people are already moving on tothe next stage, negotiating an agreement on this subject between the EC and the US. One must also take intoaccount the existence of an international body of experts using the same vocabulary and the same methods.Their proselytism contributes to this rapid diffusion that they make appear a rationalization as necessary asit is inevitable. In some ways these technical experts act as missionaries. And it is not necessary to seektheir advice in order to hear a long presentation of their anti-trust philosophy, which sometimes takes on theglamour of a religious creed, concerning the virtues of competition law as the best regulator for the market.For the upholders of this faith, the state is designated as the great sinner whose untimely interventions upseta beautiful equilibrium. National politics not only falsify the true play of market forces, they pervert thestrict mechanism of the anti-trust laws. It can even happen with national competition policies when theregulatory agency is not immune from political influence. This is why most of these experts insist sostrongly on the need for a European competition authority statutorily independent of the Commission. Suchtransnational proselytism also legitimizes the pretension of these competition specialists to act as mediatorsbetween states and multinational corporations. For their greater benefit…

The last comment suggested by this story is the veritable rout of informal mechanisms, such as theMMC, when confronted by very much more formalized institutions. By definition, these informal bodiesreproduce themselves only with difficulty and export themselves poorly. There are strict limits to theeffectiveness of the ‘gentlemen’s club’. The product of time, it needs time to reproduce itself. It also andalways proves difficult to make its rules respected outside the circle of its members and initiates: a lesson

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that recurs in an even more striking manner, in the story of the Takeover Panel and its Europeanmisadventures.

FROM GENTLEMEN’S CODES TO ‘JUDICIAL GUERRILLA WARFARE’

Even if the City could surrender with sufficient grace to the American-German legalism in the area ofmerger control, it was quite a different matter when it came to the regulation of takeovers. While thequestion of concentration was not a priority for these financiers, traditionally distancing themselves fromindustry (Ingham 1984), the idea of takeover regulation was crucial to them. As on Wall Street, speculationarising from these operations forms a great part of stock exchange activity. Further, the business of advisingon M&A represents one the principal sources of influence and commissions for the merchant banks. It wasvital for these firms, if they wanted to keep control of an increasingly international market, that the rules ofthe game on the European level should be clarified and rationalized: on the condition, of course, that thisharmonization should take place according to the British model; that is to say, in extending the influence ofinstitutions and rules which are the best guarantee of these merchant bankers’ dominant position.

Indeed, the trump cards held by the City are not negligible. Its spokes-people justly claim that nearlythree-quarters of European M&A are finalized in London. It also has a good head-start in regulatoryexperience, arising from an unprecedented wave of mergers in the late 1960s, a period when suchtransactions represented up to 6 or 7 per cent of GNP. It is the code of good conduct and the system of self-regulation set up at that time—and perfected since—that the City hopes to see accepted by the Communityso that it may serve more or less as a model for the institutions in course of development for other financialmarkets. The preliminary design, proposed by DG XII as a basis for negotiation, is largely inspired by theBritish model. Even so the city has not spared efforts in the course of negotiations: press campaigns themobilization of British representatives in the Commission and the European Parliament, numerous transfersof officials from the DTI or the TOP to Brussels. Today disillusion is commensurate with the effortsdeployed. The British are the most virulent critics of the proposed directive on takeovers. The merchantbankers declare themselves deceived in their hopes of seeing the whole panoply of institutional dispositionsdemolished, behind which continental businesses shelter from ‘raiders’, while at the same time profitingfrom the opening of the British market in which they can act as ‘raiders’ themselves. Further-more, theydenounce the legalism of the Community arrangements which they fear will destroy the informal onesworked out over the years by the City, in opening the gates to American-style takeovers. Rather than sellingits own regulatory techniques to its European partners, the City feels now obliged to fight on its homeground in order to preserve it.

To understand this reversal of positions, it is necessary to go back to the origins of this mechanism ofself-regulation. The story of the emergence of hostile takeovers in the 1950s is a reminder of the features wehave already noted in describing the transformation of Wall Street’s methods during the 1980s. The plot andthe actors are the same (Sampson 1982: 178): newcomers profiting from the obscurities and lack ofdefinition of the rules to poach the preserves of the Establishment, bypassing established traditions! After thefirst shock, a counterattack is launched on several fronts, the Establishment opens its ranks to the braver—or luckier—of the poachers; its most dynamic sections take over on their own account those new tactics thathave demonstrated their value. At the same time, the ‘guardians of the Temple’ strive to tame the fiercestardours of the innovators and cut the ground from under them in the name of a subtle distinction between‘good’ and ‘bad’ takeovers (Roberts 1989).

This defensive reaction is explained by the risks which this type of scenario brings to the whole financialcommunity. To use public opinion as a favourable witness too often in these juridico-financial battles is not

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without its dangers. The politicians, whether Labour or Conservative, could be tempted to play on thepopulist sentiments of a public all the more sensitive to the excesses of financial brigandage because it suffersthe consequences directly. In these cases, the bankers’ pragmatism urges them to take over the gamethemselves by acting as their own housekeepers and guardians. Therein lie the origins of these systems ofself-regulation. It is also the source of the criticisms levelled at them.

At the end of the 1950s the electoral success of the Labour Party revived fears in the City of seeing anexternal guardian imposed on them, such as the Securities and Exchange Commission (SEC). Under theleadership of the Bank of England the great merchant banks finally decided to put their house in order. Thefirst takeover code, which in fact never dared breathe its name, contented itself with extremely timid‘recommendations’. Meanwhile these same great banks, such as Morgan Grenfell, were realizing theopportunities offered by these new techniques (Sampson 1982:179). Unfriendly takeovers no longerappeared ‘deplorable’ and ‘unfit for gentlemen’, but as ‘means of reviving failing or poorly managedindustries’. In brief, it was no longer a question of forbidding them but simply of avoiding, as far aspossible, any excesses which could tarnish the City’s image. The self-regulation adopted aimed above all at‘washing one’s dirty linen in private’ in order to limit the public disquiet that would harm everyone. It wasalso a strategy to protect against the newcomers, who were unlikely to submit with good grace to the rules ofa club that left them with the beggar’s portion.

The ‘barbarians’ being thus held at bay, the ‘gentlemen’ could devote themselves serenely to the ‘good’takeovers. The 1960s saw a proliferation aimed at industrial restructuring. Some were even launched withthe support of the Industrial Reorganization Organization created by the Labour government. All the great Cityhouses profited with delight, as this manna dropped from heaven into their laps, and they did not concernthemselves too much with the code of good conduct that they had imposed on themselves. The haziness ofthe rules and their elastic character left plenty of room to violate, if not its letter, certainly its spirit, in orderto gain victories for their clients or to increase their own profits. As Hobson (1990:121) describes it:‘Regulation was light; the Governor raised his eyebrow, not his hand.’ In 1963 and again in 1968, with thepromulgation of the City Code and the creation of the Panel on Takeovers (TOP), the rules remainedineffective to prevent every shady deal. The TOP had been provided with a battery of sanctions and a full-time staff (mainly active practitioners from the merchant banks, city solicitors and brokers on secondment),but it remained according to Hobson ‘a flawed body, run by merchant bankers for merchant bankers’(ibid.). The critics of this institution had an easy task in denouncing its ineffectiveness, as in such cases asthe takeover launched against Gallaher by Morgan Grenfell and Cazenove on behalf of American Tobacco.In spite of the open and proven infractions of the rules, the guilty parties, pillars of the Establishment,extricated themselves fairly easily with a mild penalty that hurt neither their profit nor their reputation.Since then, it is true, both the Code and the Panel have been strengthened. But the development of theregulations had done no more than follow—belatedly—the new tricks of the financiers. Real sanctions arerare and public admonitions seem powerless to control the frequent minor transgressions.

To these critics who consider the TOP to be a toothless tiger, its defenders reply that the more legalisticsystems, like the one in operation in the US, have proved no more efficient at preventing abuses. In anera of permanent flux, like that of takeovers, it is impossible, they emphasize, to keep to the letter of the law,unless one were to employ an army of lawyers and encouraged a division of labour in which the financiersgave autonomy to these men. In contrast, they preach the merits of the British system. According to them,self-regulation brings a moral tone to the profession from within. The informal and pragmatic character ofthe TOP, the encouragement (which is almost an obligation) to preliminary consultations, leads operators toquestion themselves concerning the legal basis of their action before it is too late. The accent is on the spiritrather than the letter of the law. When a new problem arises, the rapid intervention of the Panel, the informal

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and practical nature of its decisions, allow it as a general rule to arrive at rapid decisions that conform to thespirit of the Code and are generally acceptable. The best proof, they say, of the system’s virtues is that thecourts usually refuse to intervene in the quarrels occasioned by takeovers, even when they are asked to doso by one of the parties.

In this debate, it is clear that both sides argue in conformity with their own interests. The plea of thePanel’s members is a direct reply to the threats from the Community proposals (Tait 1989), while criticismsof it come principally from all those who feel excluded from the game, notably the solicitors. These latterare all the more vehement because they are becoming more assertive in general. Having for a long timeplayed the role of technical but unobstrusively devoted collaborators of the merchant bankers, the large firmsof City solicitors are eager to profit from the opportunity offered by the Common Market. They are lookingfor a bigger slice of the cake represented by M&A. This does not prevent them from keeping their distancefrom North-American hyper-legalism: a distance that helps to protect them from their Wall Street rivals.Nevertheless, in private these City solicitors are not slow to emphasize the weaknesses of British self-regulation.

The Panel, under cover of pragmatism, refused to consider itself bound by precedents. In the absenceof a true legal code, uncertainty is at its maximum. Look to see who profits from this. If you want tolaunch a hostile takeover in the London market, you have to turn to the services of a well-establishedmerchant bank. It alone will have the ear of the Panel, it alone will know what you can and can’t do.Without it you run the greatest risks.

This lawyer, closely connected to the Panel, concludes: ‘It is the most formidable defense of their monopolythat a professional group could dream of possessing.’ The feeling of exclusion, which lies behind thesecriticisms is none the less not without foundation. In reply to a question about the growing influence oflawyers in takeovers, a previous Director of the Panel emphasized that ‘merchant bankers, and not thelawyers, remain the principal link between the TOP and the parties to a bid. The Panel would like to keep itthat way’. He continued by advising the parties not to look for lawyers to represent them, under the pretextthat these latter are not familiar with the Panel’s practices (Financial Times Conference on Mergers andTakeovers 1990).

Even more than these inter-professional rivalries, the British model can be explained by the dominantposition of the City and the gulf which separates it from the industrial world. Self-regulation is the privilege(in the strict sense of the term) of a dominant group which until now, thanks to its sociological homogeneityand the importance of its political influence, has been able to avoid all exterior intervention, whether fromthe courts or, even more so, from some state bureaucracy such as the SEC.

The highly liberal concept which prevails in Britain in regard to takeovers reflects the dominance of thefinanciers over the engineers. In contrast to their American counterparts, the merchant bankers of the City werescarcely involved in the first wave of industrial restructuring (Ingham 1984: 163). At that period, theEmpire and ‘overseas’ investments constituted the chosen field of action for the little world of cosmopolitanpatricians from which were recruited the heads of the great merchant banks. It took the dissolution of theEmpire and above all the difficulties of the pound to make this oligarchy draw in its horns and repatriatesome of its capital. But that is not to say that it abandoned its prejudices against any direct participation inindustrial affairs. When, after the First World War, the great merchant banks reinvested in the home market,they chose to do it by means of a system that allowed them to intervene in the financing and reshaping ofcompanies but at a distance, without dirtying their hands. This control at a distance was only made possibleby the powerful influence they possessed, whether with the Bank of England or the Treasury, which allowed

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them to resist the emergence of an industrial policy. With the help of these two key institutions, governmentsaw itself denied any rights over the internal operations of the City, and it also had its hands tied in thematter of intervening in industry. Nothing must hinder the freedom of the financial market. Labour’shostility to the liberal handling of takeovers is not founded on the social cost alone of this financial piracy;even more fundamentally it reflects the antagonism between two concepts of industrial policy: that of theLabour Party—shared by a section of the industrial world—according to which the state should play a keyrole in industrial restructuring in order to ensure that public welfare and economic rationality prevail; on theother side are those who condemn this as ‘corporatism’ or ‘state monopoly capitalism’, and who considerthat any political interference can only distort the freedom of the financial market, which alone knows howto make the best use of capital. This camp, led by those who defend this liberty all the more vigorouslybecause they are its principal beneficiaries, have had things all their own way since the beginning ofthe 1980s, under the banner of Thatcherism. Unfortunately for them, in spite of the liberal ideology whichgoverned the creation of the ‘grand market’, it seems they are having some difficulty in imposing theirliberal programme on their European partners. The objections of these latter appear to be sociological andpolitical rather than ideological. The ambitions of the City, which are revealed all too clearly under the flagof liberalism, find themselves up against other power structures little inclined to give way without a fight.

In the conflict at a European level over the legality of anti-takeover devices, the same opposition betweentwo concepts of the regulation of the M&A market is found. The game is merely more complex, to theextent that these concepts are rooted in institutions which are themselves the fruit of specific nationalhistories. The arguments are identical with those we have sketched out for Great Britain even if the alliancesthey reveal are different. For the one, these transactions are like any other, and only the complete freedomof the market can ensure its efficiency. It is necessary therefore to eliminate all artificial barriers againsttakeovers. The shareholders must be free to accept any offer made to them, even if unfriendly. The freedomof these shareholders is moreover the best protection against abuses of power by company directors. Thepotential bids recall them again and again to their obligations towards the shareholder. According to the oldliberal dogma, the risks (of bankruptcy, like those of a hostile takeover) are the corollary of the freedom todo business. For the other side in the argument, it is on the contrary essential to restrain this free flow of theM&A market. Enterprises are regarded as more or less a public resource which must be manipulated with acaution that reflects the degree to which it affects complex social interests, particularly those of itsemployees and the neighbouring community, but also its trading partners. According to the supporters ofthis idea, the control exercised, de facto or de jure, by public authorities—or big banks, as in Germany—simply reflects the importance, as much social as economic, of the web of relationships inherent in industrialactivity.

The rarity of hostile takeovers in Germany does not mean that it has been spared the wave ofrestructuring through mergers: 802 in 1986; 887 in 1987; and 1100 in 1988, with a total value of DM 135billion (Carrone 1990). It is simply that the methods and the operators are different. As Blandin (1989)writes, ‘In RFA, it is not etiquette to give free play to the market.’ All must be done, if not in a friendlyway, at least by the intermediary—and sometimes under the ‘friendly’ pressure of the great banks whichkeep a firm grip on the M&A market.

Even if these two models are often labelled as ‘Continental’ and ‘Anglo-Saxon’ (Albert 1992) thedifference between them is far from clear-cut. As we have seen in regard to Great Britain, the dominance ofone or the other camp is never complete and national institutions reflect specific historical compromises,which can always be challenged if the balance of forces changes—as is the case with theinternationalization of the M&A market. In each of these camps, therefore, one can see developments whichanticipate and facilitate the harmonization devised by Brussels (Hermann 1989:233). Groups that were until

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now in the minority recognize the possibility of forging external alliances in order to make their voicesheard. The expression of these disagreements makes the formulation of entrenched national positions lesseasy. The global situation becomes the more confused because neither of the two concepts seems able toimpose itself clearly at the European level. We can therefore see a situation being created after theAmerican model, in which the ambiguity of the regulation reflects the difficulties of finding a politicalcompromise between the existing forces. The importance of the judicial forum arises from the inability ofpolitical authority to take sides and declare unequivocally in favour of one or the other of the twoantagonistic systems. The legal battles created by takeovers are not simply tactical; they are also skirmishesin the confrontation of competing strategies concerning the regulation of the M&A market: all to the greaterprofit of the legal hired guns, who are also regulatory experts.

Paradoxically it is in the City of London—that paradise of informal regulation—that this re-evaluation ofthe role of the business lawyer can be seen most clearly. It is there, it is true, that the inducements are greatest.Whatever their distrust of legal formalism and judicial intervention, the financiers are above all realists.Since legal tools have become an essential component in financial strategies, they rely more and more onlawyers and they bring them in at an earlier stage in the deal-making process. The lawyers, for their part,have not sat on their hands in the presence of these new opportunities. Even more than their UScounterparts, large City firms have merged in order to follow—nay, to anticipate—the evolution of theirmarket. As is the case across the Atlantic, they seek to recruit politicians: at one and the same time to openfor themselves—and therefore for their clients—the doors of the national and Community regulatoryagencies, and because the politicization of the legal field demands other types of skill than strictly technicalknowledge. A new kind of expert is in the process of emerging, who does not hesitate to come out ofdiscreet obscurity to play the role of ‘M&A stars’ for the media—even if it means tainting a little the egalitarianideology of these law firms who like to see themselves as ‘the ultimate example of Athenian democracy’. Itis true that their fees (up to £500 an hour for major takeovers) are in line with the risks run— or the bootyamassed by their clients. As one of these new stars of business law said: ‘City lawyering has become veryhigh profile!’

For the moment, the most typically British institutions, such as the Takeover Panel, continue to resist thislegalization of business. Meanwhile, even the most ferocious defenders of the ‘gentlemen’s codes’ are wellaware that they are fighting a rearguard action: the City can scarcely hope to become one of the maincentres of a global financial market while retaining the charms and privileges of an exclusive club. It is notby chance that shortly after Big Bang the British authorities began to erect a far more formal judicialframework with the Financial Services Act, a real godsend for the law firms. The opening up towardsEurope governs this evolution, which can only accelerate. The Community institutions give to these newlegal experts new weapons, at the same time as it opens up to them new fields in which to try them out:weapons of legal harassment imported from across the Atlantic but still ill-regarded by the CityEstablishment. From that undoubtedly comes the passion for European law which reveals itself by excessinvestments of every kind, of which some observers question the good sense. Opening an office in Brusselsrepresents a gamble that is both risky and expensive, even for the biggest firms. For the middling or provincialfirms, it must be asked if these international alliances are really sensible. The multiplication of conferencesand of de luxe brochures and newsletters analysing recent directives create the feeling of a certain waste ofenergy and resources. It is as if these professionals had discovered a new El Dorado which justifies abandoningtheir traditional prudence. Certainly, the advantage gained by British law firms over their Continental rivalsallows them to hope to obtain the lion’s share in the new European market for corporate legal services. Butthis applies only to the more powerful ones; it is by no means sure that there will be room for all. In every way,it seems that this frenzy of investment goes far beyond reason. Perhaps it serves to erase a part of the

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respectable mediocrity and a long tradition of prudence which condemned these solicitors always to playsecond fiddle, in the world of business, as in the professional field. Whatever the reason—and whatever thefinal disappointments—this enthusiasm for Europe among British lawyers favours the advance of the newAmerican financial-legal practices. Thus, by a kind of reversal of history the City (traditionally the greatbastion and defender of informal justice) now finds itself the point of export for the ‘law of business’ inEurope. Whatever its professional logic, this conversion can only increase the complexity of the ‘Brusselsgame’ and contribute still more to its ‘Americanization.’

NOTE

1 A legal device which is designed to deter takeovers by considerably raising the cost of acquiring a company.

REFERENCES

Albert, M. (1992) Capitalismes contre capitalismes, Paris: Seuil.Blandin, C. (1989) ‘La forteresse s’entrouvre’, Le Monde Affaires, 25 May 1989.Boltanski, L. and Thevenot, L. (1987) Les Économies de la grandeur, Cahiers du Centre d’Etudes de l’Emploi, Paris:

PUF.Bourdieu, P. (1989) La Noblesse d’Etat, Paris: Editions de Minuit.Brooks, J. (1987) The Takeover Game, New York: E.P.Dutton.Bruck, C. (1988) The Predators’ Ball, New York: Simon & Schuster.Burrough, B. and Helyar, J. (1990) Barbarians at the Gate: The Fall of RJR-Nabisco, New York: Harper & Row.Carrone, L. (1990) ‘Conquérante Allemagne’, Le Monde Diplomatique, August 1990.Chirot, F. (1988) ‘Entremetteurs pour capitaux en fusion’, Le Monde Affaires, 28 May 1988.Dezalay, Y. (1991), ‘Territorial battles and tribal disputes’, Modern Law Review, vol. 54.—— (1992) Marchands de droit: La restructuration de l’ordre juridique international par les multinationales du droit,

Paris: Fayard.Dumez, H. and Jeunemaître, A. (1991) La Concurrence en Europe. De nouvelles règles du jeu pour les entreprises,

Paris: Seuil.Ehrlich, J. and Rehfeld, B. (1989) The New Crowd, Boston: Little, Brown.Euromoney (1990) European Corporate Finance Law. A guide to M&A and Corporate Restructuring Legislation,

London: Euromoney Publications.Fairburn, J. and Kay, J. (eds) (1989) Mergers and Merger Policy, Oxford: Oxford University Press.Ferris, P. (1984) Gentlemen of Fortune: The World’s Merchant and Investment Bankers, London: Weidenfeld &

Nicolson.Gordon, R. (1984) ‘The ideal and the actual in the law: fantasies and practices of New York City Lawyers, 1870–1910’,

in G.Gawalt (ed.), The New High Priests: Lawyers in Post Civil War America, Westport, Conn.: Greenwood Press.Hermann, A.H. (1989) Law vs. Business, London: Butterworths.Hobson, D. (1990) The Pride of Lucifer: The Unauthorized Biography of a Merchant Bank, London, Hamish Hamilton.Holzapfel, H.J. (1988) Recht und Praxis des Unternehmenskaufs, Cologne: Verlag Kommunication Forum.Ingham, G. (1984) Capitalism Divided? The City and Industry in British Social Development, London: Macmillan.Jay, S. (1988) Portrait of an Old Lady, Harmondsworth, Middx: Penguin.Johnston, M. (1986) Takeover, New York: Penguin Books.Macaulay, S. (1963) ‘Non-contractual relations in business’, American Sociological Review, 28(1).Nora, D. (1987) Les Possédés de Wall Street, Paris: Denoël.Prot, B. and de Rosen, M. (1990) Le Retour du capital, les fusions-acquisitions en France et dans le monde, Paris:

Editions Odile Jacob.

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Roberts, R. (1989), ‘How the City puts its house in order’, Financial Times 4 and 5 October 1989.Sampson, A. (1982) The Changing Anatomy of Britain, New York: Random House.—— (1989) The Midas Touch: Money, People and Power from West to East, London: Hodder & Stoughton.Smigel, E. (1964) The Wall Street Lawyer, New York: Free Press of Glencoe.Sklaar, M.J. (1988) The Corporate Reconstruction of American Capitalism, 1890–1916: The Market, the Law and

Politics, Cambridge: Cambridge University Press.Spangler, E. (1986) Lawyers for Hire, New Haven, Conn.: Yale University Press.Tait, N. (1989) ‘Calcutt continues a Takeover Panel tradition’, Financial Times, 18 March 1989.Thompson, E.P. (1975) Whigs and Hunters: The Origin of the Black Act, London: Allen Lane.Tomasic, R. (1990) ‘The expanding role of the large corporate law firm: the case of takeover litigation in Australia’,

unpublished working paper.Woolcock, S. (1990) European Mergers: National or Community Controls? Discussion paper no. 15, London: Royal

Institute of International Affairs.

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Chapter 4A new judge for a new system of economic justice?

Alain Bancaud and Anne Boigeol(Translated from French by Dennis Breen)

Nowadays in France developments in the system for regulating the economy are causing a recomposition ofinstitutions and a transformation of professional role models. A good example of these trends is provided bychanges in the judiciary. The latter, which previously remained on the periphery of the business world, isplaying an increasingly central role in a new system. As a result, it has been obliged to redefine theprinciples on which it has traditionally based its autonomy and legitimacy. The judge’s position (and that ofall legal experts operating in a segment of economic regulation whose structure has not yet beenestablished) depends on the success of what the President of the Supreme Court has called a ‘culturalrevolution’ (Drai 1988).1 What is at stake is even greater, since we are witnessing the birth of a new meansof regulating society, in which jurists practising private law will have to improve their professional situation.

RECOMPOSING THE SYSTEM OF ECONOMIC REGULATION

Traditionally, judicial judges (as opposed to those of France’s administrative jurisdiction) have played onlya limited role in settling economic disputes. As Pierre Lascoumes (1985) pointed out, political authoritieshave passed on the surveillance and handling of ‘commercial illegalities’ to groups within the businesscommunity and to administrative supervisory bodies. This separation was all the easier (as we shall seelater), given magistrates’ and lawyers’ traditional lack of interest in trade and business matters (Karpick1987). Moreover, industrialists and businessmen were equally anxious to steer clear of state justice. Thelatter, they felt, contained many flaws (including excessive publicity at hearings and judges’ poorknowledge of economic restraints), making it inappropriate for solving their problems.

Today, although judicial judges still do not play a leading role in settling economic disputes, theirposition is none the less well defined, and is perhaps changing, mainly as a result of recent trends in thesupervision of economic and financial markets.

Of course, there are still whole areas in which the judge is avoided. For example, a large proportion ofbusiness disputes are settled by commercial arbitration. There are still cases that come before the judge onlyon appeal, such as those handled by the commercial courts, whose jurisdiction is part of the legal system butwhich are composed of non-professional magistrates from the world of industry and commerce. Except forcertain civil and criminal cases which, from first instance, come before judicial judges,2 the latter usuallyhear only appeals of cases concerning the ‘noble’ economy (that is, involving national and internationalcompanies and financial deals). Consequently, only a small number of magistrates become competent tohear economic cases, and the vast majority of judges have only a very hazy knowledge of this sector.

It is mainly the judges of the Paris Court of Appeals who are confronted with these economic questions,because national and international company head offices are heavily concentrated in the Paris area.3 As aresult, 22 per cent of civil cases that come before this court are based on commercial law. The Paris Court

of Appeals alone hears a quarter of appeals against decisions by French commercial courts. Its importancehas been further boosted by the new powers it received following recent changes in competition and stockexchange law.

These reforms4 reflect a certain change in how the supervision of economic activity is conceived. Thereappears to be a tendency to give judicial judges more responsibility for legal supervision of the economy, atthe expense of administrative bodies. In some ways, there is a ‘replacement of direct state supervision byother organizations that combine independent administrative authorities with self-regulation’ (Viandier1989).

The reforms, which aim to strengthen legal security in economic and financial markets, are oneconsequence of major changes in business law. The law is playing an increasingly strategic role ineconomic battles (Dezalay 1992). This integration of economic matters into a legal framework, which istaking shape mainly under pressure from US lawyers, is accompanied by a growing need for measures toensure that market forces operate normally. Not only must transactions be legally watertight, but theeconomic and financial ground-rules should be backed up by the law. As a result, businessmen must notonly think about being fair to their clients when they make deals: ‘They have to respect market rules, whichmeans doing nothing, alone or with others, that could interfere with competitive forces’ (Piniot 1991). AsViandier (1989) wrote about the new powers of the COB (France’s Securities Exchange Commission); ‘Theglobalization of financial markets, an increasing number of players and major improvements in equipment,have made a consolidation of security measures necessary.’ The stock exchange crash of October 1987 andvarious scandals linked to offences by insiders have made this consolidation even more urgent, and it mustbe accompanied by an increase in the ‘trans parency’ of financial markets. Legal security in economic andfinancial markets is thus a rapidly developing area, and is helping to reorganize the legal system byrepositioning the profession and its institutions.

This repositioning of institutions due to the reforms can be examined by considering the two major pointsthat shape them: (a) increased powers of authorities responsible for the stock exchange and competition; and(b) the Court of Appeals’ new powers, and their consequences for the structure of the French legal system.

These reforms strengthen the idea that institutions situated on the periphery of the legal system should, atfirst instance, deal with unfair competition and surveillance of the stock markets. These institutions areshaped by the fact that they include businessmen, financial experts and magistrates. They have theadvantage of being closer to economic circles than is the legal profession, giving them an expertise thatspecialists in law cannot be expected to possess. They are ‘better able to appreciate the economic value ofthe offence’ and ‘more realistic in their choice of penalty’ (Mourre 1990). The fact that these commissionsare more suitable for business disputes is further illustrated by the means at their disposal. The COB, forexample, ‘has wider, more flexible powers of repression than judicial judges’ (ibid.: 270), especially ininvestigations. As a result, the already well-established principle that handling commercial disputes requires,at first instance at least, special institutions in which business circles are well represented, has been appliedto the COB once and for all.

Although supervision of economic and financial markets is to be carried out by authorities situated on theperiphery of the judicial system, the reforms have gone a long way towards making these authorities similarto judicial courts. The magistracy’s presence in these commissions has been increased. The COB, whichpreviously contained only one magistrate, an advisor to the Supreme Court, now contains two more seniormagistrates, one from the Conseil d’Etat (the Supreme Court for administrative justice), and one from theState Audit Office. Furthermore, the anti-monopoly board and the COB now have their own powers toimpose fines. Lastly, the functioning of these authorities has been aligned with that of the judicial system by

ALAIN BANCAUD AND ANNE BOIGEOL 75

the introduction of hearings, which include cross-examination, and greater attention to the judicial basis ofdecisions.

Jurists have carried on heated debates concerning the legal status of these new authorities. The conclusionis that they are not administrative commissions and they do not have real jurisdiction, but are a phenomenonbelonging to a ‘new legal structure’, and some people even speak of ‘near-jurisdiction’ (Drago 1987).

This integration of economic questions into a legal framework provides jurists with a new market, and theprocess already appears to be well advanced. For example, before 1989 the COB’s decisions on theacceptability and the terms of a takeover bid were almost never contested before the administrative tribunal.However, ‘since we made this sort of dispute a judicial question every single takeover bid has been referredto the Paris Court of Appeals’ (interview with a magistrate).

The judicial judge’s new powers are symbolically important in so far as they are slightly at odds with theFrench legal system’s tradition of dual jurisdiction, as a result of which appeals against the administrativecommission’s decisions were within the competence of the administrative courts. There is no shortage ofarguments to justify this transfer of competence from the administrative to the judicial structure.

The most frequently cited motive is the necessity to unify case law concerning competition or the stockmarket. In both these areas the Court of Appeals already hears disputes that come before the commercialcourt and the civil and criminal jurisdictions. It has thus acquired some competence, but this is not complete.While the Court of Appeals handled legal disputes arising from takeover bids, it was not competent to ruleon the acceptability of these bids or their terms. Until recently, the Court of Appeals heard cases related tounfair competition, but was not familiar with practices which could interfere with competitive forces; that is,agreements, or abuses of a dominant market position. It is logical, therefore, that it hear appeals against theCOB’s decisions or those of the anti-monopoly board. This bringing together of disputes under the authorityof the Supreme Court, via the Paris Court of Appeals, is ‘certainly capable of endowing new Frenchcompetition law with the consistency and authority it was partly lacking before’ (Bolze 1988:174).

The administrative justice system is also considered too ineffective to regulate the economy. It is veryslow, and steps for dealing with urgent matters are rarely used and very lengthy (Gaudemet 1990). In fact,all arguments lead to the conclusion that the administrative jurisdiction is not suitable for solving businessdisputes. During discussions on the proposed reform of the anti-monopoly board, it was reaffirmed manytimes that

the judicial judge is the lawful arbitrator for companies…appeals to the civil jurisdiction are moresuitable for economic questions…the principles drawn from administrative law are not the mostappropriate for solving problems involving purely private affairs.5

If the administrative jurisdiction does not have the necessary competence to deal with matters of legalsecurity, the judicial judge is expected to have it, or to acquire it; this, as we shall see, requires changes inhis professional customs. This turning away from the administrative jurisdiction is indicative of a generaldecline in ‘the elaborate construction of French administrative law…whose light is fading inexorably’, as achief clerk at the European Court of Justice remarked (Calvet 1991). It is becoming increasingly clear that‘the traditional dichotomy of the legal system is not suited to economic law where public interests areinterwoven with the protection of private interests’ (Bolze 1988). Criticism of this durability undermines theadministrative jurisdiction and, as Europe becomes a single entity, some jurists are expressing doubts aboutits ability to adapt, given the Conseil d’Etat’s past positions on Community law (Gaudemet 1990). As aresult, by redrawing frontiers between the legal and the administrative jurisdictions, measures designed toguarantee the legal security of markets are helping to accelerate the recomposition of France’s legal system.

76 NEW JUDGE FOR NEW SYSTEM OF ECONOMIC JUSTICE?

REDEFINING THE JUDGE’S PROFESSIONAL ROLE MODEL

Regulating the business community not only challenges French legal institutions. It is also a culturalchallenge that affects the basic principles underlying the judicial judge’s traditional role model. The legalprofession, which has always favoured general competence and a single conception of law and justice, mustdeal with increasingly specialized business law and more technical hearings. This process was set in motionby major law firms, who have acquired a taste for specialization from US lawyers, and who are trying tomeet the needs of their big corporate clients, while creating protected market niches.

Moreover, when asked to appreciate the economic implications of some decisions, and to settle cases thatare often economically very important, judicial judges have to reconsider their relationship with the worldoutside the ‘legal profession, as well as with the knowledge and know-how of experts from other fields.Their introduction to the regulation of business matters poses as many questions about their inability tochair debates and to reason in an extra-legal context, as it does about their familiarity with groups ofspecialists that tend to form around, and dominate, the various segments of economic supervision. Thesecircles of specialists contain legal experts, businessmen, members of administrative or para-administrativecourts, lawyers (usually from major international law firms), and university and corporate jurists. Thejudge’s competence, like that of other participants, will be tested by these circles. They form the frameworkinto which everyone must fit, and inside which everyone will become a specialist in his chosen field. To beaccepted into such circles, one must be able to show a certain objectivity with regard to oneself, the interestsone represents, and the most traditional forms of the institution to which one belongs. Specialists get toknow each other through discussions at conferences, training courses, briefings, workshops, or throughinter-professional mobility. As a result, magistrates in charge of the new economic cases are quite oftendispatched to the COB, the anti-monopoly board, and the Ministry of Finance. It is worth noting that thismobility constitutes a resource that can be individual or collective. The magistrates in question tend to holdseveral different positions at once, thus forming a network. Significantly, the dominant institutions such asthe COB also function as meeting points for people who are themselves nuclei.

In order to understand the nature and extent of what is at stake, it is important to remember that thejudiciary is based on a tradition of withdrawal from, and suspicion of, the business community.6Businessmen have avoided the judge, and have always preferred to come to agreements and to settledisputes themselves; and politicians have tried to separate the judiciary from other elites, in order todominate it more easily. Moreover, judges themselves have remained aloof from a segment of society theydo not know, and tend to look upon with increasing distrust. With regard to the business community, judgeshave been torn between a feeling of incompetence and a sacred conviction of their own superiority. Thelegal profession’s strategy for distinguishing itself from the rest of society has, in fact, been based on non-materialism and distance from the world of money. Meanwhile, changes in its recruitment system furtheredthis detachment. Members of the mercantile middle classes have rarely been found in the judiciary, whileother segments of the dominant class disappeared progressively. Although in the nineteenth century thejudiciary included idle-rich gentry, from the twentieth century onwards these were progressively replacedby the provincial bourgeoisie (whose status was declining), middle-ranking civil servants and members ofthe lower-middle classes. For such a judiciary, the economically well-off classes to which it did not belong,or no longer belonged, became an unknown world that is distrusted. This world was often thought to begetting excessively rich, at too fast a pace, and even in a questionable manner. In his History of theMagistracy, a senior magistrate denounced a cult of ‘oversized fortunes; and ‘goods which were, in varyingdegrees, dishonestly acquired’, and emphasized that the ‘noble career’ of a judge involved ‘raising oneselfabove the shabbiness and the material considerations of everyday life’ (Rousselet 1957). In 1934, during theopening ceremony of the Supreme Court, another stated: ‘magistrates are not men of property, and that is

ALAIN BANCAUD AND ANNE BOIGEOL 77

fortunate. If it were possible, some would try to achieve this goal. And to attempt to become a man ofproperty is to demean oneself.’

Apart from discovering and recognizing a social milieu which was previously ignored and disdained, awhole tradition of professional reserve is being reconsidered. While the major state bodies were trying to pushback the boundaries of their profession by carrying out exchanges with other branches, judicial judges wereintent on protecting the integrity of their profession by demanding of their superiors that they control therecruitment process. While other state bodies were broadening their horizons in an attempt to achieve theirworldly ambitions and to further their pretensions to being the state’s right arm, judicial judges weresheltering behind the technical irreducibility and the ethical superiority of legal know-how. As one seniorjustice put it, introducing economic, social or psychological considerations amounted to ‘cross-breeding’and ‘undermining the soundness of good judgment’ (Mimin 1972). Undoubtedly, this deep-rooted distrustmellowed as time passed, and judges recognized they could not ignore economic questions. At the same time,however, they added that these were secondary matters, in which they were not really competent, and which,in any case, constituted potential threats to the unity and neutrality of justice. At best, they treated thesequestions as raw data, only gradually integrating them into a legal framework by roundabout, evenunderhand, means.

The judicial judge responsible for regulating economic matters is going to find several aspects of hisprofessional life questioned: not only his relationship with the world in general, but also with his ownpower, his aloofness as well as his political carefulness. Since the French Revolution, the judiciary has beenbased on strict submission (both practical and symbolic) to the law. The law has been its compass and itslighthouse, its strait-jacket and its reference. During the 1970s, a senior magistrate wrote that a judge wouldfeel like an orphan without the law. Undoubtedly, this relationship has become less reverential over theyears, but the legal profession’s rule has always been to speak in the name of the law, and only in the nameof the law.

More generally, the judiciary has tended to be satisfied with the role of law enforcer rather than law-maker, and to specialize in the form and authority of the law rather than legal politics. Moreover, it tookrefuge in the sceptical realism of the practitioner, who knows the Utopia of major reforming ambitions, andthe illusion of strong principles constantly made obsolete by commerce. It has always had feelings ofillegitimacy concerning politics, and incompetence in economic matters. If it now finds itself obliged tocreate the law, it does so as little as possible, and reluctantly. One magistrate, who is typical of his peers,wrote: ‘Innovation is indispensable nowadays, but it should be kept to a strict minimum’ (Breton 1975). Thejudiciary did not pretend to establish principles of case law that would become ‘general reference points’, asthe Conseil d’Etat hoped to do at one time. Its principles were more modest, often implicit and establishedvery slowly. They remained imprecise to avoid being contested and so that, later, they could be interpretedfreely. When he did not have the law to guide him, the judicial judge tended to emphasize ‘the intentions ofthe legislator’, to take refuge in a wait-and-see policy (putting off the establishment of a principle on the pretextthat the time was not right); in a pragmatic policy (judging each case on its merits); in a laconic policy (noone except himself understanding or interpreting his decisions and definitions).

But in economic matters, the judge finds himself in unfamiliar territory, where he is expected to leaveaside his carefulness and his role as guardian of the law’s exactness and stability. In the area of economiclaw more remains to be done than has been done. Very often the law does not exist, or it is too general ortoo old to be applicable. Moreover, the business community needs predictable, explicit, fast and flexibleanswers to legal questions, and not answers that are rigid, constantly put off, or made incomprehensible andunpredictable by imprecision and indecision. Fundamentally, a new conception of the law, the way it is createdand its authority, is in the making: a new, less ritualized, less general, less abstract law, that takes into

78 NEW JUDGE FOR NEW SYSTEM OF ECONOMIC JUSTICE?

account the reality of the business world. The judicial judge, who retains the power to impose sanctions,will have to reconsider the penalty and its severity. It will have to be more severe, to distinguish betweenfraudulent and professionally abnormal practices (Piniot 1991).

If the judicial judge continues simply to uphold the law and to remain aloof, he could miss the chance toimprove his position that is provided by this type of case, which is noble and could extend his power, oreven raise him in the hierarchy. Moreover, the efficiency, both practical and symbolic, of the law and justiceis in the balance. In particular, systematically falling back on the fiction of submission to the letter of thelaw raises questions concerning legal techniques and the law’s credibility, just as the impossibility ofimposing some sanctions undermines the judge’s authority and credibility.

This situation is at the heart of a debate currently taking place within the judiciary. It would be more accurateto say the upper echelons of the judiciary, since these matters involve high-ranking judges who, in general,have been chosen by the most important judicial authorities and are under the direct control of the mostimportant legal authorities. Appeals against decisions by institutions responsible for regulating the marketscome before the Paris Court of Appeals (the ‘first chamber’ to be exact—the court is divided into seven ofthese chambers), which is presided over by the President of the Appeal Court.

The judges involved in this debate fall into one of two categories. First, there are those who uphold thejudicial tradition of reserve. They see themselves as technicians of the letter of the law and the sanction.They are uncomfortable about mixing with specialists from other fields, and refer to experts almostsystematically. ‘The less we say the better’ is their motto. They see their judgment as the conclusion of acase rather than an opportunity to make the rule of law clearer and more predictable. The other category ofjudge comprises those who see the changes in economic regulation as a chance to improve their position.They believe that the judge should create law every time he has the opportunity, and he should not hesitateto become an expert in economic policy and to fraternize with other specialists. They see themselves asefficient, tolerant specialists of a legal formalization which is less rigid than that traditionally defended bytheir peers. They believe that ‘the object of a law is more important than its form’, and they claim to bemore concerned with consensual acceptance of the rule than with its formal perfection (interviews). Theyuse simplified methods to adapt to the business community, and they take it upon themselves to teach theregulatory bodies to respect the procedure of hearing both parties, to justify their decisions and to setprecedents. This type of judge has often occupied other posts, where he could judge more creatively, andwhere he could familiarize himself with the interests and know-how of other participants. This openness ofmind often makes him reluctant to return to a jurisdiction where the role of the judge is less inventive partlybecause of tradition and partly because the structure of economic regulation tends to make the higher para-administrative instances the strategic centre of the field.

The judicial institution is being challenged by the revolutionary and far-reaching nature of the changes. Atthe moment, people are wondering if the ‘new economic magistracy’ will become a specialized branch,locked in a noble cell, or a model that others will imitate.

It is worth noting, in conclusion, that the judicial judge does not control the situation in which he findshimself, and he may have to change more radically than he expects. Lawyers who are interested in theextension of the market for appeals against decisions by para-administrative tribunals are being drawn intothe new branch. Overall, the major international law firms, whose leading clients are big multinationalcorporations, are working on a strategy to improve the position of lawyers. This strategy requires a judgewho is prepared to leave aside his traditional reticence regarding the business community, his carefulnessand even his dependence on the state. As artisans of the internationalization and legal codification of themarket, these law firms tend to look to the judge as the arbitrator between corporations and state or para-state tribunals, between EC authorities and national institutions as well as between state and EC law, in the

ALAIN BANCAUD AND ANNE BOIGEOL 79

formulation of which big corporations have a certain influence. This should encourage French judicialjudges to resist their patriotic inclinations, and to form alliances with their peers at the Court of Justice inLuxembourg. European judges are leading a movement towards improving the position of magistrates, notjust within the legal field, but also in the power structure.

NOTES

1 See also the President of the Paris Court of Appeals, M.Ezratty’s opinion in ‘La lettre des juristes d’affaires’ 21May 1990, no. 20.

2 Of all judgments handed down by the civil courts 5–7 per cent concern ‘business law’ (Minister der la Justice,Les Chiffres de la justice, 1991, La documentation française). About 7 per cent of all sentences in penal mattersconcern economic and financial delinquency (Lascoumes 1985).

3 On this subject, see Caro (1990:17–21).4 Ordinance of 1 December 1986, concerning price controls and competition; completed by the law of 6 July 1987,

which transferred disputes arising from the anti-monopoly board’s decisions to the civil jurisdiction.

• Law of 22 January 1988 on the stock exchange.• Law of 2 August 1989 concerning the security and transparency of financial markets.

5 Speech by M.Chavannes, Deputy Minister for Finance and the Economy, in the French Parliament, 18 December1986, concerning the possibility of contesting the anti-monopoly board’s decisions before the civil jurisdiction.

6 Concerning the principles on which the judicial magistracy is based, see Bancaud (1993)

REFERENCES

Bancaud A. (1993) La Haute magistrature judiciaire: entre politique et sacerdoce, Paris: LGDJ, coll. Droit et société.Bolze C. (1988) ‘Le transfert du contentieux des decisions du Conseil de la concurrence a la Cour d’appel de Paris,

Recueil Dalloz Sirey, xxv.Breton A. (1975) ‘L’arrêt de la Cour de cassation’, Annales de l’Université de Toulouse, 23.Calvet H. (1991) ‘Le juge, une idée neuve en Europe’, Esprit, March-April, 55–62.Caro, J.Y. (1990) Les Dimensions économiques de la decision judiciaire: perceptions et pratiques des magistrats, Paris:

Conseil de la Recherche du Ministère de la Justice.Dezalay, Y. (1992) Marchands de droit. La restructuration de l’ordre juridique international par les multinationales du

droit, Paris: Fayard.Drago, R. (1987) ‘Le Conseil de la concurrence’, La Semaine juridique, Doctrine, 3300.Drai, P. .(1988) in ‘Entretiens de Nanterre. Nouveau droit de la concurrence’, Semaine juridique, 27 October 1988.Gaudemet, Y. (1990) ‘Crise du juge et contentieux administratif en droit français’, in J.Lenoble (ed.), La Crise du juge,

Brussels: Storia scientia; Paris: LGDJ.Karpik, L. (1987) ‘La morale comme catégorie d’action collective’, speech to Journées annuelles de la Société

Française de Sociologie, Bordeaux, 20–21 November 1987.Lascoumes, P. (1985) Les Affaires, ou l’art de l’ombre. Les délinquances économiques et leur contrôle, Paris: Le

Centurion.Mimin, P. (1972) Le style des jugements, Paris: LGDJ.Mourre, A. (1990) ‘La repression des infractions boursières après la loi no. 89–531 du 2 août 1989 relative a la sécurité

et a la transparence du marché financier, Gazette du palais Doctrine, pp. 265–72.Piniot, M.C. (1991) De la justice des marchands a la justice de l’entreprise et des marches, La justice, Paris: La

Documentation française, coll. Les cahiers français, no. 251.Rousselet, M. (1957) Histoire de la magistrature française, Paris: Plon.

80 NEW JUDGE FOR NEW SYSTEM OF ECONOMIC JUSTICE?

Viandier, A. (1989) ‘Sécurité et transparence des marches financiers’, La Semaine juridique, Doctrine, 3420.

ALAIN BANCAUD AND ANNE BOIGEOL 81

Chapter 5German corporate lawyers

Social closure in autopoietic perspective

Ralf Rogowski

INTRODUCTION

Corporate lawyers have benefited from recent political and legal changes in the unified Germany and inEurope more than other groups amongst German lawyers. They gained both in size and in strength byplaying a significant part in the marketization and privatization processes of the former GDR economy.They also gained from changes in the regulation of the German legal profession. The recent reforms of legalservices, which are a result of European legal harmonization as well as national legislative, judicial andprofessional efforts, have led to some relaxation of the strict professional rules concerning the organizationof the law firm and the specialization of lawyers. These reforms enabled German corporate law firms toachieve strategic advantages within the German legal profession. The leading firms are now able toparticipate in international competition over legal services for multinational corporations, banks orinsurance companies. They also engage in interdisciplinary rivalry with auditors and other professions.Indeed, corporate lawyers have become a distinct group within the German legal profession.

This development of corporate lawyering in Germany can be described as a process of social closure.External systemic processes within the economic and legal systems have made it possible for corporatelawyers to develop strategies to exclude other lawyers from certain types of legal business. However, thesocial closure happens within the legal system. Thus, despite their business clientele and their closeness tothe business world, it is important theoretically and empirically to analyse corporate lawyers as componentsof the legal system. This group forms part of the structure of the operationally closed legal system which is,like other systems, ultimately guided by its needs of self-reproduction or autopoiesis. The development ofcorporate lawyering is related to processes of internal, structural differentiation and segmentation of thelegal system. Within the legal system the group of corporate lawyers was able to adopt strategies ofmonopolization of and specialization in certain fields of law. Through this social closure corporate lawyershave become the leading force in the transformation process of the German legal profession into acompetitive specialized industry for legal services.

THE SOCIAL CLOSURE OF GERMAN CORPORATE LAWYERS

The concept of social closure was introduced by M.Weber in analysing processes of societalization(Vergesellschaftung) in communities and was further developed in studies of the intermediate level of socialstratification and intra-class relations.1 According to Weber’s concept the closure of a social group ischaracterized by the monopolization of specific economic opportunities which is directed againstcompetitors. The social closure is an attempt to maintain or enhance privileges. The purpose of

monopolization is the closure of social and economic opportunities to outsiders and the dominant feature ofsocial closure in a social community is thus the power of exclusion.2

Corporate lawyers within the German legal profession

The development of corporate lawyers into a distinctive group within their profession shows the classicalattributes of social closure, that is, monopolization and exclusion: German corporate lawyers are exclusivelyengaged in a number of areas of legal advice; they have established their own recruitment patterns; and theyhave adopted powerful forms of organization which grant strategic advantages over other segments of thelegal profession. Their salaries are significantly higher than the average for lawyers and they occupy a highsocial status within the legal and economic systems as well as in society at large.

Social closure of the group of corporate lawyers is a phenomenon located within the amorphous German‘legal profession’ which has never formed a homogeneous profession. One outward sign of diversity is thata member of the German legal profession is usually not called a ‘lawyer’ but a ‘jurist’. The formal unifyingcharacteristic of German jurists is that they have passed the two legal state examinations. Admission to theBar is not a sufficient criterion to characterize the majority of German lawyers. Only 30 to 40 per cent ofGerman jurists are practising attorneys; the majority (60 to 70 per cent) either hold judicial office (about 15per cent) or public office (about 25 per cent) or are in private employment (about 25 per cent).3

Three factors have been emphasized in characterizations of German jurists from a comparative point ofview: an academic understanding of law through legal education and legal doctrine; a special emphasis onwritten texts and communication of experiences through written legal texts; and a state-centredunderstanding of the role of the legal profession with judges forming the centre of the profession.4 Thesefeatures characterize the work and attitudes of German corporate lawyers as well and they create the generalconditions for corporate lawyering in the German legal system. The special strategies and work patternsadopted by corporate lawyers which enable social closure only treat or handle these features in aninnovative fashion.

There is still little lateral mobility between the various sub-groups of German jurists. Becoming a judgeentails starting a separate judicial career immediately after completing legal education. Only to a limitedextent do transfers occur between administrative lawyers working for regulatory agencies and practisingattorneys. The rule is still that a young jurist begins a judicial, an administrative or a lawyer’s career andstays in his or her track.

The career of a corporate lawyer proceeds along such a separate track. Corporate law firms recruitnewcomers from a small group of young top graduates with no practical legal experience. However, theyoung graduate needs more than top grades in the two legal state exams to become a corporate lawyer. Thecandidate needs also a legal doctorate and preferably an American master’s degree. On average, the firstfour years are spent as a salaried attorney. Thereafter there might be a transitional period as a profit-sharingpartner without real decision-making power before becoming an equal partner and later perhaps a seniorpartner.

The strict entry conditions make it impossible for young lawyers who lack top grades or an additionalforeign legal education to enter the exclusive club of corporate law. In order to achieve high grades in legalexams, a postgraduate degree or a foreign education, it is necessary for the prospective candidate to investin private crash courses for optimal exam preparation and in additional university fees. Only candidates whoenjoy substantial family support from parents or spouses in financial and cultural terms and who engage instrategic career planning thus have a chance of becoming a corporate lawyer.

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These recruitment patterns also constitute the main barrier for experienced lawyers from non-corporatelegal practices to enter the world of corporate law. These recruitment conditions are a major factor inpreventing lateral mobility within the legal profession. In fact, they form a most powerful mechanism of socialclosure through exclusion.

However, corporate law firms face a dilemma by insisting on exceptional degrees as the main entryrequirement. High degrees guarantee, on the one hand, the special status of this group of lawyers amongpractising lawyers and, indeed, within the whole group of qualified jurists. To lower the formal entryrequirements or to adopt criteria independent of the legal education system and the formal recruitmentpatterns of the legal profession could entail a loss of status and reputation within the profession.

However, on the other hand, the qualification of these candidates is rather one-sided because their mainachievement has been success in the German legal education system. This education system with its twotiers of academic and practical training in law prepares students almost exclusively for a judical career. Thelaw firm runs the risk that these recruits are good on law but are not good lawyers, and therefore needincreased on-the-job training during their first years of practising corporate law, or they may even turn out,after the probationary year, to lack partnership qualities and then are a lost investment.

Furthermore, because of the limited supply of candidates with the highest law degrees the corporate lawfirms have begun to compete for them by raising the starting salaries. These salaries are now well aboveDM100,000 in the larger corporate law firms and are thus already higher than the average income of anestablished non-corporate practising lawyer. The candidates with exceptional law degrees are put in a strongbargaining position; it is reported that it is often rather they and not the corporate law firm who conduct theinterviews during recruitment.

The dilemma of professional regulations

Like other practising attorneys, corporate lawyers and their law firms are regulated by professional rulesadministered by professional bodies. Because of the self-regulation of professional rules the German legalprofession is called a ‘free profession’. There exist two main self-regulatory institutions of the ‘freeprofession’ of lawyers in Germany: the Chamber of Attorneys (Rechtsanwaltskammer) and the GermanAssociation of Lawyers (Deutscher Anwaltsverein). There is mandatory membership of the Chamberwhereas membership of the Association is voluntary. These professional bodies enforce a unitary scheme ofprofessional regulations regarding disciplinary control of the conduct of lawyers and the legal form of lawfirms. However, the paradigm of these professional regulations is still the solo practitioner and not thereality of large law firms.

The system of self-regulation of the legal profession faces the dilemma of traditionalism and innovation.It is criticized by corporate lawyers as dominated by the traditional interests of solo practitioners, rurallawyers and small law firms. Thus, corporate law firms tend to neglect the local Bar. However, some firmsconsider participation in the running of the local Bar as good for public relations and political campaigningfor innovation. Although the legal work concerned with professional regulations is not regarded as veryprestigious among corporate lawyers, it is sometimes internally recognized as a pro bono activity which isbest taken care of by a non-specialist senior partner.

The existing German law regulating the legal profession is still widely considered as highly restrictive.5German lawyers and law firms are legally prevented from publicly advertising their services. Lawyers canonly practise in the district of the appellate or district court of their residence. Maintaining branches of lawfirms in other court districts is not allowed and is considered unethical and a violation of the ‘localityprinciple’. The only exception so far is the establishment of a supra-local law firm (überörtliche Sozietät).

84 GERMAN CORPORATE LAWYERS

In particular, the idea of liberalizing the organizational form of the law firm has created tensions withinthe self-regulatory bodies of lawyers. The proposal to allow the formation of joint-stock or limited liabilitycompanies of lawyers (Rechtsanwaltsgesellschaft) has been successfully rejected by the Chamber.6 Thus thesupra-local law firm must still be run as a partnership. All partners are personally liable for the handling ofcases of each partner in any of the offices of the law firm. An expansion of the law firm into a supra-locallaw firm means an increase in risk and thus, in practice, an increase in premiums for private insurances.

The partnership model creates an obstacle to forming large units because if partners have to bear thepotential losses of another partner, they need to know each other personally in order to develop thenecessary trust relations. An anonymous and bureaucratic law firm is too risky for a partnership. Thus thepartnership model prevents law firms embarking on innovative investment strategies.

The professional bodies supported the introduction of the specialist lawyer. Specialization can eithermean being a specialist in a certain field of law or specializing in interdisciplinary work. The Chamber ofAttorneys is given the right to award the title of specialist lawyer (Fachanwalt) in administrative, tax,employment or welfare law.7 These titles can be obtained as an additional qualification to the obligatory twolegal state exams after attending specialist courses which are run by the professional bodies. The secondform of specialization, i.e., interdisciplinary qualifications, is valued among corporate lawyers, especially inthe form of the double or triple qualification as tax consultant and auditor.

The organization of corporate lawyering

The social closure of the group of corporate lawyers is significantly enhanced by their organization, it ischaracterized by (a) monopolization of and specialization in certain fields of law; (b) flexible, internationaland multidisciplinary law firms; and (c) special work ethic and image of corporate lawyers.

Monopolization and specialization

Corporate law firms have monopolized certain areas of law and types of cases. These include, for example,banking law. The leading corporate law firms in Germany’s banking capital, Frankfurt am Main, haveestablished long-standing working relations with legal departments of banks.8 These relations are based ontrust and mutual respect. Corporate law firms receive cases for which bankers deliberately want externalrepresentation despite sufficient internal resources in their legal departments. This is particularly thesituation when it comes to litigation.9 In the area of banking and corporate finance cases corporate law firmsbecome active on both sides, i.e., for banks and for clients of banks.

Another area of exclusive activity for corporate law firms is anti-trust or competition law and merger andacquisition (M&A) cases. Major German M&As at the end of the 1980s, such as Daimler and MBB or thenegotiations between Thyssen and Krupp and the Pirelli case,10 were arranged with the participation, andoften under the leadership, of a small number of German elite lawyers. This group specializes in takeoversand the modernization of company structures and they sometimes advise both sides at the same time,ignoring the ethically problematic nature of such practices.

Monopolization of certain fields of legal advice does not prevent German corporate law firms fromoffering comprehensive legal advice to the corporate client. Thus the legal work of corporate law firmscovers traditional fields of law such as contract law, conveyancing, partnerships and company law as wellas employment law and administrative law. Most corporate law firms have developed special reputations incertain fields of law, including competition, cartel or anti-trust law, banking and financial law, tax law,intellectual property and administrative and environmental law.11

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Monopolization is achieved through accumulating professional capital and creating a complexorganization of the corporate law firm. However, it requires that corporate law firms adapt the internalstructure of their organization. The firms have to differentiate internally according to fields of specialization.In these fields the law firms need to be equipped with specialist official and non-official material containingthe information used by the administrative, judicial or private decision-makers in the field. An effect ofdepartmentalization is that it enhances the visibility of the firm as an actor in a certain field of law andtherefore increases the chances of monopolization.

Flexible, international and multidisciplinary law firms

Because of the nature of their clientele and the complex nature of corporate cases the corporate law firmsneed flexible organization. In M&A situations the large German corporate law firms adopt increasingly a so-called American style of lawyering. They offer a team of highly qualified specialists who are able to assessthe company considered for takeover. These staff are prepared to engage in complicated legal matters at shortnotice and are experienced in co-operating with non-legal specialists in an M&A team.

M&A cases are very lucrative for corporate law firms. The largest German law firm12 estimates that theyconstitute 20–30 per cent of their turnover. These cases are challenging because they enable corporatelawyers to become ‘corporate architects’ and prime movers in changing the landscape of businessorganizations. However, corporate law firms consider that M&A cases do not provide a steady flow ofincome because they seem to depend on business cycles or economic conjunctures.

The necessity to prepare for M&A and other large-scale cases is a major factor in increasing the size oflaw firms. It needs to invest substantially to be successful in this business. The bigger the law firm theeasier it is to spread the large investment costs. Law firms which are not able to grow and to transform theirinternal organization according to needs of flexible specialization have recently lost their status as corporatelaw firms. Reasons were that their firm philosophy was, for example, dominated by the idiosyncratic interestsof their founding patriarchs, and that they were thus losing out in the M&A business and then droppingrapidly from the exclusive club of corporate law firms.

A further trend in the organization of corporate lawyering is related to interdisciplinary work. Corporatelawyers increasingly acquire double qualifications as tax consultants or auditors. Furthermore, accountantsand auditors are increasingly accepted as partners and are employed in a small auditing company(Wirtschaftsprüfergesellschaft) owned by the corporate law firm. In general, however, German corporatelaw firms have not crossed the boundaries between disciplines; none has become multidisciplinary. Theystill prefer a division of labour, and delegate accountancy and auditing work to large and influentialaccountancy or auditing companies with which they have long-established relationships.

There is a significant trend toward increased delegation of non-legal tasks in corporate law firms to non-legal professionals, leading to a concentration of the advocates’ efforts on purely legal work. Co-ordinationof tasks as a result of supra-local mergers has led to increased bureaucracy in corporate law firms.Administrative officers are employed to co-ordinate activities, and committees are set up to decide onrecruitment strategies, salaries, computers, public relations and the corporate identity issues of the firm.

Work ethic and image of corporate lawyers

Law firms have created a work ethic which demands a strong commitment to the firm in exchange for highsalaries or profits. Working hours for young lawyers are unlimited and they are expected to work after hours

86 GERMAN CORPORATE LAWYERS

and at weekends. However, the recruits, who are mostly young males, consider long working hours a signof high prestige which distinguishes them from other members of their cohort.

The offices of corporate law firms are located in city centres dominated by the financial and commercialworld. They are scarcely distinguishable from the surrounding financial service institutions or consultancyagencies. The interior of the offices conveys an atmosphere in which managers feel at home. Some firmshave adopted a corporate identity with a logo and matching colours of note paper, wall paper and furniture.The stylish furniture and the interior decoration carry the message that the corporate lawyer can distinguishbetween an uninhabitable court room or administrative office and the climate of corporate boardrooms. Andthe elitist and international character of their legal business is expressed through the display of abundant artobjects.

A feature of the work-style of corporate lawyers is that they operate often under considerable timepressure. They are assisted by law firms which are usually equipped with the latest office technology. Themost up-to-date telecommunication services and computerized libraries are used for video conferences toco-ordinate negotiation and litigation strategies. There are regular international business contacts whichinvolve a substantial amount of travelling. Communication with clients or other lawyers is often in Englishor in another foreign language. And the corporate lawyer needs social skills which include not only anacquaintance with the legal system but also the cultural environment of his international clients.

The litigation strategies of these elite lawyers are characterized by strategic planning over an extendedperiod of time, intensive preparation and high stakes.13 They are familiar with the procedural requirementsand the complicated substantive legal issues in appellate courts and in the Federal Supreme Court. Inaddition, they are the main actors in the system parallel to the judicial system at national and internationallevel, that is, arbitration, which is of highest importance in commercial matters.

In their areas of specialization, corporate lawyers take part actively in developing the legal doctrine oftheir specialist field of law through contributions to legal journals and magazines. Indeed, these specialistsoften feel superior to academics and judges in understanding the intricacies and implications of certain legalmatters. And they sometimes take pride in offering to lecture on their legal field in universities. A numberof German law schools try to bridge the world of legal academia and the world of the legal profession byinvolving corporate lawyers in teaching commercial and company law.

Within the hierarchy of practising attorneys corporate lawyers constitute the top of the legal profession.Although the names of their law firms are still unknown to a wider audience, and although even normalGerman ‘jurists’ may have heard of these firms only by chance, business magazines and other relevantpublications have begun to portray them as the most influential players in corporate takeover games.14

Through these reports it is known that amongst corporate lawyers partners earn profits of DM1 million ormore per year: more than ten times the average income of a practising German lawyer.15 However, theydiffer significantly among themselves in style and reputation, ranging from the flamboyant socialite, knownto stretch the law to its limits, through the fatherly adviser, to the retiring and cautious civil servant.

The growth of corporate law firms in Germany

The German legal profession has doubled in number from the beginning of the 1960s to the middle of the1980s. The number of qualified ‘jurists’ rose from about 62,000 to roughly 125,000.16 The number ofpractising attorneys rose faster than the number of jurists in general, and among practising attorneys thegrowth rate of corporate lawyers is higher than in other segments.

There are a number of reasons why German corporate law firms have found it necessary to increaseconsiderably in size in recent years. Some of the reasons have already been mentioned; they include the

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pressure to differentiate internally in order to specialize in certain fields of law, and the need to be preparedto engage in team work in situations of large and rapid transactions, such as M&A cases. The large Germanlaw firms have also felt the need to be present in the major countries of their international clientele. Thisincludes the establishment of offices in New York and Brussels and in European capitals. Further growthfactors were the assumption of increased competition with large foreign law firms both internationally andin Germany and expansion of lawyering in the eastern parts of Germany.

German corporate law firms expanded in two waves. The first wave came with the recognition ofinternational competition and activities in Brussels. The second wave came with the merger or expansion oflaw firms into supra-local law firms accompanied by a new interest in opening offices in Berlin.

The first wave started in the middle of the 1980s. The debate on the freedom to exercise a profession atEuropean level was the result of implementation of articles 52 and 59 of the Treaty of Rome (EEC) andefforts to enhance the internal market in the wake of the Single European Act of 1986. The right to take upor pursue activities as a self-employed person and to set up and merge undertakings (known as freedom ofestablishment protected by art. 52 EEC) and the freedom to supply services (granted by art. 59 EEC) protectcompetitors from other EC member states in so far as these provisions constitute rights to equal treatmentwith nationals of the host member state of the community.

German law firms feared a loss of influence on their home ground because larger and financially morepowerful law firms of other EC member states were allowed under EC regulations to compete directly withthem. However, this threat is now taken less seriously with respect to the capacity of German law firms tobe successful in the German as well as the European legal services market. The European law onprofessional freedom grants foreign lawyers only a limited right to practise in Germany, which is evenfurther limited by national German professional rules. The foreign lawyer must become a member of a localGerman Bar and set up an office in the district of the local Bar and, most importantly, is restricted underGerman law to give legal advice only on his home law.17 The foreign lawyer cannot use a professional titleother than that of the country where he has been admitted to practise. However, German lawyersnevertheless claim reverse discrimination18 because German professional regulations prevent them fromestablishing offices in other cities (except by forming a supra-local law firm) whereas foreign law firms canestablish more than one office in Germany under European law.19

The internationalization of legal practice was first recognized by German corporate law firms in themiddle of the 1980s; German law firms began to engage in mega-lawyering.20 They became especiallyactive in European law in the 1980s because they feared that the area of supra-national law would becaptured by big British, Dutch or American law firms. They tried a number of strategies in Brussels: someestablished their own offices in Brussels; fourteen of the one hundred biggest German law firms had suchoffices in 1992. Other law firms co-operated with foreign or other German law firms in establishing a jointoffice in Brussels. In addition there exist rather exclusive clubs of leading European corporate law firmswhich meet informally. Smaller corporate law firms have begun to engage in European economic interestassociations.21

Although rather cautiously, German law firms also engage on the international level outside Brussels.Twenty-six of the hundred largest German law firms had up to three offices in a foreign country in 1992.Six firms had offices in New York, five in Paris, three in London and three in Tokyo. In addition, firms hadoffices in Beijing, Budapest, Prague, Stock-holm, Vienna and Warsaw.22

The movement of mergers and other forms of expansion of law firms was supported by decisions of theGerman Supreme Court which granted legal status to so-called supra-local law firms.23 A supra-local lawfirm can now operate in more than one German city without violating professional rules. However, theAssociation of Attorneys is still rather critical of this development. It clings to the traditional principle that a

88 GERMAN CORPORATE LAWYERS

lawyer and a law firm should reside only in the locality of the court district in which the lawyer is registered(Lokalitätsprinzip) and uses this as an argument against national law firms.24

The German corporate law firm used to be very small. Unlike its American or British counterparts, it wasproud to be a ‘boutique shop’. However, the situation has changed significantly in the last three years. Thelargest German corporate law firm in 1989 doubled in size within three years. It increased from forty-onelawyers (twenty-six partners and fifteen associate attorneys in 1989)25 to eighty-four attorneys in 1992. InJune 1991 three of the leading twenty corporate law firms merged into a ‘supra-local’ firm (Bruckhaus,Westrick & Stegemann).26 This firm had 112 partners and associates in 1992 and is now the largest Germanlaw firm.

The mergers in the second wave included new organizational relations with the leading Berlin law firms(Raue, Bezzenberger, Finkelnburg and Quack, italicized in Table 5.1). However, these links betweenpowerful West German firms and Berlin firms can hardly be called mergers. Berlin was, prior tounification, considered a province within the world of legal practice. Thus the traditional Berlin firms werenot equal partners in these mergers and were, rather, ‘bought’ by the West German firms (at least in the caseof Raue and Bezzenberger). Most of the new Berlin offices of the West German law firms which are notlinked with older West Berlin firms do not interfere with and, indeed, are not interested in the local Berlinmarket for legal services. Their sole interest is in the East German market and in particular in dealings withthe Berlin-based privatization agency Treuhandanstalt. This government agency is responsible for theintroduction of a market economy in East Germany through the sale of the former state-owned companies.Corporate lawyers represent both the Treuhandanstalt and German and foreign investors and previousproprietors in these privatization deals. They capitalize on the legal uncertainties which derive from theunclear legal scope of the Unification Treaty and its implementation, from unresolved property claims andfrom unpredictable competition or anti-trust law administered by the main competition agency(Bundeskartellamt) which is also based in Berlin.

Corporate lawyers have been highly successful in exploiting the new economic and legal opportunities inthe former GDR. The legal problems surrounding unification have strengthened their role as power-brokers,mediators and facilitators for companies and politicians. And corporate lawyers could protect theirmonopoly in important fields of law and thus strengthen the social closure within the legal profession.

Competition or co-evolution? Inter- and intraprofessional relations

Corporate lawyers are better equipped than other lawyers to engage in strategies of market expansion.Blankenburg27 has analysed a paradoxical relationship between the monopoly for legal advice andrestrictive markets. He argues that the legal monopoly of German attorneys in giving legal advice isdetrimental to the development of strategies of market expansion; an increase in competition throughabolishing the legal monopoly would force lawyers to develop new forms of legal advice. However, hisnotion of the progress of the legal profession as a positive effect of competition

Table 5.1 The 33 largest corporate law firms in Germany in 1989 and 1992 (no. of lawyers per firm)

1992 1989

Bruckhaus Westrick Stegemann 112 75(1989:3 firms)

Pünder, Vollhard, Weber & Axster 96 30Boden Oppenhoff Rasor Raue 84 41

116 89

1992 1989

Wessing Berenberg-Gossler Zimmermann 80 24(1989 only 1 firm)

Gleiss Lutz Hootz Hirsch & Partners 75 27Droste Killius Triebel 72 n.a.Rädler Raupach Bezzenberger 62 n.a.Schön Nolte Finkelnburg & Clemm 62 n.a.Haarmann, Hemmelrath & Partner 60 n.a.Beiten Burkhard Mittl & Stever 56 n.a.Gaedertz Vieregge Quack Kreile 55 n.a.Nörr, Stiefenhofer & Lutz 48 21Baker & McKenzie (Döser Amereller Noack) 42 24Hengeler Mueller Weitzel Wirtz 42 43

(1989:2 firms)Weiss & Hasche 40 16Boesebeck, Barz & Partner 39 n.a.Sigle, Loose, Schmidt-Diemitz & Partner 38 23Heuking, Kühn, Herold, Kunz & Partners 37 34Feddersen Laule Scherzberg Undritz 35 15Deringer, Tessin, Herrmann & Sedemund 34 18Ohle Hansen Ewerwahn n.a. 29Fiedler & Forster 30 n.a.Schürmann & Partner 24 n.a.Esche Schümann Commichau 22 n.a.Schlütter, Lüer & Görg 20 n.a.Ronkel Schmitt & v der Osten 19 n.a.Brandi Dröge Plitz & Heuer 18 n.a.Thümmel, Schütze & Partner n.a. 17Schilling, Zutt & Anschütz 16 13Dr Schackow & Partner 16 n.a.Peltzer & Riesenkampff 15 n.a.Scholz Kraatz Dittmann & Partner 15 n.a.Büsing, Müffelmann & Theye n.a. 13Sources: Pritchard (1992:123) and Wilhelm (1989:74).

overlooks intraprofessional processes of segmentation and social closure which are independent ofcompetition. Legal monopoly does not prevent the profession from developing new forms of social oreconomic advocacy and public- or private-interest lawyering. In fact, the social closure of corporate lawyersshows how this group used legal monopoly to actively engage in developing strategies to enlarge the marketfor their legal services.

An example of market expansion is the rediscovery of tax law by corporate law. Tax law used to be anarea of legal advice traditionally neglected by the legal profession. Corporate lawyers are seeking to recapture

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tax law from the auditing and tax consultancy profession. However, they hesitate to compete openly in thisfield of law; they argue defensively, insisting that this market expansion of legal services derives directlyfrom clients’ wishes and that it is not meant to challenge the traditional monopoly of tax consultants andauditing companies. They want to offer advice on tax law only as an additional form of legal advice. Thetax consultancy companies and auditing companies which have been established by corporate law firms arecomparatively small in size.

There are good reasons for German corporate law firms not to engage in open competition with the largeaccountancy firms. The leading six accountancy firms are truly international and all organized like largecorporations. There exists only one truly international corporate law firm, which originates from the US.28 Anumber of other American and British law firms have also developed strong international networks.29

However, these law firms cannot match in size, financial resources or power any of the Big Six or otherlarge national accountancy firms. Thus law firms have an interest in not provoking these companies todevelop aggressive market expansion strategies which could undermine the business opportunities ofGerman corporate law firms.

A further reason for corporate lawyers to engage only in cautious market expansion strategies is related tothe quality of legal advice. Corporate law firms take pride in high-quality legal advice and thus are reluctantto offer advice on tax law which is of a lower quality. This attitude might be a reason for the slower growthof German law firms compared with common law countries. There is an informal understanding amongcorporate lawyers that their strength lies in precise and informed legal advice which justifies an exceptionalfee. A superiority in the quality of legal advice is thus seen as a guarantee to prevent disastrous competition.

Corporate lawyers are less defensive with respect to other segments of the legal profession. However,competition is again not an accurate description of their relations. Corporate lawyers instrumentalize theexisting means of German jurists and perhaps add a few new styles of lawyering. To some extent the strategiesof corporate lawyers can even be described as ‘exploitation’ of their position within the legal profession inorder to monopolize certain fields of law; this is a major feature of social closure, according to Weber.

Furthermore, there are signs of reaction against this ‘exploitation’ among those lawyers consideredineligible to be corporate lawyers and thus excluded from legal work monopolized by corporate legalpractice and from the cosmopolitan atmosphere of corporate law firms. These reactions can be labelled,following Parkin, as ‘solidarism’ against social closure.30 This ‘solidarism’ against ‘exploitation’ can bedetected in discussions of the professional bodies of lawyers in which proposals of corporate law firms, forexample, to introduce limited liability law firms, arouse opposition from lawyers working in small andmedium-sized practices who tend to dominate the politics of the Chamber and the Association.

However, what seems to characterize the development of the legal profession is not competition butdifferentiation. There are divergent trends occurring in the various segments of the legal profession whichdevelop independently into complex legal fields. The stratum spans corporate law at one end to family law,employment law and social welfare law at the other. Welfare law, for example, has become an area whichrequires rather sophisticated specialist knowledge and it is thus not surprising that there has emerged agroup of para-legal advisers dealing with it exclusively, including legal representation before the socialcourt. What seems to be emerging is a new structure which divides the legal profession along functionallines. However, this does not mean that intraprofessional relations decrease. They demand new forms of co-operation based on mutual recognition.

Special intraprofessional relationships exist between corporate lawyers and salaried lawyers employed inthe legal departments of banks, insurance companies or large corporations or in auditing or tax consultancycompanies. These in-house lawyers are legal counsellors who have sometimes achieved a quasi-independent status within their corporation. However, the distinction between the function of internal and

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external legal advice is seldom blurred. In fact, truly external legal advisers seem to be becoming increasinglyimportant because top managers consider them more trustworthy and innovative in carrying out riskytransactions. In-house lawyers are by contrast viewed as ‘brakemen’ on innovation and, because of theirstatus as employees, managers often hesitate to develop personal relationships with them.31

The status of in-house lawyers varies between the economic sectors. In comparing in-house lawyers inGerman industrial companies, banks and insurance corporations, M.Hartmann found both stability andchange in status among this academic elite in industry.32 He observed a significant downgrading of the statusof lawyers working for insurance companies, whereas the status of lawyers working for banks, often in thecapacity of directors, remained relatively high. Lawyers in industry tended to work almost exclusively inseparate legal departments and had lost influence in top management.

The relation of legal departments with corporate law firms was found to be selective. Legal departmentsare interested in autonomy and they cooperate only with outside law firms when they can dominate thelegal activities. Only in cases which require specialist knowledge, such as competition law, or which haveled to litigation will legal departments co-operate closely with external law firms.33 In particular, expertisein the legal representation of corporations in court and during administrative proceedings is the mostvaluable asset of corporate law firms. Indeed, the share of litigation work, which is reported to amount to20–30 per cent of the total workload of the corporate law firm, scarcely indicates the importance oflitigation for the law firm.34 In general the strength of corporate lawyers in their relationships with legaldepartments of corporations and banks lies in their ability to engage in sophisticated litigation.35

We can conclude that both the interprofessional relations with auditors and tax consultants and theintraprofessional relations with in-house lawyers and other practising attorneys are not dominated bycompetition. It is thus more accurate to view these relations as linkages which enable co-evolutionarydevelopments.36 The developments which occur in each profession and in each segment of the professionare not a direct result of competition. However, the different professions or segments observe each other anduse their selective contacts to create internal structures and develop strategies which can lead to co-evolution of the different fields.

The idea of co-evolution, which presupposes development along different tracks, requires an analysis ofthe differences between these tracks. It is thus necessary to adopt a broader theoretical approach which is ableto analyse processes at the level of the profession as a whole and treat it as a field or system with its ownstructure. The study of the profession of corporate lawyers can benefit here from the most recentdevelopment in social systems theory which assumes radical autonomy of systems as a result of the need forself-reproduction or autopoiesis.

AN AUTOPOIETIC PERSPECTIVE ON CORPORATE LAWYERS

For an analysis of the legal profession it is useful to combine the ideas of autopoietic systems theory andsocial closure. The concept of social closure as originally proposed by Weber emphasizes the economicmotivations of groups within communities. In this concept they are driven by self-interest to monopolizeeconomic opportunities. However, for the study of professions the social closure concept needs somerefinement. This can be achieved by switching to structural or systems theoretical types of analysis. Thelegal profession is then conceived as a field, an arena or a system.

Bourdieu analyses the correlation of interests and social fields by viewing interests only as conditions ofthe functioning of fields which are themselves shaped by these fields. Law is analysed as a field which hasits own power to generate interests.37 The agent in the field owns a particular habitus which derives from anumber of sources, including his education, social background and socialization into the field. However, if,

92 GERMAN CORPORATE LAWYERS

for example, the corporate lawyer as an agent in the legal field insists on a habitus which is independent ofthe field of corporate law and if he derives his habitus from the work experience of a solo practitioner’soffice or from a non-legal environment, then he can be compared in Bourdieu’s terms with Don Quixote‘who puts into effect in a transformed economic and social space a habitus which is the product of aprevious state of the world’.38

In other words, Bourdieu emphasizes structures and their qualities which generate the main conditions ofa social field. His approach stands to some extent in the tradition of a theory of social systems which wasfirst outlined by Talcott Parsons who also applied systems theory specifically to the study of professions.39

Parsons emphasized in abstract theoretical terms the relation of the professional practice with the socialstructure and the universal values of modern societies. Abbott, in his ‘The System of Professions’, expoundson this approach in stressing the developmental aspect of professional systems. He analyses the process ofprofessionalization in which the system of a profession is constituted by competition and exclusion.40 Thestrength of Abbott’s analysis lies in the empirical and comparative approach to the study of professions.However, the weakness of his approach relates to an insufficient theoretical understanding of internalmechanisms which enable the process of professionalization.

Whereas Parsons and Abbott analyse mainly structures and their capacity to adapt to changes occurring inthe system’s environment, the theory of social systems outlined by Luhmann emphasizes internal processesrelated to the autopoietic constitution of social systems. The need for self-reproduction is the ultimate factorwhich shapes the development of systems, according to Luhmann’s theory. The legal system is conceivedas a closed system which is constantly concerned with its autonomy and its reproduction or autopoiesis.41

The perception of the world within the legal system is guided by a system-specific selection criterion. Thiscriterion is a binary code by which the system can decide if a fact or a situation is legally relevant or not. Itis the control over the application of the binary code which renders the legal system autonomous.

Furthermore, from the viewpoint of this autopoietic systems theory, the relation with other social systemsis perceived in terms of structural coupling rather than direct interventionism or steering.42 Thus therelationship of the legal system and the corporate world is only indirect. The legal system constructs its ownreality of the corporate world according to legal norms. The corporate lawyer who acts within the legalsystem as a broker shapes the legal construction of the corporate world. In litigation he intervenesstrategically on behalf of his clients by construing the facts of the cases and influencing the development oflegal doctrine by proposing specific argumentative or discursive figures.

An example is the field of competition or anti-trust law. In order to challenge the regulatory interventionsof the German anti-trust agencies and the national anti-trust agency sophisticated legal knowledge andspecial negotiation and litigation skills are required. To be successful in competition cases the corporate lawyerhas to abide by the rules and procedures of the game; these are defined not only by the national legal system butincreasingly also by European law which modifies national German competition law and which has createduncertainty about major premisses of German anti-trust legislation. However, this situation offers prominentcorporate lawyers opportunities to develop argumentative strategies which can shape the entire field ofcompetition law.

Corporate lawyers operate as dealers or brokers, as mediators or executors for an economically verypowerful clientele. In the German economic system corporate lawyers became important as a distinctivegroup of advisers because actors in the economic system increasingly perceived the use of and theprotection from legal regulation as important for corporate management, including corporate financing.From the perspective of the economic system corporate lawyers are needed because law has becomeeconomically relevant. The price of companies is increasingly determined by legal considerations. Preciselybecause of the function of law in economic decision-making, corporate lawyers have achieved a prominent

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role as corporate advisers. However, this does not mean that corporate lawyers therefore became part of theeconomic system. In contrast, corporate lawyers have to be regarded as influential and successful within thelegal system in order to maintain their influential role within corporate decision-making. Thus it is closenessto the legal system which makes them attractive for business.

Corporate lawyers need autonomy and independence towards their clients in pursuing legal strategieswhich are not controlled by their corporate clients. Corporations are themselves ‘autopoietic systems’43

which are guided by self-referential decision-making. Unlike in-house lawyers, corporate lawyers remainpart of the environment of autopoietic enterprises. The impact of advice given by corporate lawyers tomanagement is ultimately limited by the self-reproductive needs of the organization.

The corporate lawyer achieves his advantageous position with respect to management precisely as aresult of successful participation in the legal game. As long as the legal game remains informal, becausemergers and acquisitions are negotiated informally with the competition agency, the corporate lawyer canplay an extra-legal role of negotiator or adviser. However, with a change of the rules of the legal game tolitigation and within the debate over legal doctrine, the corporate lawyer has to develop skills inunderstanding self-referential and self-reproductive processes in the legal system.

Within the legal profession the process of social closure of the group of corporate lawyers becomesmainly an internal event of the legal system in autopoietic perspective. Trends to diversify corporate lawfirms and to incorporate accountants and other professions reflect developments in the legal system. It is thecontribution of social closure to the constitution of the sub-system of corporate law within the legal systemand its reper cussion on the legal system as a whole which becomes of special interest to an autopoieticanalysis.

Theoretically and empirically it is important to distinguish between exclusion and competition. Exclusionis a strategy to draw the boundary between the internal world of the system and the external world of theenvironment. Competition is a specific recognition of the environment within the system. Exclusion is theestablishment of structural boundaries, whereas competition is an exercise of power. The previous analysisemphasized that the group of German corporate lawyers hesitates to compete and that they instead resort todeveloping mechanisms of exclusion.

However, on the interaction and organizational level rivalry between corporate law firms and other lawyersseems to be increasing. In this respect it is necessary to introduce a further distinction betweenintraprofessional and interprofessional relations. Although there is still no open interprofessionalcompetition between lawyers and auditors or tax consultants there is an increasing number of conflictinginterests. A prominent example is the interest of corporate lawyers to regain expertise in tax law, whichhitherto has been largely left to auditors and tax consultants. Nevertheless, interprofessional relationsbetween auditors and corporate lawyers are better described as the co-evolution of similarly regulatedprofessions than as competition.

Intraprofessional relations are also not dominated by competition. The various segments of the legalprofession seek division of labour along the lines of certain fields of law (specialization) or certain types ofclientele, instead of competition. Corporate lawyers use mechanisms of exclusion openly with respect toother lawyers and competition with respect to other corporate law firms.

Furthermore, the success of the corporate lawyer in the legal system has structural consequences. The socialclosure of corporate lawyers is a sign of reflexive modernization44 of the legal profession. Reforms toliberalize regulation of the German legal profession were directly or indirectly instigated by corporatelawyers, who applied the strategies of corporate restructuring which are used by their clients. This reflexiveapplication of corporate strategies, which is proposed to restructure the legal profession, ultimatelyundermines the legal basis of the profession. The goal of this modernization process is the transformation of

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the legal profession into an industry for legal services and thus carries the risk, by over-emphasizing theeconomic aspects of lawyering, that legal practice faces deprofessionalization.

However, differentiation and specialization of the legal profession will probably be countervailingprocesses. The reflexive modernization of the profession will probably lead to decentralization of itsinternal power structure and thus to a decrease of stratified relations within the legal profession. In thisrespect the profession reflects the general transformation of modern societies into functionally differentiatedsocieties and the reduced role of the ‘ironical’ state as a mere co-ordinator of divergent interests.45 Adivision of labour can be envisaged as the future structure of the legal profession in which the differentsegments of the profession recognize each other because they are both mutually dependent andindependent.

APPENDIX

During the research for this report on German corporate lawyers interviews were conducted with thefollowing attorneys and auditors:

Dr Dr Brönner, auditor, Berlin Institute of Auditors and Brönner Auditing Company, BerlinDr Andreas Fabritius, attorney, Bruckhaus Westrick Stegemann, Frankfurt am MainDr Horst Helm, attorney, Gleiss Lutz Hootz Hirsch & Partners, StuttgartDr Ulrich Hennings, attorney, Döser Amereller Noack (Baker & McKenzie), BerlinDr Gerhard Limberger, attorney, Bruckhaus Westrick Stegemann, Frankfurt am MainDr Anton Maurer, attorney, Sigle, Loose, Schmidt-Diemitz & Partner, StuttgartDr Hinrich Thieme, attorney, Boesebeck, Barz & Partner, Frankfurt am Main Dr Friedrich Trockels,

attorney, formerly Schürmann & Partner, Frankfurt am MainMr Heinz Vessely, auditor and tax consultant, Pünder, Vollhard, Weber & Axster, Frankfurt am MainMrs Daniela Weber-Rey, attorney, Pünder, Vollhard, Weber & Axster, Frankfurt am Main

NOTES

1 See, on the general concept of social closure, Weber (1968:341–3); and on social closure and intra-classrelations, Parkin (1974).

2 Weber (1968:342).3 See Blankenburg and Schultz (1989); and for the 1970s, Kaupen and Werle (1974) and Luhmann (1975).4 Luhmann (1975) and Rueschemeyer (1989).5 Becker (1990), Hommerich and Werle (1987), Husmann (1990), Kleine-Cosack (1990).6 The Association of Attorneys opted only recently with a narrow majority for the introduction of a limited liability

company for lawyers.7 Paragraphs 42a to 42d of the Bundesrechtsanwaltsordnung.8 Frankfurt am Main is also the capital of German corporate law. Twenty-seven of the leading hundred German law

firms had offices in Frankfurt in 1992; see Pritchard (1992:134–5): See also Griffiths (1992).9 See Hartmann (1990:81).

10 Wilhelm (1989:70).11 See the lists of specializations of German law firms in Pritchard (1992:125–133).12 This is, since 1991, the law firm of Bruckhaus Westrick Stegemann.13 See, on internationalization or ‘globalization’, Dezalay (1990:10–50).14 See, for example, Wilhelm in managermagazin, 2 (1989): 68–84. See also Griffiths in Legal Business Magazine,

July/August 1992:27–31, and Pritchard (1992:123–68).

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15 See Griffiths (1992:28).16 Blankenburg and Schultz (1989).17 See Rabe (1992:148). The European Court of Justice has found that the German restrictions violated EC law in so

far as they required that foreign lawyers act always in conjunction with a German advocate even in those caseswhere under German law no legal representation was required (Case 427/85, Commission v Germany [1988]ECR 1123).

18 The German term used in the discussion of reverse discrimination under EC law is Inländerdiskriminierung.19 See Eidenmüller (1990) on the relation of EC regulations and German professional rules.20 Galanter (1983).21 See Grüninger (1992) on the European Economic Interest Association (Europäische wirtschaftliche

Interessenvereinigung, EWIV).22 Information gathered from ‘Germany: index of firms and location of offices’, in Pritchard (1992:134–5).23 In particular the BGH decision of 18 September 1989 on 'überörtliche Sozietäten’; see Neue Juristische

Wochenschrift, 1989:2890. See also the overview of judicial interpretations of professional regulations by thePresident of the Federal Supreme Court: Odersky (1991).

24 See Schröder and Teichmann (1990).25 The largest corporate law firm in 1989 was Boden, Oppenhoff & Schneider in Cologne with 26 partners and 15

associates. See Manager magazin, 2(1989):74.26 Formed by a ‘joint venture’ between Bruckhaus, Kreifels, Winkhaus & Lieberknecht (Düsseldorf), Westrick &

Eckholdt (Frankfurt) and Stegemann, Sieveking & Lutteroth (Hamburg) on 1 January 1991.27 Blankenburg (1987:207–8).28 The largest international law firm in Germany is a subsidiary of the leading American law firm (Baker &

McKenzie) which took pride in owning 44 offices in 26 countries in 1992 (the German name of the law firm isDöser, Amereller, Noack).

29 Among the 100 leading firms in Germany in 1992, Pritchard (1992:134–5) lists three foreign law firms inaddition to Baker & McKenzie: Clifford Chance, Frere Chomley, and Freshfields.

30 On solidarism as a reaction to social closure, see Parkin (1974:9–11).31 Wilhelm (1989:74).32 Hartmann (1989 and 1990).33 Hartmann (1990:51–2).34 Data provided during interviews.35 See also Rogowski (1989).36 See also Rogowski (1992).37 Bourdieu (1986).38 Bourdieu (1990:90).39 Parsons (1939 and 1968).40 Abbott (1988), esp. ch. 4:86–113.41 See Luhmann (1985:281–8) and Teubner (1988).42 See Luhmann (1984).43 See Teubner (1990:75–8) and Luhmann (1988, ch. 9).44 See Beck (1992, part III: 151–236). See also Willke (1992).45 See Willke (1992).

REFERENCES

Abbott, A. (1988) The System of Professions: An Essay on the Divison of Expert Labor, Chicago and London:University of Chicago Press.

Beck, U. (1992) Risk Society: Towards a New Modernity, London: Sage.

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Becker, E (1990) ‘Nur Advokat? Oder auch Dienstleistungsunternehmer?’, Berliner Anwaltsblatt, 7–9.Blankeburg, E. (1987) ‘Strategien für den Anwaltsstand im Rechtsvergleich’ Anwaltsblatt, 204–9.Blankenburg, E. and U.Schultz (1989) ‘German advocates: a highly regulated profession’, in R.Abel and P.Lewis (eds),

Lawyers in Society, vol. II: The Civil Law System, Berkeley, Cal.: University of California Press, 124–59.Bourdieu, P. (1986) ‘La force du droit. Elements pour une sociologie du champ du droit’, Actes de la recherche en

sciences sociales, 64:5–19.Bourdieu, P. (1990) In Other Words: Essays Towards a Reflexive Sociology, Cambridge: Polity Press.Dezalay, Y. (1990) ‘Big Bang sur le Marché du Droit: La, Restructuration de Champ des Professionels des Affaires,

Vaucresson: CNRS/CRIV.Eidenmüller, H. (1990), ‘Deregulating the market for legal services in the EC’ Modern Law Review, 53:604–8.Galanter, M. (1983) ‘Mega-law and mega-lawyering in contemporary United States’, in R.Dingwall and P.Lewis (eds),

The Sociology of the Professions: Lawyers, Doctors and Others, London: Macmillan, 152–76.Griffiths, C. (1992) ‘The main men’, Legal Business Magazine, July/August, 27–31.Grüninger, M. (1992) ‘Aspekte, Strategien und Möglichkeiten einer EWIV von Rechtsanwälten’, Anwaltsblatt, 111–14.Hartmann, M. (1989) ‘Zwischen Stabilität und Abstieg—Juristen als akademische Elite in der Wirtschaft’, Soziale Welt,

40:437–54.Hartmann, M. (1990) Juristen in der Wirtschaft. Eine Elite im Wandel, Münich; Beck.Hommerich, C. and R.Werle (1987) ‘Die Anwaltschaft zwischen Expansionsdruck und Modernisierungszwang’,

Zeitschrift für Rechtssoziologie, 8:1–22.Husmann, J.H. (1990) ‘Nochmals: Wer gibt das neue anwaltliche Berufsrecht’, Anwaltsblatt, 64–68.Kaupen, W. and R.Werle (eds) (1974) Soziologische Probleme juristischer Berufe, Göttingen: Mittelstandsverlag.Kleine-Cosack, M. (1990) ‘Wettbewerbslockerung für Rechtsanwälte’, Berliner Anwaltsblatt, 4–10.Luhmann, N. (1975) ‘The legal profession: comments on the situation in the Federal Republic of Germany’, Juridical

Review, 20:116–32.Luhmann, N. (1984) Soziale Systeme, Frankfurt: Suhrkamp.Luhmann, N. (1985) A Sociological Theory of Law, London: Routledge & Kegan Paul.Luhmann, N. (1988) Die Wirtschaft der Gesellschaft, Frankfurt: Suhrkamp.Odersky, W. (1991) ‘Anwaltliches Berufsrecht und höchstrichterliche Rechtsprechung’, Anwaltsblatt, 238–47.Parkin, F. (1974) ‘Strategies of social closure in class formation’, in F.Parkin (ed.), The Social Analysis of Class

Structure, London: Tavistock, 1–18.Parsons, T. (1939) ‘The professions and the social structure’, Social Forces, 17: 457–67.Parsons, T. (1968) ‘Professions’, in International Encyclopedia of the Social Sciences, vol. 12, New York: Macmillan

and The Free Press, 536–47.Pritchard, J. (ed.) (1992) Law Firms in Europe, 2nd edn, London: Legalease.Rabe, H.J. (1992) ‘Dienstleistungs- und Niederlassungsrecht der Rechtsanwälte in der EG’, Anwaltsblatt, 146–52.Rogowski, R. (1989) ‘West German business litigation’, paper presented at the Law and Society Association Meeting in

Madison, 8–11 June.Rogowski, R. (1992) ‘Auditors and lawyers in Germany’, paper presented at the Conference ‘Juriste et Comptables’,

Paris, 20 November.Rueschemeyer, D. (1989) ‘Comparing legal professions: a state-centered approach’, in R.Abel and P.Lewis (eds),

Lawyers in Society, vol. III, Berkeley, Cal.: University of California Press.Schröder R. and E.Teichmann (1990) ‘Die überörtliche Sozietät’, Anwaltsblatt, 22–6.Teubner, G. (1990) ‘Unitas multiplex: corporate governance in group enterprises’, in D.Sugarman and G.Teubner (eds),

Regulating Corporate Groups in Europe, Baden-Baden: Nomos, 67–104.Teubner, G. (ed.) (1988) Autopoietic Law: A New Approach to Law and Society, Berlin: de Gruyter.Weber, M. (1968) Economy and Society, ed. G.Roth and C.Wittich, New York: Bedminster.Wilhelm, W. (1989) ‘Wirtschaftsanwälte: Ohne sie läuft nichts’, Manager magazin, 2:66–84.Willke, H. (1992) Die Ironie des Staates, Frankfurt/Main: Suhrkamp.

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Part II

Chapter 6The cultures of globalization

Professional Restructuring for the International Market

John Flood

We don’t do incentivizedquantitative global matrix

models of zero-defectjust-in-time delivery for

potential capital reallocationscenarios in the next

decade horizon.

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INTRODUCTION

According to Immanuel Wallerstein (1991) the disintigration of Pax Americana has had profound effectsthroughout the world. America’s political and economic institutions are unwinding and Germany and Japanare mobilizing to become the world’s hegemons, its ‘lenders of last resort’. And according to someeconomists the world economy is in the depths of a Kondratiev Long Wave which will not reach its nextpeak until well into the twenty-first century. Similarly, the nation-state is in a state of crisis as countries aretorn apart and reformed (Mann 1990). Yet we are supposed to inhabit an economy and society that isincreasingly globalized, one in which time zones are now temporary hiccoughs in the quotidian conduct ofour affairs. For some, globalization is read to mean Americanization of culture—the ‘Coca-Cola world’—but is it so? Our world then is facing, on the one hand, forces impelling it towards globalization and, on theother, forces of fragmentation. The role, and rule, of law and its providers becomes ever more crucial inadapting societies to these changes (or preventing them). Reflexively, both law and law professionals havethemselves to adapt to rapid and extensive change.

In some cases professionals have attempted to close ranks and insulate themselves; for example, the lawclosing the legal profession to foreigners that was enacted in France in 1990. Others have tried to createinstitutions that transcend conservative demands for closures: for example, the thirteen law firms from fourcontinents that have banded together to open a co-operative law consultancy office in the People’s Republicof China, to take advantage of the anticipated profits that will emerge when Hong Kong reverts to China in1997 (International Financial Law Review, 1988: 3.)1 The venture Interjura is composed of internationallaw firms—joint shareholders—from the US, England, France, Spain, Italy, Germany, Holland, Sweden,Australia and Hong Kong.2 The office is staffed by a Taiwanese-born, American-trained lawyer. Interjura

provides the firms and their clients with information concerning technology transfers, joint ventures andlarge-scale project financings. One benefit claimed of the venture is that the shareholders will getacquainted with each other in closer ways than before. Now Interjura is searching for new locations toestablish offices.

My purpose in this chapter is to explore and I hope explain through the medium of cultural analysis someof the changes that are taking place. I will argue that change is ineluctable and its effects irreversible—thatwith the political economy of the nation-state giving way to that of the super-region (the EuropeanCommunity (EC), the North American Free Trade Area (US, Canada, Mexico) and the Pacific Rim), anyprofession that serves corporate finance and commerce will be in danger of withering unless it can at leastattempt to transcend national boundaries. But this is not to say that the organizational and institutionalforms that now exist can be reproduced on a grander global scale. The recurring theme in the literature ofglobalization and change and in interviews I have conducted is that change is dependent on correctlyinterpreting and adapting to diverse cultures. In using this term I refer to the cultures of nations and periodsand the specific cultures of social and economic groups. As might be expected, a term like ‘culture’ is ahighly contested one (cf. Smith 1989a; Hebdige 1979; Williams 1976; Geertz 1973). The push ofglobalization has been checked by the mediation of culture, which is forcing mutations in organizationalforms and modes of doing business that, for the most part, professions were unprepared for.

There is a competition between the sacred and profane aspects of professions—as institutions conservingthe common weal or as goal-orientated, profit-seeking fields of endeavour in fierce competition with otheroccupations over contested terrains of work (Carr-Saunders 1933; Parsons 1954; Abbott 1988; Flood1989a; Eburne 1991; Perks 1992). The terms ‘business’ and ‘industry’ are increasingly invoked as descriptorsfor the law and accounting professions (Zeff 1988). If we were to think of the main output of the legalprofession as being litigation, then that has certainly increased; but that would only explain part of thegrowth in lawyers and legal business (cf. Pashigian 1977; Galanter 1983a; Sander and Williams 1989). Butlitigation is a relatively small part of most large law firms’ work. Similarly, if we were to think of auditingas the main product of the accounting profession, then that too has increased. But growth in accounting hasalso been due to many other varieties of business activity such as management consultancy and designinggolf courses (Perks 1992:5). The growth in international economic transactions has made the law businessmore central to the facilitating of business activity. For example, American lawyers are developing newfields such as international environmental work (Barker 1991:91) and international real estate transactions(Clarke 1991: 101). In an article on environmental law practice, a partner at Sidley and Austin wasportrayed thus:

In his latest move McMahon has set his sights on marketing Sidley’s environmental expertiseworldwide. In the field of environmental regulation, he says, the United States has a significant jumpon the rest of the world. Agrees partner Lucero: ‘This is an area where the Americans have theadvantage. We’ve been working on this for twenty years, working through problems, knowing the laws.’‘No one’s talking about setting up offices in Western Europe and competing with local lawyers,’ sayspartner Stever. But McMahon sees a niche in advising US clients about how environmental lawsabroad will probably develop. ‘Sometimes we find our US multinational clients wanting us to work withthem and massage the opinions being received from local firms,’ McMahon says.

(Barker 1991:91)

As a result of such developments professions are beginning to resemble those they serve in so far as they aremoving away from the collegial model of organizations to the bureaucratic (Johnson 1972; Nelson 1988).

100 JOHN FLOOD

But there is a cost to this. As long as the sacred rhetoric of professionalism held sway, occupations regardedas professions were granted the privilege of self-governance and autonomy. The changes taking place willprobably result in restrictions on professions’ rights to self-regulation and ultimately promote either alaissez-faire climate or one of external state or super-region driven regulation, as, for example, in theoversight of lawyers by the US Securities and Exchange Commission; the demands placed on tax attorneysand accountants to act as ex officio agents for the US Internal Revenue Service; the oversight of law firmsby the UK Securities and Investments Board; and the adoption of the Common Code of Conduct by theConseil des Barreaux de la Communauté Européenne through Europe (CCBE). This is not necessarily agreat loss: in exchange for external regulation, professions will be able to adopt organizational forms moresuited to the exploitation of international markets. Professional firms will incorporate, have limited liabilityand outside shareholders, and form multidisciplinary and multinational conglomerations. They can becometrue entrepreneurs bidding for business on a transactional basis through ‘beauty parades’ rather thanmaintaining work through sustained relational contacts. None of this is fantasy. It already exists—theexemplars are the Big Six accounting firms (Economist 1989).

In the next section I describe the process of globalization and how culture operates as a brake. And in thefollowing section I analyse the responses of the legal and financial professions to these factors.

GLOBALIZATION AND CULTURE

Business and commerce are no longer captive to the time zones and politics of their home states.Transnational or multinational corporations (MNCs) —e.g. Ford, IBM, Burroughs-Wellcome—havesuccessfully exploited the decline of empires and post-war booms producing supplies of cheap labour andmaterials and new markets for their products (Piccioto 1988; Sassen 1991). As a consequence of thissuccess, MNCs amassed substantial earnings overseas and had to construct methods to use the moneywithout repatriating it. One mechanism for resolving the problem was the euro-dollar market, basedprimarily in London. British banks and law firms became proficient in servicing this market. By the late1980s the eurodollar market was worth $2,500 billion (McCullough 1988). The eurobond and othereurocurrency markets followed. Since 80 per cent of the eurodollar market was in dollars, there was a strongincentive for American law firms to become involved (Lewis and David 1987). (For example, ClearyGottlieb Steen & Hamilton has a strong footing in this business.) The Big Six accounting firms were alsosignificantly involved in eurocurrency.

With more business being conducted overseas, the financial markets became more attuned to the globalmarket. Technology has given investors and banks the opportunities to play in multiple markets. The NewYork and London stock markets overlap in time zones and the Hong Kong and Tokyo markets are only afew hours away from the openings and closings of New York and London. With little effort it is possible toplay a twenty-four-hour market—an insomniac’s dream. The machination of the American, Japanese andEuropean foreign exchange markets that resulted in the British pound being suspended from the EuropeanMonetary System on ‘Black Wednesday’ of September 1992 is a dramatic illustration of how the marketsnever sleep.

The internationalization of markets is a function not only of capital’s desire to maximize profits andextend its reach, but also of the political movements of the past decade or so. In the US, the Carteradministration initiated the stream of deregulation and the Reagan administration nourished it; the Thatchergovernment in Britain gave the movement its philosophical respectability (Crook 1992b:14). Thatcher’srolling back of the state (cf. Walker 1989)—in welfare policies and through privatizations—has givenlegitimacy to the new regime of international mercantile capitalism (Johnson 1991). The expansion of the

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secondary market was brought to its present heights with the 1986 ‘Big Bang’ in London (McCullough1988). The drive to Big Bang was fuelled in part by the release of currency exchange rates from direct statecontrol in 1979 (Smith 1989b). This release prompted the development of futures and options markets infinancial instruments and currencies. Releasing the London Stock Exchange from the cartel arrangementsthat had ruled it, Big Bang—more of an implosion that an explosion—sucked in potential market-makersfrom the US, Japan and elsewhere. It delivered the large American banks, especially, from the restrictionsof the Glass-Steagall Act and made London an attractive site for investment (Hobson 1991).

The British government’s move to privatize large parts of government enterprises has stimulated aninternationalization of primary markets (Neate 1987). The simultaneous offering of British Gas, forexample, on the British, American, Canadian and European markets required the co-ordination of manybanks, law firms, accounting firms and renegotiation of several sets of domestic securities laws.3 BritishGas is one of a chain of privatizations that includes the water, telephone and electric utilities, the coalindustry and the railway industry. Germany, through the Treuhandstalt, is privatizing the businesses of theformer East German republic. And with the ‘Velvet Revolution’ in Eastern Europe privatization has becomean international sport.

Internationalization is also evident as corporate raiders seek investment opportunities overseas. CarlIcahn muscles into Japanese companies; Hoy-lake, the offshore raiding company established by Goldsmithand Roths-child, attempts to take over British American Tobacco (BAT) and its related companies includingFarmers Insurance. Similarly, the business failures of the 1990s are international, as in the cases of theMaxwell publishing empire and the Olympia & York construction development business (Carrington andMurphy 1992; Flood and Skordaki 1993). Modern business, then, appears to acknowledge no borders. Andthe professions that serve capital also are beginning to function in a global system that transcends the nation-state.

This process is not, however, unilinear and necessarily progressive. We are not witnessing an inexorablemove to globalization that will promote a universal order. Perhaps Michael Lewis grasped the nature of theproblem, when, in Liar’s Poker, he said, in conversation with another Salomon Brothers trader:

I didn’t know, I gulped, that there were two hundred and eighty-five investment bankers in the wholeworld.

‘There aren’t,’ he said. ‘There are more. And they are all the same’In other words, the whole idea of globalization was a canard….Debt issuance and bond trading were no longer the domain of a single firm, but of hundreds. Many

of the new players didn’t share our exalted sense of self-worth. Japanese banks such as Nomura,American commercial banks such as Morgan Guaranty and European monoliths like Credit Suissewere all willing to do the same job as Salomon Brothers in Europe, and for far less pay…. They hadthe same information we did. Information, with communications, was becoming cheaper and easier toobtain.

(Lewis 1989:232–3)

First, the type of globalization we are experiencing is in the international financial markets (Crook 1992a);most other spheres of activity are still constituted in micro-markets. There are limits to globalization andthese limits are, amongst others, I shall argue, a function of culture. For the restraints of culture oftenproduce unexpected results. The arguments between the United States and Japan over their traderelationships attest to this (Smith 1989a).

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One constraint on globalization is that for the most part international business is located primarily in threesuper-regions, namely, North America, Europe and the Pacific Rim. Most of Africa, South America andAsia is of minor value to big business compared to the big three regions. This is also reflected in thestructure of such supra-national institutions as the Group of Seven.4 Together these three super-regions are aset of inter-locking units that dominate world commerce. Their importance is emphasized in a report issuedby the Japanese Ministry of International Trade and Industry which warned of the dangers of unregulatedregional economic integration. The report said: ‘We should bear in mind that economic integration may endup significantly reducing the world economy and world trade if the wrong method is employed’(International Herald Tribune 1991:13). The private sector is also acting on the principle of regionalism inits goal to become global. In an interview the president of Nomura Securities, the largest financialinstitution in the world, said:

We are seeing the emergence of regional economies and regional investment houses that have globallinks. People once thought globalization meant a simple integrated financial market. That soundsgood, and perhaps if everybody agreed on deregulation and standardized rules, we would have thatsimple integrated market. But in the real world—the world where real business is done—globalizationis neither simple nor integrated.

(Schrage 1989:71)

Another Japanese commentator has written in a similar vein:

Decomposing the corporate center into several regional headquarters is fast becoming an essentialpart of almost every successful company’s transition to global competitor status… [I]t is consistentwith recent developments in Europe as it moves toward 1992, in North America… and in Asia….

(Ohmae 1989:137–8)

Dicken (1992) points out, using the global advertising companies as his example, that even those servicesthat strive for global reach have problems in attempting to integrate the scattered parts of their companies:that is, globalization has not been achieved.

The concept of culture is inextricably important in the analysis of the globalization of business, yet it iselusive. As the statements above demonstrate, the concept of globalization is easy to enunciate but difficultto achieve. Smith (1989a) suggests that culture is often granted the role of a residual category without beingfully examined. He warns us not to fall into ‘the trap of thinking of “a culture” as an immutable set ofpractices, beliefs and meanings’ (Smith 1989a:428; cf. Church 1985). Because culture is tied to place andhistory, we should think of it as a moving, not a fixed, target. The culture of professions is a reflexiveentity: the beliefs, myths, habits, norms and ideas are constitutive of the structures and constituted by them(Silbey 1992). That is, cultural analysis examines the construction of both the history and present socialorder: it is interested in style as much as substance. It was Weber who said, ‘we are cultural beings’ (1949:81). These elements of culture display themselves in actual practices and in the media and other texts.

In the case of the professional restructuring of the global market we are concerned with two aspects ofculture, namely, national culture and organizational culture and their interaction (Soeters and Schrueder1988; cf. DiMaggio and Powell 1983). For example, in their study of six Dutch accounting firms, threeDutch and three belonging to Big Eight firms and all with Dutch employees, Soeters and Schrueder foundthat there was significant American influence on the culture of the Big Eight firms. However, they hypothesizethat this influence is not so much due to socialization but rather to self-selection, which runs contrary to

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explanations in much of the organization literature. Their study is at least suggestive about the extent of thestrength of the force of the ‘Americanization thesis’ that has been promulgated.

There are two further points confounding the analysis. They concern the spatial and temporal. When wetalk of globalization we essentially refer to markets in financial services rather than what some call the ‘realeconomy’ of goods. Financial goods are easily and quickly transferable, yet they are produced in three majorlocations—New York, London and Tokyo—each with its own distinctive regulatory schema and socialstructure (Sassen 1991). Even with English as a lingua franca for commerce and finance, personalinteraction between these three centres is fraught with contingency. Business people agonize over thecorrect form of manners and meanings embedded in apparently simple statements (Page 1990). Forexample, Americans and British remark on the apparent inability of the Japanese to say ‘no’ directly. Theirvery indirection creates impressions of agreement where none exists (Goldenberg 1988). In a geographicalsense the world is vast and sometimes unbridgeable, but chronogeographically the world has shrunk almostto the size of a pea. Instantaneous and simultaneous communication is the norm thereby creating the ‘globalvillage’ (Boden 1990). Events such as financial crises and revolutions occur, develop and mutate not withindays or weeks but in minutes and hours via satellite news organizations like CNN. And even more mundane,everyday happenings are reflexively adjusted in the same ways. It is the temporal aspect that makesglobalization possible; it is space and culture that make it difficult to carry it through to its fullest potential.

The struggle for globalization then involves conflict with culture. As I shall indicate in the next section,the hoped-for promise of globalization for the legal profession and less so for the accounting profession hasnot been fulfilled because in large part these professions have been unable to determine accurately their rolesvis-à-vis the other financial professions or how to free law and accounting from their particularistic contexts.But as significant elements of the legal and accounting professions move away from law and accountingproper to business consulting, their chances of expanding overseas improve, but so do the dangers inchanging.

LAW, LAWYERS, ACCOUNTANTS AND INTERNATIONALIZATION

For elite corporate lawyers the legal world contains three systems of importance, namely, the Anglo-American, the civil and the Islamic. For purposes of this chapter I am excluding the third because of itslimited significance over the last decade and a half, especially as OPEC has lost its control over the worldpetroleum market (cf. Delaunay 1992). The common law and civil code systems are quite different(Whincup 1992), but have nevertheless permeated each other in some countries. For example, the Scottish,Sri Lankan and South African legal systems are essentially civil code types with English common lawoverlaid. Japan acquired the German code system, which following the Second World War was influencedby American common law (Schlesinger et al. 1988:322). For business transacted in the world—i.e., thethree super-regions—these two systems predominate (Glendon et al. 1985). The two legal systems haveproduced remarkably different legal professions (Abel 1988). While the common law legal professions haveproduced, at the most, three divisions of judge, advocate and office lawyer (i.e., barrister and solicitor), thecivil code system has produced a plethora of types of lawyers—for example, notaries, magistrates, judges,advocates, civil servants, prosecutors—all as discrete categories. Moreover, as Rueschemeyer (1973) hasargued, following Weber, common law lawyers are primarily associated with the market, while civillawyers are aligned more with the state. Even though Rueschemeyer has argued thus, Weber maintained,‘[Adjudication by honoratiores] may thus well stand in the way of the interest of the bourgeois classes andit may indeed be said that England achieved capitalistic supremacy among the nations not because butrather in spite of its judicial system’ (1978:814; cf. Albrow 1975; Feldman 1991). So, given Weber’s

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categories of legal thought and their relationship to the development of capitalism and to lawyers, why havethe common law lawyers been so conspicuously successful in marketing their skills and legal systems, andwhy have the civil code lawyers lagged so far behind? To begin to answer the question in the context ofglobalization and culture, I examine the recent developments in the American and major European legal andaccounting professions, and then continue looking at the organizational and work aspects.

It is clear from a cursory perusal of the financial and legal press that common law lawyers are veryclosely tied, and have been for some centuries, to the market (Rueschemeyer 1973; Sugarman 1993). In theCity of London many connections were formed through the livery companies and the City institutions.Dennett notes that Mihill Slaughter, father of William, co-founder of Slaughter and May,

As well as members of the [Stock] Exchange, Mihill had a wide acquaintance among the bankers,accountants, solicitors and promoters whose professional life revolved around the market. It waspossibly such an acquaintance with John Morris of Ashurst Morris Crisp & Co. (or perhaps fellow-membership of the Fishmongers’ Company) that led to the offer of an appointment as an assistantsolicitor for Mihill’s son William when he qualified in July 1879.

(Dennett 1989:16)

These traditions were reinforced in 1977 when the City of London Solicitors’ Company made the claim inits submission to the Royal Commission on Legal Services that City solicitors market a product and thatproduct is English law (1977, emphasis added). And Steven Brill emphasized these tendencies from anAmerican perspective when he wrote in 1985 of the takeover of Sullivan & Cromwell by ShearsonLehmann/American Express. A source quoted in the article said ‘we’re going to restructure S & C’s fees sothat in mergers and acquisitions they’ll charge a percentage of the deal, the way investment bankers do….Charging by how long something takes some lawyers is nonsense’ (Brill 1985:14). He went on to say thatthe normal leveraging of one partner to two or three associates would be replaced by a more economic useof ‘back-office grunts’ at a ratio of one to ten or one to twenty (ibid.). Of course, Brill’s article and thequotations were pieces of inspired fantasy in 1985, but no longer. British legal culture has already begun torealize Brill’s fable.

One episode that highlights a legal profession’s joint and several responses to attacks on its core values wasthe reform of the British profession by the Thatcher government. At the beginning of 1989 the Britishgovernment published three Green Papers (i.e., discussion papers) on the reorganization of the legalprofession. The proposals they contained were far-reaching, radical and dramatic. The Lord Chancellor’sDepartment proposed:

that free competition between the providers of legal services will, through the discipline of themarket, ensure that the public is provided with the most efficient and effective network of legalservices at the most economical price, although the Government believes that the public must also beassured of the competence of the providers of those services.

(Lord Chancellor’s Department 1989:1)

The argument proffered was purely economic and in tune with the laissezfaire principles of Thatcherism,with no regard for the traditions of the legal profession (Bishop 1989). In two areas in particular the GreenPapers proposed that the legal profession follow the route of others, such as the accountants, and formmultidisciplinary practices (MDPs) and multinational practices (MNPs) (ibid.: 43–8). Both MDPs and MNPscould take a corporate form without lawyers necessarily controlling the company. Two surveys, by

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Gouldens (a City law firm) and the City of London Solicitor’s Company, showed City lawyers andaccountants greatly in favour of MDPs and MNPs. But they did not agree as to the possible benefits to beconferred. In its response to the Green Papers, the City of London Solicitor’s Company wondered about theidentity of the profession and its work (City of London Law Society 1989). The response said:

Under an MDP regime, it could be said that solicitors would have a choice: whether to concentrate onessential core legal business and services closely related to it or whether to diversify into the morebroadly-based conglomerate consultancy business of which the legal services would merely be a part.The choice, it might be said, would fall to be tested by market forces and this would itself be no badthing.

(Ibid.: 39)

After this nod in favour of competition, the Company continued:

The trouble with this scenario is that the loss of focus which would be the inevitable result ofabsorbing the legal function into a larger mixed practice (unless it were run as a discrete business)would tend over a period of time to blunt the public’s conception of even that part of the legalprofession which declined to go into MDPs. Whatever were then perceived to be the sins of solicitorspractising in a multi-disciplinary form would tend to be visited on solicitors practising independently.This would be most undesirable. If the legal profession is to continue and build on its considerablerecord of success of serving the public in recent years, it is almost certainly better to do this byconcentrating on what it knows and does well. The further it gets away from these things the morelikely it is that it will come unstuck and its reputation founder.

(Ibid.: 39)

This ambiguous approach indicates the multiplicity of constituencies a professional association has to serve(cf. Lee 1992). We can see the pervasiveness of the culture of formalism and legalism, a retreat into arhetoric of core values, still flourishes when the Company refers to ‘concentrating on what it knows anddoes well’. Historians have shown that solicitors diversified their portfolios of work continuously to meetactual and perceived client demands (Sugarman 1993): lawyers were (and are) entrepreneurial. Also onecould question what the Company meant by ‘record of success’. In spite of their doubts it was understoodthat City law firms operated within a competitive environment and that too great an adhesion to Ludditeprinciples would only harm their business.

Such feelings failed to deter others in the legal profession. The judiciary, barristers and non-Citysolicitors remained consistently opposed, to the extent that the bar hired Saatchi & Saatchi to run anadvertising campaign on the theme: ‘300 years after the Bill of Rights, a Bill of Wrongs…. A system ofjustice, envied throughout the world, and that has taken over 700 years to develop, has been given just 12weeks by the Government to justify itself’ (Bar 1989).5

In some respects the Green Papers reflected trends that were already in motion. One example of the trendto transnational business was typified by Macfarlanes, a City firm of solicitors, which formed the coylyphrased ‘strategic alliance’ with O’Melveny & Myers of Los Angeles (Flood 1989a; InternationalFinancial Law Review 1989c:6; Rice 1989:16). Other examples were Allen & Overy, one of the LondonBig Ten firms, opening a Paris office that had ‘strong links’ with a major firm of avocats, Gide LoyretteNouel (International Financial Law Review 1989b); and Ashurst Morris Crisp opening a joint office inTokyo with Sidley & Austin of Chicago.6 There are, however, costs to non-merged alliances. Both Allen &

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Overy and Gide Loyrette expressed their commitment to remain independent of each other. Nevertheless,both were reported to have lost substantial quantities of referral business (Fennell 1989c). One partner of alarge English law firm talked of his firm’s membership in ‘Le Club’, an elite syndicate of law firms inEurope and the US. He saw it as an alternative to his firm setting up foreign offices.7 The next logical stepwas taken by the Law Society when it published rules on multinational partnerships (MNPs) (Stewart1991). However, the insurance requirements of the rules have placed enormous costs on large law firmsthus effectively barring any serious MNPs by foreign law firms being set up in the UK, whereas UK firmsdo not find it so expensive (Flood 1993).

The other trend, towards the establishment of MDPs, has been promoted primarily by the big accountingfirms. Coopers & Lybrand Deloitte, one of the Big Six, advertises itself as satisfying ‘client needs bydeveloping multi-disciplinary teams of professionals including barristers, solicitors, actuaries, insuranceprofessionals…ex-Inland Revenue…staff, and chartered secretaries’ (Flood 1989a:5). And some law firmshave already been approached by investment banks and accounting firms for merger talks. Conversely, oneCity law firm has considered taking over a smaller firm of accountants. I shall return to the accounting firmsbelow.

There is clear evidence that both professions are and have been proactive and entrepreneurial in selling theirservices. The senior partner of Gouldens, a City firm of solicitors, said that his clients, for example, LordHanson, the corporate raider, demanded an entrepreneurial outlook that matched theirs; they were notsatisfied with just legal advice. He referred to one client ‘who wanted to know whether he could do a deal.He wasn’t in the least concerned with the legal side. He just wanted to know if he could do it—yes or no.’Three statistics attest to City solicitors’ commercial success. First, 30 per cent of cases of the CommercialCourt’s docket, the elite division of the High Court in London, were between non-British disputants (TheTimes 1989). Second, in 1988 British law firms generated £300 million in overseas earnings (Law Society’sGazette 1989).8 Third, the top twenty City law firms accounted for a third of English lawyers’ total feeincome of almost £4 billion in 1990 (McCullough 1990). Table 6.1 provides a breakdown among the toptwenty City law firms.

In terms of globalization, the importance of the EC Single Market is marked. It affects not just theEuropean legal professions, but also the American and Japanese. In a speech Jaques Delors, President of theEC Commission, prophesied that by the end of the century, over 80 per cent of the European Community’slaws would issue from Brussels rather than member states’ legislatures.9 And in the eyes of many lawyersBrussels has become the Washington, D.C. of the east, where it is necessary to have a presence in order tolobby the Commission (Sontag 1989). For example, the government of Hong Kong retained a Belgian lawfirm to advise on EC anti-dumping law: the first time a government has hired a law firm to advise oninternational trade (International Financial Law Review 1989a; cf. Rozen 1990). One English lawyer statedthat up to 70 per cent of his chargeable time was spent on lobbying. Yet another commentator has remarkedthat ‘lobbying the European Commission is like trying to push a jelly with a blancmange’ (Burnside 1989:49). Lawyers are becoming more open about being lobbyists in Brussels (Flood 1993). But there is a

Table 6.1 Top 20 law firms in England and Wales by market share based on gross fees in 1989

Law firm Gross fees (£ millions) Market share (%)

Clifford Chance 183.8 4.2Linklaters & Paines 113.1 2.9Lovell White Durrant 97.5 2.5Slaughter and May 85.8 2.2

THE CULTURES OF GLOBALIZATION 107

Law firm Gross fees (£ millions) Market share (%)

Freshfields 81.9 2.1Allen & Overy 74.1 1.9Herbert Smith 70.2 1.8Simmons & Simmons 70.2 1.8Denton Hall 68.3 1.7Norton Rose 68.3 1.7McKenna & Co 54.6 1.4Nabarro Nathanson 50.7 1.3Richards Butler 48.8 1.2Cameron Markby Hewitt 42.9 1.1Evershed Wells & Hind 42.9 1.1Wilde Sapte 39.0 1.0Stephenson Harwood 35.1 0.9Clyde & Co 35.1 0.9Turner Kenneth Brown 35.1 0.9Alsop Wilkinson 31.2 0.8Total for top 20 1,302.6 33.4Other (9,795) firms 2,597.4 66.6All firms 3,900.0 100.0Source: McCullough (1990:7)

clear division between the outlook of the English and the American law firms. English lawyers areconvinced that American lawyers do not have the nous to operate in the EC. They suffer from the perceiveddefects of being extra-Communitarians and being overly aggressive in their tactics (Rice 1990). As onelawyer described it, Thinking you can bully a Commission bureaucrat because you are a hot-shot lawyerfrom Washington loses you friends very quickly.’ The rules of the lobbying game are such that the client’sname is rarely disclosed to the Commission. The allure of the Commission has been strong: by 1989 113foreign law firms had established offices in Brussels (Burnside 1989). With the advent of the MergerRegulation, however, ‘many firms on both sides of the Atlantic with strong competition/anti-trust/M&Apractices felt unable to stay away any longer’ (Rice 1990). The burgeoning of the EC as an area for practicehas intensified the scope of differences between the common law practitioners and the civil code lawyers.The aggressive Anglo-American style of lawyering contrasts markedly with the European cottage style. Butthe EC was largely, until the entry of the UK, the preserve of the civil lawyers. Nevertheless, Rice notes,‘To succeed in Brussels, [Anglo-American] firms need to form alliances with the best European corporatelawyers and bring them into partnerships on equal terms. Over the years this is what Clearys has done andthat is why Cleary Gottlieb Brussels is to many the only true European law firm around’ (1990:33).10

Mega-law has been fundamentally a North American and British phenomenon (Gallanter 1983b; Flood1989b; Dezalay 1991). Despite its short history, mega-law has begun to establish a culture that is evidencedby the introduction of a vigorous legal press (Powell 1988)—for example, in the US, The American Lawyer,The National Law Journal, The Legal Times of Washington; in the UK, The Lawyer, The InternationalFinancial Law Review, Legal Business—which has lionized certain lawyers for their ‘macho’ approaches tothe law (cf. Lisagor and Lipsius 1988; Wolfe 1987; Stevens 1987; Stewart 1983). The tenth anniversary

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issue of The American Lawyer, for example, wrote this of Joe Floam of Skadden Arps, the lawyer whopioneered the hostile takeover:

One can admire the superlatives that attach to Joseph Flom, or be jealous of them. But there is nodenying them and no denying that Flom personifies the best aspects of the new age of lawyering. JoeFlom, 65, is among the best lawyers in the profession, an Old World generalist with encyclopedicrecall of case law and deal and litigation strategies, a whirlwind of creativity, a near-caricature ofperseverance. He defines the concept of client service. He is also the consummate lawyer-businessman, a visionary entrepreneur who took Skadden, Arps, Slate, Meagher & Flom from a 160–lawyer, $30 million-revenue, mostly one-practice shop ten years ago to a 1,000–lawyer, multifaceted,multioffice institution that will gross $400 million in the 12 months ending this March [1989].

(Brill 1989:66–7)

The point about these encomiums is that they are a collaborative exercise between the law firms and thejournalists (one can draw analogies with labelling theory and deviance amplification theory here). They arean attempt to establish the hegemony of the legal profession over others by boosting, and an attempt to writea new culture of the corporate law firms. The journals heighten their status and sales by boosting theprestige of mega-law and its firms hone their public relations images through the journals and anincreasingly competitive market; and so it goes on.

In England the City law firms have similarly been able to boost their images through their long-standingties with City financial institutions, upon which they were formerly reticent. Freshfields, one of the oldestCity firms, traces its connections back to 1743 when Samuel Dodd, one of its partners, was appointedsolicitor to the Bank of England, still one of its clients (Slinn 1984). At least two other City firms—Slaughter & May and Linklaters & Paines—have commissioned and published histories to circulate to theirclients and others. These provide interesting exemplars of the use of history for ideological purposes.

Elite law firms are revelling in this hagiography. It reveals them as spirited, virtuous and progressive.And the English legal press now writes similar profiles to those in America. Legal Business described aplanning lawyer, David Cooper, at Gouldens, thus:

‘All my friends are my clients,’ he claims. ‘I don’t have a private life.’ That is the only possibleexplanation for the fact that he personally billed £1.75m last year…. That means that Cooper’sdepartment… billing £2.4m, was responsible for more than ten per cent of… Goulden’s gross feeslast year… Cooper claims that he probably works 4,500 and 5,000 billable hours a year—which boilsdown to between 12 and 13 hours every single day of the year—and an average of nearly £400 anhour if based on a strict hourly basis. ‘Work it out,’ he challenges, ‘I start at 7am and start charging,charging, charging.’

(Dillon 1992:25)

In indulging thus, the Anglo-Saxon firms have certain advantages over the European firms. Many of themhave names steeped in history—Freshfields, Sullivan & Cromwell, Linklaters & Paines, Cravath Saine &Moore, etc.— which they can retain even though the named partners are dead, an institutional bulwarkagainst change and fission. The Anglo-Saxon firms can advertise in the US and UK; they can merge freelywith other law firms in their countries. But with the diverse types of lawyers in the European countries, lawfirms have typically remained small. In neither Germany nor Italy can law firms institutionalize a name in

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the manner of the American and English firms, which creates difficulties in establishing stable, enduringidentities, nor can they merge with the same ease as the Anglo-Saxon firms.

These differences are becoming of more pressing concern now that the EC Commission has issued itsdirective on recognition of diplomas (Reynolds 1988; Carr 1988). The principle of the directive is that allprofessional diplomas from member states will be recognized throughout the EC. In some respects thedirective has provoked some member states into attempting to tighten their rules.

France has generally had a liberal policy towards foreign lawyers, allowing them to establish themselvesas conseils juridiques (business advisers) along with French practitioners (but not as avocats with rights ofaudience) (Boigeol 1988; Morton 1988). With the French legal profession having fused the avocats andconseils juridiques into a single group of avocats, the Bar now requires that any lawyer wishing to giveadvice in France must be a member of the French legal profession (International Financial Law Review1991a:2).11

Given the small size of French law firms and their fears of a post–1992 Anglo-Saxon invasion, it isunderstandable that they are trying to preserve, albeit monopolistically, their legal and organizationalcultures. A partner in Gide Loyrette & Nouel put it this way:

There is no feeling of panic as to the future of the smaller French law firm. In some ways this isunfortunate. French lawyers have not really grasped the dimensions of what will happen, as theydon’t think that there will be any radical change. And yet there are going to be some seriouscompetitors. Associations will become much more usual. The advantage of an association is that itenhances the international development of firms, which gives the client the confidence that they willbe dealt with by someone whom you consider to be the best.

(Muinzer 1990)

Conseils juridiques were not embedded in the ideology of the ancien regime. They possessed the freedom totake any form they wished, from partnership to limited company. But now the profession is one of avocats,with the Bar trying to reassert its primacy by prying into the commercial affairs of the firms—wanting tosee tax returns and details of personal and firm income (Stewart 1992a). Some business law firms areconsidering moving out of the Paris Bar to the Nanterre locality which includes La Défénse and Neuillywhere many of the legal offices of the large accounting firms are based. The pressures ofinternationalization are strong. In preparation for 1992, exchange controls were relaxed, the Frenchgovernment liberalized in the conduct of financial work and banks and new financial institutions from the US,UK and Japan have been created in Paris. Whereas these institutions are benefiting from liberalization, forlaw firms in France cross-border mergers with foreign firms have been thrown into confusion with the newlaw.

These pressures can be exemplified by the situation in the German legal profession. The German Bar hasa stiff set of restrictive practices, which generally restricts lawyers (Rechtsanwalt) to practising within theirown localities and prohibits firms from merging across localities (Morton 1989). A recent decision in theEuropean Court (Commission v. FDR 1988) ruled invalid the requirement that a local lawyer must bepresent in the court-room with a foreign lawyer.12 Some law firms with international practices haveinterpreted this decision to mean that they can merge across localities. A partner in a Hamburg firmcommented:

Our competitors are the Anglo-Saxon firms, the specialist boutique firms and the charteredaccountants, who do a great deal of business advisory work in Germany. How do we resolve this

110 JOHN FLOOD

impasse? I believe that if a number of the leading firms get together and agree to flout the rules wemight achieve something, but one firm alone cannot do it.

(Morton 1989:iii)

In part, these conflicts arise because to German lawyers international work and business law have neverbeen a mainstream form of work; instead, the emphasis has generally been on court work. Thus in order togain expertise in the field, young lawyers have sought training in the US or the UK, thereby risking‘contamination’ with Anglo-Saxon entreprenuerial mores. Nevertheless, the unexpected political union ofEast and West Germany has thrown German lawyers into a classic field of Anglo-Saxon law, namely,privatization. The Treuhandanstalt, the trust set up to sell off East German businesses, has created a hugevolume of work:

The role of the lawyer is…‘different from what is normally required in West Germany’ and muchcloser to the Anglo-Saxon model. A heavy involvement at the pre-merger stage, coaching clients,structuring, formulating proposals, advising on strategy and lobbying all form part of what the lawyermay be called upon to do. The lawyers love it. ‘We just know so much more about the process, thethinking of the parties and the valuation of risks’….

(Stewart 1992b:15)

An extreme situation obtains with the Italian legal profession. The dominant theme of law practice is theculture of individualism (Carr 1989; Olgiati and Pocar 1988; Stewart 1992e). Elite lawyers aspire not topartnership but to solo practice. Carr (1989: iii) describes the situation thus:

The root of the law firms’ historical inability to grow lies in one simple fact. As they themselvesopenly admit, they are trained from the cradle to be prima donnas. No Italian wants to be oneamongst many. From law school on the majority of Italian lawyers aspire to set up their own firm.Bucking that trend can cause difficulties, as one lawyer in what, in Italian terms, is a large firmillustrates, ‘When I returned from the US and joined this firm my father said “What’s the matter? Don’tyou have the courage to set up on your own?”’

Institutionalizing a law firm is fraught with difficulty. Retaining young lawyers means competing with thebetter salaries offered by the banks, for example. The political economy of Italy is such that most largeinternational financial deals are made in Milan, but require the sanction of the government in Rome,creating pressure on a number of firms to try to maintain offices in both cities. In addition, the 1939 law onprofessional associations prohibits the formation of a true partnership, so ‘all letters and opinions have to besigned by the individual lawyer, not the partnership, leaving the lawyer alone responsible’ (ibid.: iii). Yetlaw firms exist as de facto entities (cf. Olgiati 1993).13 This emphasis on individualism subverts moves to morecollectivist organization-building, which in turn feeds the Italian ideology of professionalism that isantagonistic to the internationalization of business law. As a result, in Italy mega-law firms such as Baker &McKenzie are gaining ground in international law practice and the big accounting firms (with their hybridaccountant-lawyers, the commercialisti) are also offering advice on the legal aspects of putting dealstogether.

In Europe, as in the Pacific Rim, the Anglo-Saxon common law culture has begun to prove its hegemony,in the form of business people wanting to do deals based on it, in preference to the civil code counterpart.But this hegemony operates within limits, namely, that lawyers perceive themselves as lawyers and not

THE CULTURES OF GLOBALIZATION 111

businessmen. MacDonald articulates this conundrum well from the perspective of an American lawyer: ‘Ibelieve modern lawyering and law firms have always been conducted as a business enterprise. For somereason, many leaders of our profession seem to cringe at this thought’ (1989:594). This ideologicalconstraint militates against the kind of expansion that the big accounting firms have undergone.

The success of the accounting firms vis-à-vis law firms in internationalizing can be traced to a heterodoxview of business development. Accounting firms have piggy-backed on their auditing—which gives them aglobal picture of any client and an invaluable entrée, an advantage denied lawyers —and diversified intofields other than auditing, such as management consultancy, tax and corporate reconstruction (Montagna1974; Stevens 1981; Perks 1992). The Price Waterhouse Annual Review for 1986–7 shows, that of all theservices offered by the firm—audit, tax, management consultancy and insolvency—managementconsultancy grew by 27 per cent over the previous year, more than twice the rate of auditing (PriceWaterhouse 1986–7:5). There is an equivalence between law and accounting here. The core knowledgebases of both are subject to similar cultural constraints: law and accounting are jurisdiction-bound. Forexample, the British and French accounting conceptions of ‘true and fair’ views in accounts are quitedifferent (Freedman and Power 1992; Kerviler and Standish 1992); and attempts to introducestandardization and harmonization into accounting practices are recognizably distant (Waters 1989;Freedman and Power 1992; Weetman et al. 1992). Even the international accounting bodies, such as theInternational Federation of Accountants (IFAC), put forward a grand vision along the lines of ‘the globalaccounting profession is becoming a reality’ (Barrett 1992:110). Yet they follow it with the rider, ‘IFAC’sethical and auditing standards are now widely accepted even though true harmonization is not possiblebecause of differences in cultures and regulations of various countries’ (ibid.: 113).

Accountants also frequently assume the role of broker between professions. The director of internationalservices at a Big Six firm stated:

When the client wants to invest in a foreign country operation, he needs advice on tax structures,restrictions on capital investment, and the like. He comes to the public accountant and not the investmentbanker. Taxes play a very important part in this role. There is a lot of work relating to new taxtreaties. Just yesterday I had a West German client sitting [here] who needed advice on how tostructure sales to get the best tax advantages so as to not hinder his company’s overall operations inother countries. Very frequently clients will ask us, ‘Can you recommend bankers?’ Or, ‘Can yourecommend lawyers?’ We suggest several and let them make the final choice. Very frequently we haveto tell even the largest MNCs they need them, especially attorneys.

(Montagna 1986:107)

In continental Europe the accounting firms have been particularly successful in establishing MDPs. Forexample, in France Arthur Andersen has twenty-five full-time lawyers in tax, company law, M&A, andlabour law; Coopers & Lybrand Deloitte has 120 legal professionals in tax, business law and labour law;Ernst & Young has fifty-five full-time lawyers in tax, company law, M&A, contract, EC, competition,labour, intellectual property, banking and finance (Eburne 1991:18). One accountant argued, ‘We want tobe seen as the number one business advisers; and the law is very clearly relevant to that. The demarcationpoint is very fluid. There is an increasing overlap and competition in all services that can be described asbusiness advisory services’ (ibid.: 16). Whereas the MDP principle grew from the tax work, the accountingfirms’ legal work is favouring corporate and company law over tax.

Although the accounting firms more or less remain partnerships, they have altered their internalstructures to reflect modern bureaucratic trends. Instead of the simple partner and associate division of the

112 JOHN FLOOD

law firms, accounting firms have seven or eight levels, namely, junior, supervisor, senior supervisor,manager, partner, executive and senior partners (Montagna 1974:20). This enables the accounting firms toleverage their staff more thoroughly and extract more rent from them than the law firms (cf. Galanter andPalay 1991; Brill 1985). Even the largest international law firm pales into insignificance against the size ofthe Big Six. The largest accounting firm in the world, KPMG, the result of a merger, has 5,540 partners andan annual revenue of $4.13 billion; the smallest of the Big Six, Arthur Andersen, has 2,016 partners and anannual revenue of $2.82 billion (Economist 1989).14 Even Skadden Arps, one of the most successful mega-law firms, generated only $400 million in gross revenues in 1988 (Brill 1989) and $500 million in 1990(Brill 1991).

Expansion and concentration, although they create potential for greater rewards, nevertheless produceconflict. The recent attempt by Arthur Andersen and Price Waterhouse to merge into the largest accountingfirm in the world with 4,642 partners and annual revenues of $5.038 billion failed because of conflicts ofinterest over clients and, especially important, cultural differences in organization. Arthur Andersenoperates as a single, centralized partnership, whereas Price Waterhouse has a more decentralizedarrangement allowing more autonomy to regions (Waller 1989). And, despite more than three months ofnegotiations, the partnerships of the two firms could not reconcile their disparate corporate cultures.Moreover, some national regulations barred the merger. Specifically, both Japan and Canada would havedisallowed the merger in their respective countries, which would have left the firm with potentiallycompeting branches in those countries.

Law firms face these conflicts to an even greater extent than the accounting firms. Flom asks: ‘Is there alimit? Yes, there is a limit on the growth of a law firm because of anachronistic rules that are being applied.Take conflicts of interest’ (Federal Bar Council 1984:97). The recent failed takeover bid for BritishAmerican Tobacco by Hoylake highlighted the difficulties that result from restrictions on conflict of interest(American Lawyer 1989). Cravath Swaine & Moore, acting for BAT, accused Skadden Arps, acting forHoylake, of a conflict because of having been counsel for Farmers Group, an investment bank that had beentaken over by BAT the previous year. Conversely, Skadden accused Cravath of conflict because it wasacting for both BAT and Rothschild Holdings, a partner in Hoylake. Cravath attempted to withdraw itsrepresentation of Rothschild Holdings, but Rothschild sued to prevent Cravath from representing BAT. Thesuit was settled by Skadden withdrawing its Los Angeles office and one of its New York partners from thework. This exemplifies the continuing imposition of a relational ideology on what has become atransactional business. In other words, the diminution of long-term relationships between law firm and clientin favour of the short-term transactional relationship has not been mirrored in the rules that govern thesepractices. So as the ideology of business gains ground, the strains between it and the sacred forms ofprofessionalism intensify and the role of the lawyers begins to change.

Some law firms are also recognizing the need to loosen ties. Baker & McKenzie’s non-American officesare largely staffed by local lawyers; this has earned the firm the reputation of being a franchise law firm—a‘McDonalds’ (Stevens 1987). Skadden Arps sees itself composed of a series of interlocking boutiquesrather than as one big firm, but largely within one legal system. Arnold & Porter has established whollyowned subsidiaries in financial consulting, general consulting and real estate consulting, which placeslawyers in the role of co-ordinator, planner and organizer, a role which, Fitzpatrick says, will take lawyersinto the twenty-first century (Fitzpatrick 1989).

For law firms, the limits of globalization are inherent in their jurisdictions. The example of theprivatization of British Gas demonstrates this clearly (Neate 1987). The UK government intended to issuethe shares simultaneously in the UK, Europe, Japan, the USA and Canada. Essentially, there were fewproblems between the UK and Europe: the UK prospectus was used with a ‘wrap-around’ with Europe-

THE CULTURES OF GLOBALIZATION 113

specific information. With the USA, Canada and Japan there were major problems with the advertising ofthe issue and the drafting of the prospectus. The UK government was planning a massive advertisingcampaign ahead of the publication of the prospectus. The other jurisdictions absolutely forbade any puffingbefore the filing of their registration documents with securities and exchange commissions. The US andCanadian lawyers had to promise their Commissions that no advertisements would enter North Americafrom the UK, even though with everyone concerned with modern communications technology that promisewould be hard to keep. The UK lawyers had hoped to use the document drafted by the UK merchant bank,but the US and Canada lawyers declared that was impossible. This led to the drafting of a ‘North American’prospectus, which had to be translated into French for the benefit of Quebec. One dramatic differencebetween the North American and English documents was in describing the future of the company: theEnglish saw this as portraying a rosy future and the Americans required the risks be emphasized. One of theEnglish lawyers described the process this way:

Certainly this whole question of how to write prospectuses for various jurisdictions, whoserequirements are different in the way I have been describing, is one of the biggest practical difficultiesfaced on an international share offering of the British Gas variety…it is obviously absolutely criticalthat the same detailed message is being given worldwide about the company, even though the prospectusmay have to be in a different order and in some respects apparently different in content….

On the Gas offer, we at Slaughter and May as solicitors to the UK Government, carried out amassive physical checking exercise on all the later drafts of the United States, Canadian and Japaneseprospectus, comparing them with the UK base document and marking precisely where there werechanges, whether of order or of substance, or even of punctuation, so that these could be carefullyexamined against the UK base document and assessed by those senior people in the clients and in ourfirm who were responsible for the UK prospectus. The objective was that at the end of the day allthose concerned with the prospectus, in all jurisdictions, would be satisfied that none of the changesmade had altered the basic message.

(Neate 1987:69–70)

Thus, even when the transaction is one that covers the world, it is rendered problematic by particularisticcultural concerns.15 And even the players in the game found difficulties. As it was primarily a Britishoffering the leader of the professional advisers’ team was the merchant bank, with the lawyers playinghandmaiden. For the British this was normal and unquestioned; for the Americans it was perverse. There thelawyers are in charge of this kind of enterprise. They see themselves as the quarterback of the team,planning strategy and tactics (Fitzpatrick 1989).

It should be mentioned here that sometimes the term globalization is used synonymously withAmericanization. This is a fundamental error. There may be some Americanization of culture but it may bepreferable to talk of the export of American techniques that are adapted to local cultures and so becomelocal knowledge. An illustration is the creation of the ‘vitamin pill’ defence of Consolidated Gold Fieldsagainst the Minorco takeover by John Grieves of Freshfields (MacErlean 1992:7). Grieves said he derivedthe idea from Marty Lipton of the New York firm of Wachtell Lipton who invented a takeover defencecalled the ‘poison pill’ (Borden 1989:43). Similarly, there have been situations where American lawyershave been involved in European takeovers, but the consequence of these high-profile activities is that theyare copied quickly. Such knowledge can not be patented, so the active life of such expert knowledge is shortbecause its ideological component is low compared to its technical value, that is, the shift fromindetermination to technicality is rapidly made (Jamous and Peloille 1970).

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If, however, business transactions can be uncoupled from their immediate environment, that is, thetransaction does not have to be sanctioned by the local law, then law firms might be able to market a particulartype of law for transactions. For example, the Japanese prefer to use English law in debt security work(Scrivenor 1989). Although this should logically give English firms the advantage, sometimes suchagreements are made entirely by non-English lawyers. This raises questions about the subsequentinterpretation of the agreement. Will that interpretation be grounded in an English cultural perspective orsomething that only approximates it, a neological English legal culture that will be refracted through analien system? One area of activity that is directly uncoupled from local law is lobbying, and one cancompare American and English efforts in Brussels, as I did earlier. It is evident that the American lawyershave not been conspicuously successful in their endeavours. One can then ask what particular skillsAmerican lawyers have that others do not? A certain entrepreneurial flair, an explicit aggressiveness—perhaps. At best we should think of the Americanization thesis as an interesting hypothesis that requiresmuch testing before we can verify it. There is currently a dearth of evidence for testing. And we should askwhat would be the appropriate kinds of evidence in this case. No research has yet broached thissystematically.

Is it possible for lawyers to maintain a separate role as competitors in international business markets fromthe accountants and the investment banks? Probably, but it may well be a localized one (cf. Fitzpatrick1989). As long as lawyers are tied to particular conceptions of the role of law and operate within particularlegal systems, others in the international financial field will compete aggressively and not feel bound by theideological and cultural constraints lawyers impose on themselves. The French government’s tender forlawyers to advise on the creation of a unified business law for the franc zone resulted in competition fromsuch law firms as Slaughter & May and Jeantet & Associés. But the victor was Ernst & Young Juridique etFiscal (Stewart 1992d:9). Possibilities for escape from confinement of particular systems lie in thedevelopment of alternative structures such as international commercial arbitration. As business begins torely less on domestic forums for dispute resolution, lawyers are being called on to devise new sets of‘anational’ norms (cf. Marriott 1992:2). Arbitration agreements represents a new form of lex mercatoriathat is independent of state systems and can be purchased in many forms at many sites (Teubner 1992). Andit is interesting that the accountants already consider themselves the inheritors of the lex mercatoria(Renshall 1992). The development of EC law as a regional legal system offers lawyers signal opportunitiesto create new legal forms special to their sets of expertise, especially with the aid of the Brussels andLugano Conventions on jurisdiction (McLachlan 1992:40). At bottom, the problem is the nature of lawitself. Historically, it has been grounded in diverse cultures and has rarely been deployed across them in thesame manner as accounting or business principles. In many respects then, the forces of globalization arecreating a tumultuous environment for a potentially endangered species.

NOTES

1 The law firms are well situated. China has been displaying a greater rate of economic growth than most westernnations: its rate of growth since 1978 has been 9 per cent per year and the annualized rate of growth for GNP hasbeen 14 per cent for 1992 (Economist 1992:14).

2 The law firms involved in Interjura are: UK: Ince & Co, Marriott Harrison Bloom & Norris; US: Thelen MarrinJohnson & Bridges, Wilmer Cutler & Pickering, Bracewell & Patterson; Australia: Minter & Ellison; Spain: J &B Cremades; France: Gide Loyrette Nouel; Sweden: Mannheimer & Zetterlof; Hong Kong: Masons & Marriott;Holland: Nauta van Haersolte; Germany: Triebel & Weil; Italy: Ughi & Nunziante.

THE CULTURES OF GLOBALIZATION 115

3 In view of the increase in international mergers and acquisitions, the Securities and Exchange Commission (SEC)is relaxing its rules for foreign investors in the US. They will only have to comply with their own securitiesregulatory schemes. The SEC has also permitted the New York Stock Exchange to extend its trading hours inrecognition of the internationalization of the market place (Labaton 1991:11).

4 The member states are: United States, United Kingdom, France, Germany, Japan, Italy and Canada.5 After a brief period for review and reply to the Green Papers, the British government issued its legislative

proposals in the form of a White Paper. With the exception of a few minor sops to the Bar, the governmentremained committed to its original ideas (Ford 1989; The Times 1989; cf. Zander 1990). The proposals were enactedin the Courts and Legal Services Act 1990. Those most disturbed by the proposals were, in Dezalay’s words, ‘thesages and scholars of the law’ (the Bar) (cf. Fennell 1989a; 1989b). As a former Lord Chancellor put it, ‘Thesolicitor is a man of business, a barrister is an artist and a scholar’ (Aylett 1978:160). With its traditional monopolyover rights of audience in the courts and hence litigation, the Bar has never appeared to give much considerationto the business of law. However, the Bar is as business-minded as the City solicitors and other professionals forwhom they work, especially as many barristers now work in law firms. The commercial Bar has formed anassociation known as COMBAR and publishes a directory of its members and their specialties. Sets of chambersdistribute glossy brochures advertising their skills. Barristers compete with solicitors for work at the internationallevel: London chambers have already established branches in cities like Paris and Brussels. And at the 1992 BarConference the president of the Law Society warned the Bar to forgo assuming the role of solicitor in addition totheir customary rule of advocate.

6 Some law firms are using cross-jurisdictional joint ventures, like Ashurst and Sidley, as a means of setting upoffices in Eastern Europe. Ashurst also has the reputation of being the law firm everyone would like to mergewith.

7 There is an array of alliances, joint ventures, EEIGs, etc., that various law firms in Europe and the US areexperimenting with as alternatives to opening offices. These alternatives are especially important for the medium-sized firms that are unable to finance international expansion by conventional means (cf. Stewart 1990, 1992c).

8 One City solicitor I interviewed was not at all concerned about the American invasion of lawyers to London. Hesaid, ‘I think English lawyers are much better than most Americans, except for those in New York and Boston—who are almost English anyway. The reason is we use language with precision, whereas American lawyers uselanguage in blocks to convey emotion, so English documents are drafted better. Americans are much too prolix.’But another solicitor wrote, There has been allowed to develop a form or style of drafting, possibly stemmingfrom anti-avoidance tax legislation, which ranges from ambiguous to downright vague, such that it is all too oftenimpossible to know with any certainty whether or not a given course of action will or will not turn out to bewithin the law’ (Legge 1991:3).

9 One example of far-reaching EC legislation is the merger regulation, which will shift the control of internationalmergers and acquisitions from local jurisdictions to Brussels—a case in point was Hanson’s attempt to take overICI.

10 Some lawyers I interviewed are convinced there has been a retrenchment in Brussels because the Americanlawyers could not apply the same techniques as in Washington, D.C. (cf. Greenhouse 1991). Griggs (1992), amember of the UK delegation of the CCBE, has predicted that the EC Commission will soon propose a new structurefor European professions that will not be bound by discipline or borders.

11 There are indications that the EC Commission might take action over the French reforms of the legal profession(International Financial Law Review 1991b:4).

12 This was reinforced in 1991 when the European Court decided the case of Sagen v. Dennemeyer, which said that‘a UK based patent attorney, Dennemeyer & Co Ltd, could continue issuing patent renewal notices to its Germanbased client companies in spite of a German law which effectively gives local patent attornies a monopoly inpatent work’ (Stewart 1992a:18).

13 Stewart (1992e) notes that some firms have now reached fifty to sixty lawyers strong.

116 JOHN FLOOD

14 In the International Accounting Bulletin of January 1990, the international personnel of the then Big Fiveaccounting firms were: KPMG: 74,000; Ernst & Young: 68,300; Coopers & Lybrand: 62,500; Arthur Andersen:51,400; and Price Waterhouse: 41,000.

15 The current Maxwell Communications Corporation UK insolvency and US Chapter 11 bankruptcy is causingsuch headaches over co-ordination of seemingly incompatible legal regimes to the UK Chancery Division judgesand the US Bankruptcy Court judges that they have now set up an ad hoc informal communication line betweenthem to ensure they do not contradict each other (Moss 1992; Carrington and Murphy 1992).

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Chapter 7Process and policy of legal professionalization in Europe

The Deconstruction of a Normative Order

Vittorio Olgiati

the road to the free market was opened and kept open by an enormous increase in continuous,centrally organized and controlled interventionalism…

K.Polanyi

For this is the paradox of a society which, from the eighteenth century to the present, hascreated so many technologies of power that are foreign to the concept of law: it fears the effectsand proliferation of those technologies and attempts to recode them in forms of law…

M.Foucault

FOREWORD

As Michel Foucault has shown, the mapping of ‘occupations’ and ‘services’ has always played a relevant rolein the structuration of (western) society. Particularly in times of large and rapid social changes, attempts toproduce ordered tabulations of all possible work areas, skills and professions were highly rewarded.Undoubtedly, they provided empirical guidelines to advance scientific formal knowledge, enforce socialcontrol and implement any sort of political programme. Given such a historical cultural background, itcomes as no surprise to note that a great deal of study and research is nowadays turning up on this testedline of attack to approach the issues of social stratification and functional differentiation that crowd‘transitional’ processes of European unification at present.

Within the disciplinary area of sociology of law, a number of scholars concerned with processes of legalprofessionalization have been particularly influential in renovating such a recurrent cultural climate. As amatter of fact, in recent decades significant transformations have occurred in the province of law. Economiccycles and technical developments substantially influenced legal structures, roles and functions; new informalboundaries between professional jurisdictions and/or technical performances have emerged; newcredentialling systems and market shelters have been claimed; new legal services have also been demandedand created. Charting processes of professionalization and niches of production to reconstruct a grid thatcould be of use for social and institutional arrangements has thus become a current exercise.

Notwithstanding the relevance of documents and knowledge that this sort of academic operationalism isable to array—and notwithstanding the potential critical use which could be made of it—the aim of thisstudy is rather different. Instead of providing a taxonomic account of what European legal professions actuallydo in terms of work, know-how, skill and attributes, or offering a list of professional patterns related tocertain professional models, an attempt will be made here to focus on some general problematic variableswhich concern both the process and the policy of legal professionalization in Europe.

In fact, if one agrees that professions do not just find things laid down for them, but ‘construct theirproblems as they work with them’ (Abbott 1986; Bourdieu 1986; Larson 1988), the issue of how such asubjective activism is anchored by formal and informal power structures can hardly be underestimated.Structural and functional elements of professionalism in general and of the legal profession in particular are‘based on forms of political domination’ (Burrage et al. 1990). Therefore the study of how changingpatterns of the legal professions are disposed at local, national and transnational level requires somethingmore than a mere ‘cartographical’ survey. It involves a perception of the nature and dimension of thetransformations occurring in the broader socio-normative domain and the ability to treat legal order andlegal professions as genuine variables. In brief, as Freidson would put it, to understand the state of thesocially constructed universe at any given time, or its change over time, one must understand first thebroader social organization—the institutional setting —that permits the definers to do their defining.

THE CASE STUDY: TOWARDS A ‘ONE-DIMENSIONAL’ PROFESSIONALFRAMEWORK?

In many discussions on the legal professions, changes in the worldwide economic system and risingcompetition in the so-called ‘market’ for legal services have been depicted as the forces that are driving thelegal field in Europe towards an unprecedented general restructuration. In particular, the increasingcommercialization of law and the diffusion of multidisciplinary and multinational corporate law officeshave been pointed to as two major structural trends in contemporary legal professionalism. Thus, it seemsthat there is no alternative: before the end of the decade European legal practices concerned with business‘are likely to be restructured along the lines of the big international and multi-disciplinary conglomerates, inthe form of capitalistic societies using outsider investors. In short, these would be service firms, like others,where the advantage of legal and judicial services would be simply one of the services on offer’ (Dezalay1990).

This statement is based on a number of indicators. The expansion of economic competition not onlyprovides a wide range of supply, it also requires specific technical and structural devices. To the extent thatthese components differ from traditional arrangements, they imply an irreversible detachment of the legalprofessions from the humanistic concerns of traditional legal culture and practice. This, in turn, drives themtowards an equally irreversible attachment to the management and decision-making mechanisms ofeconomic production (Irti 1984). Professional action ceases to be legitimized by reference to principles ofequity and justice. Instead, it is subjected to the requirements of computability, performativity andefficiency: all typical of economic transactions for profit. In brief, the professional jurisdiction simplybecomes a ‘market’ for delivering a particular type of service.

A similar legal environment has substantially emerged in Europe only in recent decades, involving theelite segment of the profession. However, since business has enlarged its activity worldwide, the whole legalfield related to it has to fit into it fully and comprehensively. By an effect of homology, in fact, therestructuring of the legal market would be but a corollary of what is happening in the economic field:financiarization and globalization of ‘productive’ activity. Given such a context, it seems therefore thatEuropean legal jurisdictions and expertise will be basically transformed. More precisely, it seems that‘entrainés dans le mouvement d’uniformization de l’espace economique mondial, le droit et le pratiquesjudicaire des États de Communauté Economique Européenne sont condamnés à voir disparaître, parentiers, leurs traditions et specificités nationales’ (Dezalay 1989a).

Notwithstanding its appeal, the above picture is, in reality, far from elucidating the whole spectrum ofcurrent professional trends. To a certain extent it may lead to an underestimate not only of the historical

VITTORIO OLGIATI 123

‘rationale’ of the (institutional) process of division of legal labour in Europe, but also of its actual (social)composition and (political) dislocation within the broader social system. In particular, being mainlyconcerned with the ‘market’ in ‘corporate’ legal professionalism, it may not offer a sufficient account ofhow the issue of ‘governmentality’ (Foucault 1980)—and consequently the process of institutionalization of(legal) expertise (Johnson 1992)—is currently ‘displaced’ in Europe.

If one looks more closely at the overall European law-in-context at present, one cannot but note that, 35years after the Treaty of Rome and contrary to widespread media opinions, the number of professionalmodels that are competing to achieve, control or extend different professional traits is as high as the varietyof ‘local discretionary legal systems’ and legal traditions and cultures that are at the core of these models.Even in European regions where the process described above has been consciously implemented by a statepolicy, there are and will remain—as a recent study on ‘tomorrow’s lawyers’ in the United Kingdom hasdemonstrated (Thomas 1992)—conspicuous discrepancies in the reordering of professional bodies andjurisdictions. On the other hand, in countries where no specific policy has apparently been enforced—as inthe case of Italy— the possibility is quite apparent of a number of compromise solutions based on ageneralized intertwining of attributes and performances between ‘mature’ legal professions and ‘new’ legalpractitioners at a structural as well as at a functional level (Alpha 1989). Last, but not least, none of theabove contradicts, but rather confirms, a more general commitment of official EC law policy-makers. First,because EC programmes concerning any sort of professional services are nowadays explicitly orientated togive priority to future decentralized strategies for managing diversity; and second, because—as will bediscussed in detail in this study—EC directives and decisions enforced so far, by duplicating rather thansimplifying traditional professional monopoly devices, are also confirming that legal professions in Europeare and will continue to be anchored to both national bodies and official positive (national) law.

Given such clear evidence of the complexity of the province of legal professionalism in contemporaryEurope, it seems therefore quite appropriate to approach the topic by assuming a more comprehensive socio-legal perspective. From this particular starting point, in fact, one may have a better view of either thebattlefield in which competing professional models are forced to act, or the actual coigns of vantage that(for now) they have been able to achieve.

THE CASE STUDY: THEORETICAL GUIDELINES

The number of variables and the quality of arrangements that could be taken into account to try to enlightenthe process and policy of legal professionalization in Europe at present compel us to establish two basicmethodological guidelines. On the one hand, to deal with a historically determined set of questions (ratherthan a selective collection of concurrent and/or complementary materials), so that the study could fit in andstimulate further action-orientated research strategies. On the other hand, to focus on the core problems ofthe socio-legal field as a whole, rather than to deal with some of its segments or complementaryramifications only, so as to avoid, as far as possible, the risk of overstating (in a deterministic fashion) theirconjunctural impact on the overall evolutionary trends.

In fact, to the extent that one is aware of the complexity of the Old Continent, one cannot ignore theinterrelation between the ‘thickness’ (Geertz 1987) of European socio-legal heritage and the unpredictabilityof the outcomes of current programmes of European Strukturbildung. Therefore, it seems particularly usefulto look at the constitutive elements of European institutional domain: law, economy, politics and culture, asintertwined institutionalized mechanisms, and from this starting point to look at the developmental rationalethat they embody.

124 PROCESS OF LEGAL PROFESSIONALIZATION

For this reason, the above-mentioned hypothesis of a radical collapse of traditional traits of legalprofessionalism in Europe—the so-called Big Bang (Dezalay 1990)—will not be taken into directconsideration: to offer a more comprehensive understanding of socio-political and normative dynamics itwill be for now, as Foucault would say, ‘suspended’. By contrast, a more plausible and socially adequateresearch strategy will be considered here: namely, the socio-legal strategy suggested by the works ofWilhelm Aubert.

The scientific legacy of Wilhelm Aubert demonstrates that trajectories of modernization in the context oflaw and society in the West are not one-dimensional, but rather embody an uninterrupted process ofcontinuity and development based on a plurality of variables. This process is always open to any possiblerelative—and unavoidably problematic—solutions. So problems arising from social dynamics, rather thanmere data collections, are considered the real source of enquiry for a proper scientific analysis (Aubert 1989).Of course, the acceptance of this analytic framework does not imply denial of the importance of empiricaldata: it simply confirms that even such evidence has to be related to the problem of its epistemic conditions.

These considerations lead directly to the second theoretical guideline. To be aware of the complexity ofthe Old Continent also implies the acknowledgement that European socio-legal systems have always been,at one and the same time, localistically divided by conflicting institutions and cultures, and universalisticallyunited by general principles and evolutionary scenarios. This accounts not only for the variety of legaldoctrines and plurality of legal systems, but also for the differentiation, overlapping and transplantation of avariety of forms of legal practice at regional, national and transnational level. Additionally, one cannotignore the fact that the many-headed character of the European socio-institutional realm, as well as its long-lasting attempts at convergence and amalgamation of basic structural and symbolic devices, have beenemphasized in recent times by specific historical trends. For example, the intensification of transcontinentalpractices and the cultural impact related to it seems to have reinforced both the heteronomy andisomorphism of the overall European normative system. In this context, convergences and divergencesbetween different socio-legal (local) contexts, professional trends and law-making policies might appearsimply as a matter of nominalistic definition if their specific ‘logic’ is not fully understood. And this is apoint that can hardly be missed if one only considers that the EC programme for the completion of theinternal market consists precisely in a shift of EC official policy from the ‘old’ to a ‘new’ approach toEuropean ‘standards’; that is, to an approach which will be increasingly based on limited general directivesfrom above in favour of substantial law-making from below (Cockfield 1990).

In brief, the aim of the study is to focus on professional problems and issues stemming from the context ofthe European law-and-society unification process as a whole. First, a general overview of thetransformations occurring in the overall European legal domain offers the opportunity to consider the natureand meaning of the questions that are on the agenda in the field of European legal professions. Thespecificity of professional traits vis-à-vis current processes of socio-institutional change will then bediscussed in order to have a better understanding of the potential and limits of the professional modelspresently enforced.

In developing this argument, the study also offers a detailed account of the EC’s Janus-headed law policyrationale concerned with the continuity and development of national legal jurisdictions. Finally, prevailingprofessional trends are analysed to point out their inner contradictions and their prospective impact onEuropean systems of law. A brief concluding comment corroborates the idea that the changing patterns ofEuropean legal professionalism are sustained by a new general ‘policy of governmentality’ of expertise inEurope that seems to lead not only towards a great division between different professional fieldworks—thatis, between corporate and national-law-orientated legal practices—but also, and above all, towards a newthematization of their technical diversity, cultural identity and political loyality.

VITTORIO OLGIATI 125

THE PROCESS OF EUROPEAN UNIFICATION: BASIC SOCIO-INSTITUTIONAL ISSUES

As has been said, an underlying common assumption of current discourses on legal professionalism incontemporary Europe is that the process and policy of legal professionalization are basically heterodirectedby market forces. In reality, no one can underestimate or even ignore the fact that, by definition, legalpractice and legal professions are what law is: in the last instance, they mirror the state of their art. Changesoccurring in the normative realm are, therefore, their primary—not secondary—reference point.

If one recognizes this self-evident premiss, it follows that in order ‘to avoid some of the cruder forms ofeconomic determinism associated with market analysis of legal professions’ (Economides 1992)—and toachieve a better understanding of the nature of current legal experience in Europe —it is absolutelynecessary to realize the substantial configuration and the lines of development of the legal domain atpresent. With reference to this point, let us briefly sketch a synthetic but comprehensive overview.

One of the most striking aspects of the province of law in contemporary Europe is undoubtedly theemergence of a number of legal systems produced by the so-called (semi-autonomous) socio-legal orders or(autopoietic, i.e., self-referential) socio-legal systems (Moore 1973; Streek and Schmitter 1985; Teubner1988). These orders have gained in recent times an increasing socio-institutional power and are now able toact as (relatively independent) sources of law. A peculiar trait is that they have grown not only inside the(territorial and functional) boundaries of official state law, but also outside, above and against it.Paradoxically, this growth has been made possible by virtue of a number of institutional shelters providedby each national state at local, national and international level. Another peculiar trait is that the so-calledsocio-legal orders are not necessarily ‘territorial’ (semi-perfect sovereignty), they aim at coping with theenvironment according to substantive and situational arrangements (conjunctural elasticity) and mould theirstructure according to principles of functional differentiation and organizational dominance (purpose-orientated particularism). The most distinguishing feature, however, is that they are (still) either semi-autonomous, as far as they are sheltered by positive official law, and self-referential, as far as their main aimis to transform external constraints into internal potential, regardless of the broader environmental effectsthat this may cause. Being (still) basically semi-autonomous and self-referential, they are, therefore, notonly legally incoherent, but also, and above all, politically irresponsible.

Taking full advantage of such characteristics, they have acquired a large economic and social relevance.Their pressure over (traditional) socio-institutional arrangements provided by each nation-state has alsobeen empowered; so much so that not only are they now competing among themselves to affirm as steadilyas possible their respective jurisdictions, they are also claiming a political ‘investiture’—that is, formallegitimation on the part of official law—to act as institutions provided with the potestas of self-government(autonomy), self-management (autarchy) and self-jurisdiction (autocriny). In other words—as the emerginghypothesis of setting up the so-called ‘multi-door-courthouse’ system demonstrates—they are nowstrategically orientated to challenge social control, cultural hegemony and institutional dominance of thetraditional province of states’ law (Olgiati 1991).

Within, above and outside such a highly dynamic normative scenario, substantial changes in the structureand functions of nation-state (and of their legal systems) also play a relevant role in shaping the overallEuropean legal domain. First of all, once the dimensions and implications of the legal setting produced bysemi-autonomous socio-legal orders have been realized, nation-states have in turn developed a sort ofsecondary adjust ment. Attempts at decodifying formal-rational rules and procedures, at implementing ‘softlaw’ policy-making, and enforcing various forms of alternative justice have increasingly been carried out.Informal devices have also been promoted, to the point of creating a new, peculiar combination offormalism and informalism, re-regulation and de-regulation, repression and motivation, and so on

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(Chouraqui 1989). A major strategic issue, however, has been the devolution—or better, discharge—ofquotas of their (traditional) legal authority: on the one hand, in favour of trans—and supranational (publicor semi-public) organs and institutions; on the other hand, in favour of sub-national (local and regional)entities. As a direct consequence of this strategy, there is now evident the increasing decomposition andoverlapping of almost three levels of official formal-legal sovereignty concerning, respectively, thepolitical-economic control of (transnational) functions, the political-institutional control of (national)structures, and the political-social control of territorial (local) collective and/or individual bodies.

A number of traditional centralistic legal arrangements of nation-states —and the whole legal culturerelated to them—has also been basically altered and/or eroded (Cohen-Tannugi 1985). Universal formal-legal patterns, such as the ‘certainty’ of (state) law, and fundamental principles of legal tradition havepractically been dismissed or reversed. For example, the Italian Constitutional Court recently stated(decision n. 364/1988) that, due to the actual composition of the legal system, ancient standard rules such asignorantia legis non excusat and nemo ignorare jus censetur can no longer be universally ascribed even tolawyers. In Belgium a Court of Arbitration—an institution that can hardly be classified according to classicconstitutionalism—has been set up (Law 10.5.1985) with powers of immediate and/or postponed annulmentof bills and decrees (art. 6.2) with retroactive effect; that is, officially infringing the venerable dictum of therule of law lex retro non agit.

The relative retreat of nation-states’ law and the devolution of legal authority in favour of trans—, supra—and/or sub-national institutes has produced, in turn, two further sources of (still) semi-autonomous legalproduction which are extremely relevant for the current and future structuration of European legal domain:EC organs and regional governments.

EC law-making includes types of primary legislation (such as charters of rights, agreements, etc.),secondary legislation (such as regulations and directives) and court decisions, each of them directlyorientated to interfere, in one way or another, with transnational, national and local legal systems.Secondary legislation, in particular, has expanded so much that claims have been made that by the end ofthe decade it will cover almost 80 per cent of total legal production in Europe. This prospective trend iseven more impressive if one considers that the technicality of such legislation is much more complex,situational and asystematic than that of socio-legal orders.

Moreover, its content, by rule, hardly matches any pre-existing legal sphere, because by definition it isorientated to create a new, broader legal system. The adoption of the European Single Act in 1987 and thesigning of the European Political Union Treaty (Maastricht Treaty) in 1992 increased EC powers to regulateEuropean society to such an extent that even areas of social life which have not been subject to state controluntil now, will inevitably be affected (Steyger 1992).

Regional law-making is also expanding in quantity and quality. Its growing impact on other socio-legalsystems is due to its reference to basic social (territorial) issues. On the one hand, it deals with regulatoryand administrative problems, such as environment, health, town-planning, which directly interfere with thatpart of the normative realm that socio-legal doctrine defines as unofficial, intuitive, living legal orders of theso-called Lebenswelt (Habermas 1986). On the other hand, it not only couples with either the legal(national) arrangements of local state apparatuses or the law policy-making of semi-autonomous localconstituencies (such as Scotland, the Basque country, Flemings and Walloons), but also with all the ‘localdiscretionary systems of law’ (Church 1985) that always flourish from ‘paper law’ when this is put intoeveryday local legal practice.

To sum up, if one combines the really muddled results of both the legal action of socio-legal orders andthe legal reaction of national state laws together with the flow of legal rules stemming from EC organs, on

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the one hand, and local authorities, on the other, one immediately realizes what an immense, but incoherentand unstable, corpus juris has been made available to contemporary European legal professions.

The question, therefore, is this: what consequences will these structural and functional legal changesconcerning the most relevant sources of law have on the process and policy of European legalprofessionalization in Europe?

THE EUROPEAN LEGAL PROFESSIONS AT A CROSSROADS

The impact of the systems of law sketched above on current patterns of legal professionalism as well as theprospective structuration of areas of legal work in Europe must still come under systematic scrutiny. Yet, itseems quite clear that to the extent that social and economic professional relations are based on or mouldedby a set of norms that are formally and substantially contradictory and by a set of legal spheres that are alsosimultaneously decentred and combined, fragmented and superimposed, up to the point of producing anunequalled context of legal pluralism, legal professions might be compelled to redefine their wholetraditional assets (Huyse 1985).

As has been noted, the crisis of traditional forms of socio-legal regulation and the explosion of legalpluralism—or, better, the emergence of a state of ‘interlegality’ (Sousa Santos 1988, 1990)—has alreadyprovoked, and it is likely to do so even more in the future, explosive effects in the structural and functionalordering of the European institutional domain (Crozier 1980). Within and outside professional jurisdiction,a number of questions about the legal professions’ status roles have already come to the fore. And it is nowclear that what is at stake is precisely the epistemic conditions of their basic system of action, that is, thenature and core standards of their technical diversity, cultural identity and political loyality vis-à-visEuropean society at large.

To get an idea of the importance of the problems involved in each of these issues, let us briefly discussthem in detail.

From a technical point of view, any attempt to keep under control the differentiated complexity ofEuropean normative overproduction has proved so far almost impossible. On the one hand, theimplementation of processes of highly selective specialization aimed at coping with such a complexity hasbroken up the substantive uniformity of interprofessional communications. On the other hand, theimplementation of processes aiming at accelerating socio-legal standardization has led to the dissolution ofbasic binary codes or, if one prefers, the fundamental paradoxes of law—official-unofficial; public-private;formal-informal; action-imputation; deviance-conformity; and so on—so far considered essential to providelegal reasoning and practice with a coherent professional rationale (Luhmann 1988a, 1988b).

The real problem, in any case, stems from the fact that actual legal overproduction has substantiallyundermined the degree of legitimacy of existing professional models. In fact, the infinite diversitas(particularism) of current legal systems technically prevents the acknowledgement of a jus in omnia, that isa universalis citizenship (Pizzorno 1990). Additionally, the type of law-making involved in it does notprevent, but rather exacerbates, internormative conflicts. Teubner (1989) recently summarized the locationof these conflicts, by proposing ‘the following differentiation: 1) conflicts between autopoietic socialsystems; 2) conflicts between quasi-laws of semi-autonomous social fields; and 3) conflicts betweensubarenas within the law’. Whether this classification is exhaustive or not is not relevant here. For ourpurposes, it is simply worth noting that such a generalized normative modus vivendi is not only the causeand effect of a situation of disquieting indeterminancy of law, but also creates constant ideological stress inwork performances.

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From a cultural point of view, the uncontrolled increase in the complexity of European legal productionhas been equally traumatic. Attempts at reducing legal pluralism—a task that, according to authors as variedas Friedman and Luhmann, is the major and everlasting ‘knowledge mandate’ of legal professionalism(Friedmann 1989; Luhmann 1977)—has not been successful. European legal professions have thus firstexperienced a pro found state of cultural disenchantment, and second, a veritable crisis of identity.

A process of reconversion, that has occurred within the profession since the 1930s (Olgiati 1987, 1992a;Krause 1988), has been fostered in order to cope with the new situation and to avoid an incumbent ‘logic ofdecay’. However, even such a professional adverse normative has been and continues to be carried outwithin a particularly adverse normative climate.

Indeed, the epocal transformation of contemporary western society from modernity to post-modernityimplies a type of mentality and a number of structural and functional devices that cannot be legallyregulated in advance. Visible symptoms of (theoretical and practical) decline of law as a fundamental meansof social regulation (Aubert 1989; Foucault 1980) therefore aggravate the equally visible decadence of thelegal doctrines and codifications inherited from the Enlightment (Luhmann 1987). The diacronicperformances of a plurality of differentiated legal systems, in fact, not only produce—as we have said—adissolution of fundamental binary legal codes of western legal tradition, but, by preventing the ascription ofa logically coherent set of functions, favour a substantial limitation of ‘personal’ and ‘formal-legal’responsibility. Moreover, basic ‘cross-border legal relations’ (Gessner and Schade 1990) are continuouslyadjusted and/ or renegotiated outside the framework of a legally prescribed model. Most of them are evenperformed by means of non-consensual unthematized processes, as the presupposed social consensus issimply an ideological fiction (Luhmann 1979; Offe 1977). Notwithstanding repeated attempts to promotecultural flexibility, caution, discretion, wisdom and restraint, it has thus become clear that

[Traditional] norms and doctrines have to be discarded in search for tools for European integration.[Traditional] normative and doctrinal approaches are based on misconceptions of law, and areincapable of producing the changes in attitude and training which are thought to be necessary forunification.

(Friedman and Teubner, 1985)

As one can see, the dislocation of a plurality of conflicting legal systems within, above and against officialstate law, as well as the creation of ‘soft laws’, ‘quasi-legislation’, and so on, on the part of the latter, issomething more than a mere structural change. On the one hand, it implies that official (state) law isincreasingly losing its traditional hegemonic and pivotal role as an instrument of social engineering anddispute treatment (Olgiati 1991; Sousa Santos 1992). On the other hand, it indicates that processes occurringin the whole legal domain are ‘de plus en plus susceptibles de s’inscrire’ not only ‘dans le cadre del’analyse de la crise de la regulation juridique’, but also, and decisively, ‘dans le cadre des regulationsmacro-sociales…et des mecanismes de constitution et de gestion de l’ordre politique’ (Commaille 1991).These, in short, are the reasons why the structural and functional position of European legal professions as‘go-between’ or ‘boundary roles’ between law and society is not at all in balance.

Paradoxically, a number of scholars have noticed a shift in legal roles ‘du notable a l’expert’ (Dezalay1989) and of legal practice from ‘indetermination to technicality’ (Flood 1991). In reality, the evolutionarytrends sketched above made apparent that what is occurring at present in the European legal domain putsinto serious question, far above the asset of the traditional ‘gentleman lawyer’s moral authority’, its generalpolitical commitment towards the broader socio-institutional realm.

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The emergence of new powerful law-makers is compromising the traditional strategic alliance of legalprofessions with the so-called ‘sovereign power, the public’. In turn, the crisis of the glorious jus publicumaeuropeum has reached such a degree that the traditional balance of professional powers has also been largelydestabilized. This has led the professions to recognize that the traditional vertical centre-periphery legalmodel—that is, the gradualistic legal pluralism à la Weber—and the law itself are simply ‘une carte de lalecture deformée’ (Sousa Santos 1988). But what they are increasingly experiencing seems to be even moretraumatic than that: the ‘bouleversment de la regulation juridique au sein de l’ensemble du système social’,that is, the rise of a ‘nouvelle économie des relations entre normes sociales et normes juridiques’(Commaille 1991).

All the above has initially affected certain areas of legal work and expertise, such as legal aid, legal ethicsand legal education. But there are now clear indicators that the legal and political core of the profession, astraditionally defined by state laws—the (formal) defence guarantees, on the one hand, and the (substantial)social control of the work—have been already seriously questioned (Dingwall and Fenn 1987). Thus it ispossible to affirm that ‘restructuration du champ juridique’ at present goes along with a general crisis oftraditional political loyalty of the legal professions towards official state law (principle of legality), towardscivil society (principle of disinterestedness) and towards (national) political institutions (principle ofprofessional independence).

Needless to say, this is also true for those minority groups of European legal professions which seem tohave gained from current socio-institutional changes. Indeed, not all segments and factions within theprofession have followed a common linear stream. Processes of change are not merely deconstructingtraditional systems of action. They are also producing new, unexpected and conspicuous professionalopportunities. These new openings have been largely emphasized in the last decade by the so-called ‘newlegal press’ (Powell 1988). It is now commonly understood that trends as different as the expansion of legalservices in areas such as counselling and arbitration, the creation of new technical legal schemes, the escapefrom (state) ‘ordinary justice’, the revival of a lex mercatorum universalis and the rise of models of‘automatized justice’— to quote just a few well-known examples—are not situational variables: they mightbe of importance for the definition of some new patterns of professional practice (Kahn 1982).

Yet it is self-evident that even these segments and factions within the profession do not practise either inan ivory tower or in a socio-institutional vacuum. Even among them, therefore, what really matters atpresent is not so much the (situational) change in the structure of legal work or in the amount of legalservices, but the acknowledgement of ‘la mise en question’ of the socio-legal Grundnorm of European legalprofessionalism; that is, the strategic ‘principle of reciprocity’ between the power of legal discourse (theprofessional knowledge-power nexus), the power of social dynamics (the institutionalized hierarchy of classstructure) and the power of political bodies (organized hegemony of ruling elites) (Olgiati 1992b).

The time has come, therefore, to question whether and to what extent the above problematic issues are theprelude to an overturning of traditional professional models and an advancement of qualitatively newprofessional projects.

THE PROCESS OF PROFESSIONALIZATION: CHANGE, RESISTANCE ANDTRANSFORMISM

In order to address in a plausible and socially adequate manner the question of whether and to what extent anew professional model is germinating in Europe in the area of legal professionalism, it seems useful toconsider, first, the actual ‘behaviour of law’—as Donald Black would put it—or, if one prefers, theempirical factors that are shaping certain legal jurisdictions and are sustained by certain legal structures.

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This makes it easier to elucidate, in due course, the variables that in a manifest or latent way permit them tooperate according to certain prescriptive guidelines.

As a matter of fact, the above-mentioned trends are directly reflected and reshaped—by virtue of specificdiscourses and cultural codes—at any level and in any part of the European legal systems. A veritable processof ‘contestualization’ therefore takes place. And this is precisely the key that not only marks the variety, butalso explains the degree of variation, between each professional model within each professional group.

In order to appreciate the effectiveness of this type of reflexive adaptation, it is important to note thatalthough European legal professions are at present facing a situation of generalized normativeindeterminancy, they can still take full advantage of a number of historically determined social, legal andinstitutional devices that strongly resist, reduce or counterbalance the pressure of change.

By rule, these devices have a double dimension: while at a superficial level their conceptual patterns arehighly concrete, at the core level, by contrast, they are highly abstract (that is, Typenbegriffe, Ventilbegriffe,etc.)—Being able to gain at the same time a high flexibility and an equally high consistency, they aretherefore particularly suited to preserve, by a mere revisionist evolution, traditional professional standards.A well-known case in point is the system of professional action based on relational trust dynamics: a systemthat does not necessarily tend to maximize the expected utility of the performances, but rather creates andpreserves the best conditions for their (potential) self-reproduction (Olgiati, 1992b).

On the other hand, how can one ignore the capacity for resistance and transformism of those structures of‘long durée’ (Siegrist 1990)—academic institutions, professional guilds, etc.—that for centuries haveembodied the professional power-knowledge nexus? With reference to such powerful professional groupsas French, Spanish and Italian Latin-type notaries, for example, not even (national) political systems ruledby party coalitions are at present able—or willing—to implement programmes aimed at transforming eithertheir technical and cultural standards or their professional constituencies. As has been documented, they dealwith current socio-legal change by reinforcing their social and institutional organization sets in connectionwith powerful interest groups (in particular, state bureaucracy) (Suleiman 1987). They have also set up theirown professional schools and created their own semi-autonomous system of law—the so-called notarial law.Through a strict formal control on individual performance and by virtue of highly individualistic workcommitments, they are now the top and the strongest professional elite of the whole professional jurisdiction(Olgiati and Ioppa 1992a, 1992b).

The case of Latin-type notaries is worth mentioning here, not so much because they play a pivotal role incontinental European legal professionalism, nor because they deal with the most influential clients andlucrative legal matters. The fact is that they are also linked to such an extent to the over-all structure of theStates of Civil Law that to challenge their actual status role raises institutional questions about the (official)process of European unification that can hardly be put on the agenda. As can easily be understood, theinstitutional issue of coupling civil law/common law legal systems—as well as the institutional issue ofcoupling monarchical/republican political systems—is a matter of historical conditions that are not yetgiven.

Besides the ‘thickness’ of certain professional standards related to the power-knowledge nexus, the‘thickness’ of local legal practice and the symbolism related to the historical process of the division of legalwork cannot be underestimated. Factors such as relational communications and socialization are of extremerelevance in evaluating current psychological and cultural attitudes towards socio-institutional change.

With reference to this point, a recent survey commissioned by the Conseil supérieur du notariat françaisdeserves attention, as it is one of the few attempts made from inside the profession to explore practitioners’orien

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Table 7.1 Questionnaires and interviews: allocation and responses

Country Questionnaires allocated Interviews obtained

England 350 418Spain 400 316France 400 451Italy 400 465Question: Direction of the profession in the next five years.

Much change Little or no change Don't knowEngland 356 60 2Spain 96 209 12France 244 190 16Italy 129 322 13Question: I will continue to carry out my work as I do now.

Yes No Don't knowEngland 122 248 47Spain 238 55 23France 217 179 55Italy 329 92 44Question: Competition is…

Local Regional National International Don't knowEngland 2 25 336 50 5Spain 218 10 53 28 7France 35 54 350 12 1Italy 274 19 144 20 8Question: Activity is . . .

Local Regional National International Don't knowEngland 102 120 117 74 –Spain 195 48 23 45 –France 159 190 71 30 –Italy 298 70 54 39 –Source: Skordaki (1990).

tation and expectations towards the EC process of market unification and legal harmonization. Althoughthe survey has been carried out on a small scale and apparently with insufficient scientific assistance, itsresults are nevertheless emblematically interesting because they seem to contradict widespread mediaopinion. Let us consider, in particular, Table 7.1 concerning responses given by a sample of English,Spanish, French and Italian practitioners (responses concerning practitioners from Germany,Belgium/ Luxemburg, The Netherlands, Denmark, Scotland, Ireland and Portugal are omitted, due to theextreme dis-homogeneity in the number of both the questionnaires allocated and the obtained interviews).

As can be seen from the responses concerning the first question, the impact of current socio-institutionalchange is perceived differently in each national context. The national context itself—as the responses ofEnglish lawyers after a decade of Thatcherism clearly demonstrates—is assumed as a reference point. The

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responses of the subsequent questions confirm that up to now there has not been, and there is not expectedto be in the near future, any substantial Big Bang in practice. In fact, the majority of the practitionersinterviewed foresee that they will continue to carry out their work as they do now mainly at local andregional level.

The above considerations do not imply, of course, a denial that the impact of change at macro level doesnot produce significant mutations at micro level. For example, much routine work has been taken intocorporate law departments of commercial enterprises (in-house lawyering). Computerized procedural orlitigation support systems, such as legal know-how database services, are increasingly encoding many sortsof legal knowledge and skill. A wide range of activities in a number of innovative work areas have beencreated by new degrees of specialization. New forms of cognitive and ideological legal reasoning have alsoemerged.

Yet the variation in the type and amount of legal services required—to the extent that has been perceivedas a basic issue—has so far been handled quite simply by implementing a process of adjustment ofconflicting professional structures and functions: as is well-known, in fact, legal professions deal, bydefinition, with social and technical variability, and handle it according to their everlasting (jurisprudential)casuistic experience.

Even in well-localized professional niches, such as those related to international financial centres likeLondon, Frankfurt and Paris, a process merely of continuity and development seems to have taken place.The emergence of a number of networks of (relatively small) law firms and a further diversification in theirinternal organization—rather than the creation of large interdisciplinary law firms devoted to their ownexponential growth by means of aggressive mergers—is a clear indicator that European legal professionsare sorting out a European-style professional model by means of a process of limited and controlledevolutionary adaptation.

This evidence is particularly interesting because in recent decades pressure on the part of large, powerfulAmerican law firms to propagate their professional model has also influenced European legal practice.Attracted by the implications of the process of EC unification and experiencing increasing limits onexpansion at home, large American law firms opened branches in a number European cities to offer servicesand acquire clients in competition with European offices.

At first, they seemed to have several factors in their favour: knowledge of complex transactions,experience in pooling teams of lawyers, cash reserves, and, last but not least, clients willing to take overEuropean business. In a few years, however, the initial euphoria for what has been called ‘the Americanchallenge’ has given way to a more realistic attitude, due to the persistence of a number of formal andinformal local, national and transnational constraints. Attempts at lobbying in Brussels for legal services,for example, proved quite difficult, due to the difference in national lobbying styles. Professional (national)monopoly and the lack of local long-established connections compelled American lawyers to set up differenttypes of partnerships, associations or alliances with European colleagues rather than to compete directlywith them. Loosely structured arrangements such as those required by the so-called clubs and networks offirms—flexibility, non-exclusivity, no real commonality, etc.—are thus still largely prevailing. And acompromise mixture of American work-structure and European expertise is now the dominant feature of thework area. The paradox is that, by working closely with foreign partners, European legal practitioners haveacquired such a range of legal know-how, while maintaining and even reinforcing their professional socio-institutional background, that their jurisdictions have become enlarged. The constitution of a European co-operative law office called ‘Interjura’ or the creation of a cross-professional joint venture like Ashurst &Sidley offering legal services for investors respectively in the People’s Republic of China and in extra-EC(Eastern) Europe, are indicators that may confirm such a trend.

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To sum up, if one looks at the structural, cultural and social dimensions of European legal professions’behaviour at local, national and transnational level at present, one cannot but note that the impact of largersocio-institutional changes has been handled so far in such a way that a process of continuity anddevelopment is largely prevailing.

Yet this does not lead us to conclude that the problematic variables previously discussed have beenresolved or are less incumbent. In reality, the transformistic, moderate attitude of the European legalprofessions is basically a sort of role-play. The European legal professions are well aware of the seriousnessof the socio-institutional changes occurring in Europe at present (Karpik 1985). Therefore, they are alsoaware that any adaptation occurring in their jurisdictions might even produce stronger pressure towardsnormative complexity. This, as we have seen, is the challenge that is putting their professional identity andloyalty to the test. As long as the outcomes remain unpredictable, however, they simply try to benefit eitherfrom the protective shelters of long-lasting internal arrangements or from the entrepreneurial stimulation ofthe external factors, while claiming to refuse to be heterodirected. Their basic professional attitude is thusquite simple and well tested: given the nature of the situation, they cope with it to the extent that it iscongruent with their basic needs and interests. In the opposite case, as history shows (Karpik 1988; Olgiati1990), a substantial political opposition might be formed to socio-institutional upheavals.

TOWARDS A ‘CORPORATE LAWYERING’ PROFESSIONAL PROJECT?

Given the above opportunistic attitude towards current socio-institutional change—an attitude that, as iswell known, is typical and traditional of legal professions (Luhmann 1977)—what are the basic units oflegal practice in contemporary Europe? In other words: is there a professional model or a professionalproject which might be able to emerge and prevail in future European normative scenarios?

The question is far from rhetorical. As current attempts to systematically map the changing patterns of thestructure of legal offices and the nature of legal work demonstrate—the so-called market for legal service,significant economic interests and expectations for greater competitive advantages are already involved. Inreality, this type of approach does not seem to offer any substantial indication. On the one hand, becauserecurrent conjunctures in the economic circles of present-day society do not create per se any referencepoint for long-lasting normative projects in the field of legal professionalism; and on the other hand, andabove all, by adopting merely an adversarial perspective with winners and loosers (Whelan and McBarnet1992)—a singular variation of the well-known traditional ‘sporting theory of law’—one might confuse thepart for the whole and the tactics for the strategy. In brief, one simply misses the basic issue: theachievement of a stable organizational dominance, not so much in the material, but in the symbolic politicalsphere.

The above question is thus far from being rhetorical in another sense: it concerns a possible ‘solution’ ofthe actual disquieting state of legal ‘indeterminancy’: the assessment of a (relative) normalization of theprofessional power-knowledge nexus vis-à-vis the political economy of European unification. That is tosay, nothing less than the coherent (non-contingent) definition of a new general normative order in Europe.

As can easily be realized, such an issue is far from being at hand. As far as legal professionalism isconcerned, it implies, in particular, a structurally rooted institutional framework that one could count on tobe, in theory and in practice, either plausible (intersubjectively constructed through a rational discourse) orsocially adequate (necessarily grounded on primary social needs) (Luhmann 1983).

Taking the challenge seriously, a number of scholars emphasize and are increasingly assessing in Europethe importance of the well-known corporate lawyering model as a ‘new’ professional project for Europeanlegal professionalism. The reason for enhancing this project is found in a number of issues. The model has

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been largely applied in the United States and its use has already spread into a number of (westernized)countries. It seems to fit well within the management and decision-making mechanisms of the worldwideeconomic structure. Additionally, it matches with the asynchronic and asystematic law-making of largesupernational companies. What really matters, however, is that it not only embodies but also symbolicallyreflects the historical fact that the most effective social actor and real primary source of law incontemporary (western) society is no longer the socially isolated individual—as our legal tradition stillteaches—but the anonymous corporate organs of (semi-autonomous) socio-legal orders.

Given such a technical and symbolic nature, however, the model of corporate lawyering radicallycontrasts to public (state) legal systems. As is well known, it implies legal functions and professionalperformance that are orientated towards or controlled by neither (politically responsible, territorial) officialorgans nor the citizens at large. Not by chance, its reference structure—the large law firm—‘is the agent ofprivate corporate power…which clothes private interests with the mantle of legitimate authority’ (Nelson1988).

Being inherently related to a source of law which is (so far) basically orientated to computability,performativity and efficiency of economic transactions rather than to a balance of institutionalized powers oran ideal of justice, the corporate lawyering model is also subject to the direct influence of devices that arenot necessarily related to fundamental social needs. For example, legal roles and functions are absorbed andsubsumed into a larger mixed practice (consultancy, brokerage, financing, etc.) which is useful indeed but,by definition, is not normatively necessary. As has been stressed in a number of studies, this mixed practiceleads, in turn, to the loss of the specific meaning of a ‘legal’ practice. In fact, law is treated as a meretechnical instrument, as a medium regardless of its fundamental character as an ‘institution’ (Habermas1986). By disregarding any type of professional ‘incompatibility’, corporate lawyering exacerbatescompetition among legal professionals and the exploitation of any potential legal supply. Last, but not least,the transposition of the model to the level of transnational activity does not simply create a type of practicewhich is (potentially) ‘unlimited in space, unlimited by the delineation of fields of activity and unlimited bya defining concept of the profession’ (Glenn 1990). It also creates interest groups, cartels that, byimplementing the logic typical of corporate action, undermine and distort basic professional goals orientatedtowards other groups of society. In this respect, highly emblematic is the paradoxical fact that ‘Pour luttercontre le développement de la justice privée, certains voudraient que la justice d’Etat se privatize, endonnant aux plaideurs la possibilité de choisir leur judge, leur droit et d’éviter toute publicité malséante’(Dezalay 1989a).

To sum up, to the extent that the implementation of the corporate lawyering model implies a qualitativetechnical and cultural transformation of the identity of European legal professions, it also promotes theconstruction of a different relationship between legal expertise and society, that is, the definition of a newpolitical and normative design of public order in Europe.

The structural and functional implications of this project—based on (private) corporate, rather than(public) individual/collective interests—are indeed so incoherent with reference to the cautionary wisdomand equity of traditional European legal experience, that it is not by chance that attempts at enchancingcorporate lawyering as a new dominant professional model have so far been (and still are) strictly limitedand controlled in Europe by a number of legal (official) arrangements. To have a better understanding ofthis, let us briefly consider the following points.

While it has been argued that the rise and growth of corporate lawyering in the USA rests largely upon aninternal organizational dynamic (Galanter and Palay 1991), by contrast, in Europe, as in many Third Worldcountries decades ago (Dias et al. 1981) or in Eastern European countries in the last few years, it clearly

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rests on broader exogenous factors related to the nature of the international division of labour, the explosionof legal pluralism and the crisis (of legitimation) of the state.

The fact that corporate legal practice in Europe is related to these variables was already perfectly clear inthe 1930s, as the Italian Law 23.11.1939 n. 1815 (prohibiting the constitution of societa’ di professionistiand creating the so-called professioni protette) clearly demonstrates (Vacca’ 1990). But this was even betterrealized, after the Second World War, by the Constituent of the European Community. As is well known,according to the Treaty of Rome the notion of ‘freedom to provide services’ in the legal field greatly differsfrom the common notion of ‘service’ as (productive) ‘activity’ (arts 59, 60). Article 51.1 of the Treaty statesthat those activities which are even occasionally related to a public power are excluded from ‘freedom ofcirculation’. If one then reads this article together with article 48 concerning the activity of a ‘publicfunction’, it is quite obvious that the issue at stake is precisely the practice of legal professions. The factthat in the preliminary drafts of the Treaty the exclusion of lawyering was explicitly mentioned alsounderlines the relevance of the final statement. In other words, being aware of the implications describedabove, since 1957 EC member states agreed to enforce what has been called the legislative armistice (fromart. 53 to art. 62, in relation to art. 48 and art. 51.1): a substantial limitation of the general principles of theTreaty when a ‘service’ is related to state’s political sovereignty. Thus, for political reasons of ‘publicorder’—and with the implicit approval of the professional bodies—the European legal professions havebeen, and still are, ‘protected’ from the imposition on a general scale of a model of legal practice that mayundermine their basic ‘public’ functions (Martin Bernard 1990).

As a direct result of this ‘legislative armistice’ a substantial legislative inertia on the part of both ECorgans and member states about professional reforms characterized the situation up to the 1970s. In the lasttwo decades a certain number of EC decisions as well as some national professional law reforms have beenenforced, apparently to meet the legal needs set forward by particular sectors of the profession. As we shallsee in detail in the next paragraph, however, these new provisions are not orientated to modify the strategyof the Treaty of Rome. Rather, they confirm that there is a sort of reciprocal convergence between them; somuch so that article 16 of the very first EC Act contemplating a political European unification —the well-known Single European Act—states that unanimity is necessary for EC directives whose execution impliesa change in current national legislation concerning the professions’ asset. And it is not by chance that thisparticular article will be formally included in the Treaty of Rome as a second paragraph of article 57.

In other words, it seems quite clear that even more recent policy-making on law is basically orientatedtowards the containment of the corporate lawyering model and that a strategy of continuity anddevelopment is the main guideline of the process of legal professionalization in Europe. This is hardlysurprising. After all, as Crouch and Marquand (1990) put it:

The fact remains that for the foreseeable future…the existing nation state remains the main focus ofboth the political loyalty and the political competence of the great majority of citizens…. There areparadoxes here for most political forces. International business is a set of interests that possesses apolitical competence that can most easily transcend national boundaries, yet the conservative politicalforces with which business interests are primarily associated are those most in need of national symbolsto render themselves attractive.

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EC POLICY-MAKING ON LAW, CROSS-BORDER LEGAL PRACTICE ANDTHE PROTECTION OF (NATIONAL) LEGAL WORK

The current process and policy of legal professionalization in Europe cannot be correctly understood byassuming American-style corporate lawyering as the prospective dominant model for Europe. If there is atpresent an institutionalized political strategy that, by reflecting basic structural trends, radically marks thedifference between European and non-European processes of legal professionalization, this is precisely theprogramme of European unification. Therefore, EC law policy-making and EC cross-border legal practiceare the stepping-stones that should be taken into account to decipher the evolutionary framing of theprofessional jurisdiction in Europe.

For any European occupation or profession, EC law policy-making and cross-border practice mean, byofficial definition, either legal harmonization (of national socio-legal arrangements) or the integrationthrough law (of national professional monopoly). In the case of the legal professions, however, the doubleprocess of legal harmonization and integration through law cannot be implemented unless their Janus-headed character is fully recognized: according to national (state) laws, in fact, the public-private nature oftheir services implies that they also perform a double, public-private status role.

To recognize such a Janus-headed legal dimension is even more important if one considers that theprocess of European unification is geopolitical in character and the issue of forging a solid Europeangovernance cannot be correctly enhanced unless one realizes that ‘Europe does not have, and has had not ahegemonic centre. It has always been polycentrically divided into rival metropoles, each with its ownspecific political, economic and cultural attractiveness’ (Jacobi 1990).

This general statement accounts for the fact that, to the extent that European unification remains a multi-state political programme set up to cope with an increasingly unstable socio-institutional environment, itpoints to the pivotal mechanisms of traditional constituencies. However, to the extent that it also ostensiblyaims at modifying socio-institutional relations on a larger scale, it directly undermines them. It is not bychance that what is going to be discussed hereafter is thus something more than a list of legal arrangements:it is the dislocation of power resources for the assessment of a (potential) future symbolic domain.

In 1990 there was in the European Community more than 286,000 lawyers, distributed as in Table 7.2. Ifdata about other professional groups working as professionals in the legal field in Europe (in particular,Latin-

Table 7.2 Number of lawyers in the European Community, 1990

Italy 63,000Spain 62,000United Kingdom 55,000Germany 52,000Greece 20,000France 17,000Belgium 8,000Portugal 7,000The Netherlands 6,400Ireland 4,000Denmark 3,000Luxemburg 300

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Source: Martin Bernard 1990.

type notaries, but also judges and public officers) are then added, it becomes evident how effective so far hasbeen the policy jointly pursued by national states and EC organs to ‘protect’ the whole legal jurisdiction.

Let us consider, first, the process of implantation of the above mentioned corporate lawyering model onthe part of European practitioners. In England and Wales the ceiling of twenty partners per firm wasremoved in 1967. The number of lawyers in the fifteen largest firms was 1,102 in 1988; in the same year thenumber of assistant solicitors in the twenty largest firms was 2,581 (Thomas 1992a). This happened,however, mainly within the City of London and involved only practitioners who were members of anaccredited professional body (Lee 1992). In Italy the professional Law 32.11.1939 n. 1815, prohibiting theconstitution of societa di professionisti, is still in force. Corporate lawyering is, therefore, formally illegal.The constitutional legitimacy of this Law and the rationale of its content have been subsequently repeatedlyassessed, either by the Constitutional Court (decision 22.1.1976, n. 17) or by the Supreme Court ofCassation (decisions 30.1.1985, n. 566; 6.12.1986, nn. 7263, 7265) (Vacca’ 1990). In Spain, where there arefive different legal professions, it is difficult to find a large law firm (Harms 1991). In Germany ‘thereexisted in 1989 only one truly international corporate law firm…. The leading law firm Westerik undEckoholz which consisted in 1981 of only 11 members counts in 1991 a total of 37 members’ (Rogowski1991). In France, under law 29.11.1966 n. 66–867, it is possible to set up professional associations but, likeother European colleagues, French practitioners cannot practice unless compulsorily enrolled—asindividuals—in a (public) Law List. Finally, it is true that a European lawyer can now develop his or her owneconomic activity, by joining the Economic European Interest Groups EEIG (EC Council Reg. 25.7.1985 n.2137/85). But it is also true that the rules governing this type of association are coupled with currentnational professional legislation.

As has been said, American law firms tried to implement US-style corporate lawyering in Europe. Duringthe period of the so-called American challenge a qualitatively significant number of US law firms openedbranch offices or joined European corporate structures. In 1990 American law firms set up a record of forty-six overseas offices, of which there were fourteen in Brussels, six in London, and three in Frankfurt.However, in Luxemburg—a country notoriously well-disposed towards financial activities—theestablishment of foreign law firms is not permitted: the only one that was there—a South African firm—was forced to close. In France, from 1 January 1992 all foreign lawyers are banned from practising unlessthey become members of the French Bar. Those foreign lawyers who are not enrolled are thus prohibitedfrom practising even in foreign and European law. In Germany it is prohibited to perform a legal role inCourt unless the practitioner is compulsorily enrolled in a (national) Bar. Foreign practitioners must beassisted by German colleagues. Belgium and Greece intend to pass laws mirroring the French laws. Givensuch a trend, it is clear why aspirations of extra-European practitioners about a liberalization of professionalmonopoly are now orientated not so much towards EC directives, but towards the international negotiationsof the General Agreement on Trade and Services (GATS).

All this does not imply that either national or foreign law firms in Europe are at the margin of the broaderlegal field. On the contrary, they deal with legal matters that are at the core of worldwide economic systemsand employ a large fraction of the professional elite. Moreover, they have at their disposal so manyresources that they could create a cultural and material legal environment (potentially) independent ofofficial (public) institutions. Yet this is precisely why institutional—not market—barriers of positive(public) law are so strict in their respect.

In general terms, one might say that these barriers enforce a veritable actio finium regundorum betweenpublic and corporate legal activity. They are clearly orientated to (a) protect a system of professional

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credentials that (at least, formally) stresses the importance of fiduciary personal relationships; and (b)maintain a system of public order that (at least, formally) recognizes the principle of the balance of powers.As a final result, corporate lawyering in Europe is impeded in dealing with cases that involve public powersand Court appearances. In other words—as is well known among the practitioners—it is confined to dealingwith legal services in extra-judicial areas such as legal counselling and negotiation, that have never been—and are not—monopolized by means of public regulations.

That being said, what about European cross-border activity involving cause-lawyering by legalpractitioners of EC member states? With regard to this, both issues of freedom ‘of establishment’ and ‘toprovide services’ have been of particular concern for the CCBE, the representative body of European(national) Bars. Given the nature and functions of this body— whose main achievement so far is theenforcement of the principle of so-called ‘double-deontology’—it is not surprising to note that, since itsconstitution about fifteen years ago, a large number of EC resolutions, directives and decisions have beenbased on compromise solutions that reflect nation-orientated professional models. Indeed, the problematicrelationship between legal activity and law-and-order arrangements is constantly at the core of thesesolutions.

Following the provisions of the above-mentioned ‘legislative armistice’ of the Treaty of Rome (and thesubsequent legislative inertia), the most important EC decisions, in one way or another, confirming thatpolitical and institutional reasons (namely, a potential weakening of states’ control on internal public order)have prevailed so far, are:

• decision 21.6.1974 n. 2/74 (case Reynes), that recognizes the freedom of establishment withoutcitizenship, but excludes a host legal practitioner from performing public powers in Court for example,as ‘honorary’ judges);

• decision 3.12.1974 n. 33/74 (Van Binsbergen case) that recognizes the freedom to act in a host Courtwithout residence, but confirms the compatibility of national laws on compulsory residence withreference to arts. 59 and 60 or the Rome Treaty when the ‘good’ functioning of the justice system isinvolved;

• decision 28.4.1977 n. 71/76 (Thieffry case) that allows practice only on the basis of a recognizedequivalence among professional qualifications;

• ordonance 7.4.1980 n. 136/79 (AM & S Europe case) that permits the CCBE to defend the interests andvalues of national Bars in the EC Court of Justice.

• decision 12.7.1984 n. 107/83 (Klopp case) that allows inscription in a host Bar, thus confirming both its‘opportunity’ and ‘necessity’;

• decision 25.2.1988 n. 427/85 (RFD case) that rejects the so-called German model (principle of territorialexclusivity), but suggests a principle of proportionality between national regulations;

• decision 19.1.1988 n. 292/86 (Gallung case) that confirms the general principles of the Treaty (i.e., the‘legislative armistice’), permits a host country to impede the exercise of the profession for reasonsrelated to deontological matters and enforces the principle of ‘double enrolment’;

• decision 7.5.1991 n. 340/89 (Vlassopoulou case) that allows a host country to control the equivalence notonly of the qualification system, but also of the degree of legal knowledge of the practitioner;

• decision 10.7.1991 n. 294/89 (France case) that rejects once again the decision on the so-called Germanmodel, but enforces both the principle of double residence among practitioners and the principle ofproportionality among national regulations.

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As can be seen, the above decisions of the European Community duplicate, rather than reduce, current(national) monopoly mechanisms. Altogether, the enactment of principles of ‘reciprocal acknowledgement’in formal qualification, ‘proportional equivalence’ about legal culture, ‘double rule’ in deontologicalmatters, ‘double residence’ to act in Court, ‘double enrolment’ in Bar associations, and so on, seems torefine, rather than liberalize the system of institutional controls at trans-European level. Additionally, itcannot be ignored that EC decisions establish or allow a number of discriminatory criteria, such as that of‘limited duration and frequency’ of legal performances in host Courts (EC directive 22.3.1977 n. 77/249),or that of ‘national membership’ in elective professional governing bodies —even among Europeanpractitioners.

In this general context, it is worth noting that recent national law reforms played (and play) a relevantrole in sustaining and refining the same strategy. For example, a programme towards a political unificationof the two main traditional segments of the profession (avvocati/procuratori, solicitors/barristers, avocats/conseils juridiques) has already been enhanced in France in 1990, proposed in England in the Green Papersof 1989, and included in Italy in various legislative drafts. Notwithstanding the above-mentioned ECdecision 25.2.1988 n. 427/85, the so-called duty of ‘interprofessional concertation’ in Court betweenresident and host practitioners, enforced in Germany by Law 16.7.1980, has become a generalized model ofpractice in other EC countries. If one then adds the impact of contestual reforms of the judiciary, as forexample the recent case of the transformation of the Paris Court of Appeal in a (specialized) Court forfinancial matters (Bancaud and Boigeol 1991), one can easily imagine to what extent national interestgroups are concerned with the restructuration of the legal field and the definition of a ‘plausible’ and‘socially adequate’ professional model in Europe.

Indeed, the above examples suggest that a qualitative leap ahead of a legal and political nature is takingplace: not only the protection of national legal jurisdictions, but also the co-optation and calling of newgenerations of European legal practitioners around a more general nation-orientated professional model.

The fact that, in a period of great professional turmoil at international level, the well-known EC directive21.12.1988, n.89/48, on the ‘mutual recognition of higher education diploma’ defines as a legal profession ‘theone which requires a precise knowledge of national law and involves providing consulence and/orassistance on national law as a constant and essential aspect of professional activity’ is thus an indicatorthat deserves the highest consideration.

First, it confirms that the national legal culture and national legal system (type of law, type of practice,type of behaviour) are—and will be in the future—at the core of professional credentials. Second, it confirmsthat these elements are—and will be in the future—the only and basic (precise, constant and essential)criteria to distinguish a legal from a non-legal profession in Europe.

The above EC directive, in fact, defines as a ‘diploma’ not only a university degree, but also thecertificate of professional training and the professional qualification (enrolment, title, etc.) given by thestate. By enforcing mutual recognition of these diplomas, therefore, two birds have been killed with onestone. On the one hand, the legitimacy of all (existing and future) national official professional bodies, ritesof passage, systems of education, and so on, that deal with or are linked to the production of thosediplomas, has been formally recognized. On the other hand, the same official prerogative that they alreadyhad by virtue of state law has been formally ascribed to them: the right and duty to define the nature of theprofession and the character of its jurisdiction. Last, but not least, by adding to national qualifications therequirement of a period of three years’ compulsory training or an official examination in the host country,the directive provides national jurisdictions with a further level of institutional control through selection oncross-border legal performance.

140 PROCESS OF LEGAL PROFESSIONALIZATION

In short, EC institutions are now directly involved in a sort of ‘production of distinctive producers’ in thefield of legal professionalism in Europe. It is clear, in fact, that to the extent that EC directive 89/48included the whole set of dispositions concerning access to and practice of a profession, it created a new,integrated official system whose aim is to protect the jurisdictions of those professions—like the legalprofession— that were already protected by state laws at national level. Thus, the existence of nationallyregulated professional models, far from collapsing by virtue of a global Big Bang, has been both formallyand substantially confirmed, reinforced and extended at EC level.

PROSPECTIVE TRENDS: A ‘GREAT DIVISION’ OR A ‘UNITASMULTIPLEX’?

As has been noted, the EC directive 89/48 recognizes the legitimacy of present and future nationalprofessional arrangements (compulsory enrolment, residence, training, etc.) and states that a legalprofession in Europe is the one which requires a ‘precise knowledge’ of national law and involvesproviding consulence and/or assistance on national law as ‘essential and constant’ aspects of professionalactivity.

The spirit and letter of the directive is so clear that there is no doubt about the fact that from now on anyprofession not provided with the required credentials could de jure et de facto be excluded from thejurisdiction of either national or trans-European official (public) legal systems. Indeed, a ‘coherent’enforcement of the directive implies that foreign legal practitioners must apprehend the (official) local legalculture and fully become local legal practitioners if they wish to practice in any European country. It alsoimplies that European practitioners trained in national law, but dealing with other sources of law (for example,lex mercatoria) as a ‘prevailing’ aspect of their activity, will not be considered as legal professionals andwill be impeded from practice in national Courts. The prospective impact of a ‘coherent’ implementation ofthe above directive on current and future legal professionalism in Europe is even clearer: a great divisionbetween those who are and those who are not ‘national laws orientated’. In other words, in order to avoid aprocess of legal professionalization extra legem, EC institutions and national professional bodies will beforced to unify the profession around the issues of a broader concept of (national) technical diversity,cultural identity and political loyalty.

The rationale of this prospective trend has already been made evident by the above-mentioned attemptstowards the political programme of unification of the two main internal segments of the profession(solicitors/ barristers, avvocati/procuratori, etc.). Being otherwise absolutely socially, culturally andtechnically ‘irrational’—due to the growing differentiation, stratification and specialization of the wholeprofessional group (Abel and Lewis 1988)—such a unification is basically a way to reassess formally theprimacy of a specific power-knowledge nexus; that is compulsorily to enhance the well-known principlecuius lex, eius rex which is typical of the legal tradition of (western) legal pluralism.

Paradoxically, only a small group of lawyers are aware of the fact that internal unification necessarilyleads towards a larger and deeper external division. The profession’s ideologues and current media opinionssuggest, in fact, that the policy involving the two segments of the legal profession —s well as the requestfor a formal codification of ethical rules—is a mere technical process to modernize the legal system andfavours the so-called globalization of legal services. Powerful socio-legal orders, on the contrary, haveactually perceived the political implication of this professional project and, as been said earlier, are nowcompeting among themselves and with the states in order to have greater control of the symbolic realm of(western) culture, legal culture included. The policing character of the unification of barristers and solicitors,avvocati and procuratori, avocats and conseil juridiques, and so on, directly clashes with the already

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existing legal experience of ‘interlegality’, that is, with the mixed practice created by an increasing numberof different legal systems. In other words, it directly interferes with well-established interests, structures andmentalities that, as we have also previously noted, have grown even within the domain of national legalsystems. On the other hand, it also clashes with deep-rooted democratic arrangements and ideals because bydefinition, a unified profession based on compulsory enrolment cannot guarantee either the rights of defenceor the defence of the law. In this respect, the contradictions contained in English Green and White Papers of1989 and in the Courts and Legal Services Act 1990 are a perfect example of how governmentalinterventionism is in balance when dealing with national raisons d’état, transnational legal interests, theirresistible dynamics of social differentiation and current cultural attitudes.

A general convergence of the European legal profession towards a national-laws-orientated professionalmodel appears in any case a highly problematic project as soon as one enlarges the perspective and looks atthe reality of the overall legal climate and at the general patterns of the behaviour of law at present, that is,if one realizes the difference between ‘paper law’ and ‘law-in-action’.

On the one hand, one cannot ignore the growing qualitative and quantitative importance of those legalservices that have never been, are not and never will be, a monopoly of the legal professions, such ascounselling and negotiation. To exclude unified, national-laws-orientated legal practitioners fromcounselling and negotiations concerning other sources of law or other types of legal activity is not (legally)impossible, but it is at present politically questionable. It is likely to create serious resistance and, in thelong run, a substantial loss in their credential system (social rewards, expertise, etc.). In any case, theseextra-judicial legal services seem to imply such an overall compartmentalization of legal work and expertise—a structural trend that at present involves not blue-collar workers (as happened in the 1930s), but any kindof white-collar professional—learned practitioners included—that increasing socio-professional differencesbetween (cosmopolitan) professional ‘elites’ and (local) ‘workaday’ professionals (Freidson 1986) shouldbe expected.

Nor can the declining role of state law with regards to the evolutionary changes occurring in the broadernormative realm be ignored. Both its legitimacy and efficacy—as we have noted—are increasingly beingquestioned. This evidence could be compensated by making general use of the major resources of its legalmaturity: the ‘symbolism’ of law and its byproduct, the so-called imaginaire juridique. However, suchresources cannot, and could not, per se mask the fact that its inner fragmentation, decodification andmaterialization has already given rise, in practice, to a large number of professional sub-models. If theseelements are combined it is clear to see that even a unitary national-laws-orientated professional project isnot, and is not likely to be in the future, at all homogeneous.

Let us briefly consider, for example, the case of the United Kingdom. As has been demonstrated (Thomas1992b), not even a Thatcherite policy has been able to impose a common model. Lawyers in NorthernIreland and in Scotland, in rural Britain and in the City of London still have different characteristics. Let usnow look at the Italian situation. Here, as has been said, corporate lawyering is formally prohibited. Yet, byvirtue of legal juggling—the so-called principle of intermediation (Salandra doctrine)—one can count anumber of law offices (collettivo, associato, imprenditoriale, esterno, etc., each with structural andfunctional distinctions) that are de facto ideologically and operatively orientated towards that model. At atransnational level, legal practices in action in Greece, Spain or Germany are also not comparable, eitherbecause of the specific conditions of the justice systems, or because of the political setting. Experimentsconcerning cross-border legal education have increased, but so far they are a sort of selective rite ofinitiation, rather than a common workable pattern.

Given all the above, it is thus possible to affirm that, in any case, even the enforcement of a unitary,national-laws-orientated professional project will not only maintain local specificities, but it will also be

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discretionally conditioned by local variables. In other words, one might reasonably fore— see theemergence, not of a real common (trans-European) model, but rather a sort of flexible unitas multiplexwithin the same national (official) legal domain.

CONCLUSION: EC GOVERNMENTALITY BY LEGAL EXPERTISE

This study has sketched the complexity of the problems involved in the current process and policy of legalprofessionalism in Europe. The explosion of legal pluralism and the technical erosion of traditional formal-rational (state) legal systems has led to a questioning of the cultural identity of legal expertise. Theasymmetric and asystematic fragmentation and inter-twining of different sources of law and levels of legalauthority has largely weakened their traditional political loyalty. Prospective professional models such asthat of corporate lawyering could drive legal professionalism towards a multidimensional type of practicethat is likely to dissolve the meaning of legal (public) performance; that is, its technical diversity.

Classic legal arrangements produced by the legal culture of the Enlightenment are increasingly loosingtheir theoretical and practical efficacy. The enforcement of a mere defence policy of professional monopolyat national level is simply inconceivable. In turn, the implementation of a unitary national-laws-orientatedprofessional project at EC level raises a number of problematic issues, as it is based more on a realpolitikstrategy than on law-in-context evolutionary professional patterns. Thus, the definition of a coherentstructuration of legal professionalism in Europe is oscillating between internal attempts at resistance andtransformism and external pressures for innovation and change. Crises, differences, conflicts and evolutionare thus the major elements that shape the European legal professions at present.

This is not surprising. After all—as Edgar Mortin puts it:

European culture does not only suffer its differences, conflicts, crises; it lives from them…Europeangenius does not just lie in diversity and change, but in the dialogue within diversity which ultimatelyeffects change…. Expressed in another way: that which is of greatest importance to the existence andevolution of European culture is the fruitful collision of differences, antagonisms and competing andcomplementary forces.

Given the specific institutional context of legal professionalism, however, it seems that this ‘fruitfulcollision’ is producing a quid pluris: a generalized ‘transpositioning’ (Woodiwiss 1990) not only ofjurisdictional structures but also, and above all, of the normative meaning of legal functions at each local,national and transnational level. The final vectorial result of this ‘transpositioning’ is still uncertain andhighly unpredictable. None of the professional models that are currently enacted can claim a clearhegemonic position and it is possible that conjunctural interprofessional conflicts will be strategicallyresolved—as history often teaches—outside the jurisdiction, on a larger societal ground.

Yet, to the extent that the ‘official’ prospective model is institutionally sponsored and monitored by ECgeneral policy from above—and moulded by local cultures from below—it seems that it might lead towardsa qualitatively new professional scenario of European dimensions. Notwith-standing all its limitations,problems and contradictions, a unitary, national-laws-orientated professional model seems to embody, infact, an enormous opportunity that few can ignore.

On the one hand, it might force the traditional dualism of state-profession to wither away, graduallyeliminated by an effect of normalization that displaces legal professions within the grouping of institutions,arrangements, mechanisms, and so on, which together comprise—as Johnson (1992), following Foucault,has acutely perceived in theoretical terms— that particular form of governmentality that the European

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Community will require. On the other hand, and consequently, it might also force the European legalprofessions to dismiss their actual role of national ‘gardiens de l’hypocrisie collective’—as Bourdieu (1991)has it—that is, the role of representative of a system of institutional relations whose presumptions have to agreat extent been eroded already, to become ‘gardiens et enterpreneurs’ (not of the nation-state—assuggested by Rudolf von Gneist a century ago) but of that part of national socio-legal heritage,environment, life and culture that is the vital patrimony of European civilization.

In other words, and in conclusion, the emergence of an EC unitary national-laws-orientated professionalmodel, by minimizing the duality of state-profession by a transpositioning effect, not only could compelEuropean legal culture to reconstruct the technical diversity and cultural identity of the European legalprofessions as essential government devices of the historical process of European unification. It could alsocompel the European legal professions to reconstruct their political loyalty to the broader European socio-legal system as organic intellectuals and depository of a socio-political legal experience that, albeit intheory, includes both human rights and democracy.

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Approach to Law and Society, Berlin: de Gruyter.—— (1988b) ‘The unity of the legal system’, in G.Teubner (ed.), Autopoietic Law: A New Approach to Law and

Society, Berlin: de Gruyter.Martin Bernard, J.M. (1990) Abogados y Jueces ante la Comunidad Europea, Madrid: COLEX.Moore, S, (1973) ‘Law and social change: the semi-autonomous social field as an appropriate subject of study’, Law

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professioni in Italia, Bologna: Il Mulino.—— (1990) ‘Diritto positivo e autoregolazione professionale nei “Discorsi sull ‘Avvocatura” di Giuseppe Zanardelli’,

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presented at the ISA-RCSL and Law & Society Association Joint Meeting, Amsterdam (The Netherlands), 26–29June.

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146 PROCESS OF LEGAL PROFESSIONALIZATION

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Chapter 8Bank lawyers

A Professional Group Holding the Reins of Power

Michael Hartmann

In the discussion of the legal profession, its power in society, its inner structure and its development,practically all authors (Abel 1985, 1986, 1988; Abel and Lewis 1988; Curran 1986; Halliday 1986, 1987;Powell 1985; Rothman 1984) concentrate on the Bar. With very few exceptions (Dezalay 1990; Hartmann1988, 1989, 1990; Heinz and Laumann 1982; Spangler 1986), those lawyers occupied in the commercialsector or in public administration receive hardly any attention at all. This focus may (still) be appropriatefor the Anglo-Saxon societies, considering the extensive dominance of law offices there, but as far asGermany is concerned, this is certainly not the case.

In Germany, one speaks of the power of lawyers in society primarily with reference to those lawyersworking in large commercial enterprises or in central state agencies and offices. In this regard, bankinglawyers are especially important. They embody economic power like no other professional group. Thisexceptional position of the mere 2,000 banking lawyers is due to two facts. First, the German banks,particularly the large banks such as the Deutsche Bank or the Dresdner Bank, have enormous economicpower as a result of their traditionally honoured principle of the universal bank. By means of their ownshareholdings, or their right to vote customers’ deposited shares, they control the supervisory boards ofmany other commercial enterprises, or at least exercise considerable influence there. This means that theyalmost always play a central role in takeovers or mergers, as is demonstrated by the activities of theDeutsche Bank in connection with Daimler Benz’s development into the biggest German industrial concern.Furthermore, it is the lawyers who to a very great extent hold the reins of power within these enormouslyinfluential large banks. Traditionally, lawyers occupy half of all of the positions on the board of directorsand a considerable part of the executive positions in management as a whole.

The area of private banks is considered a domain of lawyers. For a long time, one even spoke of a‘lawyers’ monopoly’ in the banking business. This choice of words becomes more comprehensible in viewof the percentage of lawyers among the total number of graduates occupied in the banking branch, even aslate as the 1960s. At that time, around 40 per cent of those graduates had finished law school. With thepercentage of graduates at around 2.5 per cent, lawyers accounted for more than 1 per cent of the total workforce in the field.

These percentages, which are extremely high compared to the industrial sector, are due to the nature ofthe banking business. For in the final analysis everything here revolves around contracts—contractsbetween those lending money and those borrowing it. And contracts simply do contain a considerable legalcomponent. Therefore, lawyers are in demand in many areas in banks; or at least the circumstancesencourage the use of lawyers. Accordingly, their percentage of the total work force has remained stable tothe present day, despite many changes. Thus, at the most, 500 lawyers are occupied in the leading big banks.The relationship between lawyers and other graduates has, however, changed substantially. Today, onlyapproximately 20 per cent of graduates in the banking branch went to law school. Lawyers did not actually

participate in the considerable expansion in the proportion of graduates in the 1960s, which rose from 2.5per cent to the current 5.5 per cent. Hence, they have indisputably lost significance in terms of percentages.

The questions are now: what is to be seen as the source of this decrease, and what will future developmentlook like? In order to be able to answer plausibly and with empirical backing, it is necessary to analyse twomatters. On the one hand, it is necessary to inquire which professional groups have been more successfulthan the lawyers, and what stage this process of displacement has reached. On the other hand, inquiriesmust be made regarding the influence which the fundamental restructuration and internationalization of thefinance markets has already had on the competition between lawyers and other professional groups, andregarding the future expectations which these changes warrant. For the observable and impending changesin the finance business are the factors which doubtlessly affect the position of lawyers most seriously andwill continue to do so in future.1

THE FIELDS OF WORK

With regard to the fields and departments in which lawyers are placed in the banking branch, it is to benoted from the start that lawyers are to be found almost everywhere: in the private as well as the corporate clientdepartments; in the foreign trade business as well as in real estate financing; in the new issues department aswell as in the management of branch offices; and they are finally also to be found where they are most oftenemployed in the industry, namely in the personnel and legal departments (see Table 8.1).

Table 8.1 Lawyers in Bank A (%)

Salaried employees covered bycollective wage agreement

Sal. empl. not covered by collectivewage agreement/ authorizedsignatories

Directors Total

BranchesManagement 0 0.5 24.5 25.0Private clients 2.0 4.0 1.5 7.5Credit-/corp. clients 8.5 11.0 4.5 24.0Foreign 2.0 0.5 0.5 3.0Investment 1.5 0.5 0 2.0Legal department 4.5 8.0 8.5 21.0Personnel department 0.5 2.0 1.5 4.0Internal 1.5 1.5 2.0 5.0Trainees 8.5 0 0 8.5Sub-total 29.0 28.0 43.0 100.0HeadquartersPrivate clients 1.0 1.0 1.0 3.0Credit-/corp. clients 0 4.5 4.5 9.0Foreign 0.5 1.0 4.0 5.5Investment/stock market 5.5 5.5 6.5 17.5Legal department 0 6.0 12.5 18.5Personnel department 0.5 2.0 3.5 6.0Organization 0.5 0.5 0 1.0

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Salaried employees covered bycollective wage agreement

Sal. empl. not covered by collectivewage agreement/ authorizedsignatories

Directors Total

Trainees 25.0 3.0 0 28.0Other 1.5 6.0 4.0 11.5Sub-total 34.5 29.5 36.0 100.0Total 31.0 29.0 40.0 100.0

A closer look nevertheless reveals clear areas of deployment concentration. When the junior executivetrainees are omitted in view of their training situation, the majority of lawyers are distributed over six areas.Naturally, the legal department employs the largest group, which represents about one-fifth of the total. Nextcomes the field of credit transactions (not including private customers) with approximately 20 per cent, thenmanagement in branches etc., foreign transactions and syndicate business (including all new issue projects)with approximately 10 per cent, and personnel with about 5 per cent.

In relation to the total number of employees in the individual departments, the proportion of lawyers is,besides those in the legal department, especially high in the areas of syndicate and foreign business locatedin headquarters. In one of the banks, lawyers make up 11 per cent of the office workers in the centralforeign business department and 16 per cent in the central investment banking area. In another bank 22 percent of all employees in the central secretariat, which is responsible for the syndicate business, as well as 5per cent of the central foreign transactions department have the same qualification, represented by the lawschool degree.

THE WORK OF THE LEGAL AND COMMERCIAL DEPARTMENTS

The cause of the heavy concentration within these areas of activity is clearly to be seen in the fact that, inthese fields, normal business is most frequently and intensively connected with legal questions. Here, as arule, the proportion of lawyers is higher the more business procedures are marked by legal issues. At thesame time, however, there is a clear division. The work in the legal departments is from start to finish of alegal nature, whereas in the other four fields the percentage of legal demands is higher than average but is, at10–40 per cent of working time, very plainly overshadowed by the commercial elements, even in thosepositions occupied by lawyers.

The legal department represents in each bank an area limited to service aspects; its duties consist mainlyof legal advice to other departments and the board of directors. Not including advising members of theboard who have accepted positions on supervisory boards of other corporations, most of the work of thelegal departments stems from the three areas of credit, foreign and syndicate business. In other words, itcomes from those areas where, as a result of intrinsic problems, the majority of those lawyers who areoccupied primarily with commercial duties are located. This means that, as regards legal work, the focus ison the following legal fields. Banking law is understandably dominant, with all of its ramifications andcross-references to other fields of law. But the Civil Code is also very important, as are laws regulatingcompetition, company law, insolvency law, and foreign and international law. Special areas within industriallaw and social legislation, as well as public law and planning and building laws and regulations play asmaller role. Thus, the spectrum is pretty broad. The demands placed upon the lawyers working here withregard to legal subject matter are consequently higher than is usual.

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A relatively high degree of specialization, a large measure of independence and high hierarchicalclassification are characteristic determinants of the structure of legal departments. The specialization is dueto the large number of areas of law which must be covered, and is, in legal departments as a result of theirsize which varies between twenty and fifty lawyers, more pronounced than in industry. But that has just aslittle effect on the relative independence of the individual lawyer as it does on the high professionaldemands. He or she usually covers a specific legal area largely independently. The hierarchical positionsonly make themselves felt in connection with important policy decisions, with financial commitments on anextraordinary scale or direct inquiries from the board of directors. In addition, the two-heads-are-better-than-one principle applies here, as it does everywhere in banking, where written statements are concerned; that is,two lawyers give their signature, one of whom must have achieved a certain rank in the hierarchy. Normally,though, information is given on the telephone, at least as a start. Then the individual lawyer decides, to agreat extent independently, whether, say, loan security is good enough, or an export pre-financing deal ispossible.

Providing such information requires a certain amount of economic thought and knowledge in addition tosolid legal knowledge. In contrast to industry, lawyers in the legal departments of banks are only to acomparatively limited extent occupied with the direct execution of business transactions. The fact that alarge number of legally trained bankers are sitting in executive positions of the bank makes itself felt here.They don’t require legal advice during negotiations on the same scale as do technical experts or sales peoplein industry; or, at least in some cases, don’t want to have the scope of their competency reduced.

In addition, bank lawyers are—in contrast to industry—well represented in the commercial departments.Here, the situation is particularly favourable in two spheres of business: namely, syndicate business andlarge-scale credit transactions (corporate customers/foreign operations), since legal problems arise here withparticular frequency.

In syndicate business, which is concerned with the financing of enterprises via the capital market in theform of bond issues (transactions with internal capital) or share issues (transactions with internal capital),the main questions involve company law (especially concerning stock corporation and cartel legislation),tax law, balance sheet laws and international law. For instance, in those cases where a company wants to belaunched on the stock market, a decision first has to be made regarding the best form for this to take place.In legal terms, questions must be dealt with in connection with the transformation of a limited partnership,general partnership or private limited company into a public limited company as well as in connection withthe problem of the optimal procedure with regard to taxes. Furthermore, a decision has to be made as towhether, in consideration of the stock transfer tax, a capital increase should take place before or after theissuing of shares. Companies must also receive advice on formal requirements, such as conductingshareholders’ meetings and deadlines for convening them, etc. In connection with larger share issues andespecially with bond issues, the rights and responsibilities of the individual financial institutions involved inthe transaction must be specified exactly in contracts. In particular the role of the syndicate leader has to bedefined precisely in the underwriting agreement, since that figure is really the sole representative of the wholeoperation externally, so that the individual customer can contact one name rather than many different partners.Such agreements are usually especially complicated when the company seeking additional financingsources and/or a large number of the banks participating in the syndicate are based in foreign countries,since then foreign, particularly Anglo-Saxon, law becomes more important. But the different bond formswhich come under consideration also give rise to a whole series of legal difficulties which have to beresolved.

In credit business, legal questions present themselves essentially in those cases where large loans todomestic and especially foreign companies are at issue, or in cases of export pre-financing or project

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financing. Since granting loans is one of the two classic banking business fields, problems from practicallyall the important legal spheres with which the legal departments are involved arise here, such as civil lawand laws concerning banking in general, competition, corporations, trade and insolvency, as well asinternational and foreign law. With regard to awarding loans, it is primarily, from the legal perspective, amatter of evaluating the risks which each contract contains, the security circumstances and, especially inconnection with group companies, the determination of the liability regulations. These requirementsnormally increase with the size of the credit involvement, the susceptibility of each branch to crisis, and thelack of economic stability in a given country.

The degree to which the legal requirements in the area of syndicate and credit business affect the use oflawyers in these departments depends, however, on how the responsibilities are divided between suchdepartments and the legal department. The need for lawyers in the new issues department for example, isnaturally going to be less where, as in one of the large banks, almost all legal problems are turned over tothe legal department. The same thing goes for the foreign trade department, for example, when its legalquestions are for the most part solved by the legal department.

Regardless of the division of labour between the business departments and the legal department,however, the percentage of lawyers in the two areas is still much higher than average. That is because thereare a number of reasons for employing lawyers in syndicate and more complex loan transactions. The mostimportant are the higher speed with which decisions are made and their higher quality thanks to theintegration of legal and commercial expert knowledge. Thus, it is naturally advantageous to have lawyersworking directly in the new issues department, in case very quick decisions are needed; for example, in thecourse of a new issue project constantly changing interest rates, or because the enterprise going on to thestock market wants to issue its stock at the optimal point in time.

They not only carry out negotiations themselves but also, and above all, take into consideration thesuggestions, sent at very short notice and usually via fax, without having to check back with the legaldepartment. At least in some sub-fields it is possible to reach better credit or syndicate agreements when thecommunication concerning important questions flows more smoothly on both sides, i.e. both the businessdepartment in question and the legal department speak the same, legal, language. Besides that, discussionwithin the business departments also becomes more effective, because legal questions can be debatedimmediately, and hesitation about contacting the legal department, which is often more pronounced whenthe significance of a problem is unclear, is thus eliminated.

Despite the requirements concerning legal knowledge, the positions occupied by lawyers in commercialdepartments are nevertheless determined to a large degree by business problems. According to the lawyersquestioned, commercial tasks account for between 60 and 95 per cent of the total work. The analysis ofcompany financial statements is first on the list, for, regardless of whether an enterprise wants to enter thestock market or to increase its capital by issuing more stocks, whether a loan is applied for or exportfinancing is being planned, even in financing larger projects an exact economic analysis of the company orcompanies involved is absolutely indispensable to every decision.

Besides the balance analysis, there are still a whole series of further commercial tasks which must also behandled by the lawyers in the investment banking area or in the central credit department. Thus, forexample, when private limited companies are to be changed into public limited companies, considerationmust be given to the question of which company structure should be chosen in order to attract potentialinvestors. In the same sense, in new issues projects it is a matter of advising the client as to the optimal timefor issuing stock, fixing the issue price so that the company going on to the stock market can take the bestadvantage of the possibilities of the market, or pursuing active price support where share blocks are to besold. In all these cases, the course of stock market transactions has to be monitored exactly, in order to make

152 MICHAEL HARTMANN

at least halfway precise forecasts. The issuing of stocks requires, in addition, presenting the company tointerested large-scale investors such as insurance companies or other banks. Finally, there is alsoincreasingly the task of identifying firms which are well-suited to launching on the stock market, andconvincing them to take this step. Here, active persuasion is required, which would hardly be successfulwithout solid commercial expertise.

In addition to that, in syndicate business the clientèle from the branches of industry, trade and so on alsohave to be advised on questions of capital procurement. Depending on the company’s circumstances and thesituation on the finance markets, issuing stocks or taking out a short- or long-term loan might represent themost sensible solution. Within the main categories there are then a series of variations which may beconsidered. If the client wants to take out a larger loan, it then becomes a matter of determining whether it ismore advantageous to carry out the transaction through a foreign subsidiary or through the bankheadquarters itself. Economic risk analyses have to be conducted, especially in connection with foreign firmsor transactions, in order to evaluate the expediency of the loan and its economic security. For some projectfinancing, forecasts also have to be made of interest rate fluctuations and future earnings prospects.

The area of project financing. which requires very comprehensive economic consideration, among theareas of activity mentioned, is the one in which the share of demands relating to genuine legal knowledge,at 5–10 per cent, are the lowest in proportion to the overall requirements connected with the work. Similarlylow values are also to be found among those positions occupied by lawyers in the stock market departmentsor in the loans departments in the branch offices. The highest percentages, 30–40 per cent, are, as may beexpected, to be found among those lawyers who are occupied with checking large-scale loans in theheadquarters or with issuing procedures. The other areas are somewhere in the middle at around 20 percent.

As a rule, those two-thirds of all lawyers occupied in banks who are located in commercial departmentsmust rely on their specific legal knowledge or at least be able to use it sensibly for, at the most, 20 per centof their-work. The vast majority of their working day is however taken up by tasks of a commercial nature,such as are normally handled by management experts or bank business people.

THE LEGAL METHOD

Confronted with such figures, it must be asked whether the legal expertise actually applied is the soleexplanation of lawyers’ position in relation to the total number of graduates employed in banks as well as theirshare of the banks’ total work force, which has remained stable for decades. This is especially questionablewhen one considers that, on the one hand, disregarding parts of syndicate business and central creditconsultation, many of the legal problems which arise don’t necessarily require the use of a lawyer. On theother hand, lawyers show three essential disadvantages (compared with their competitors with a businesseducation): namely their normally far less extensive initial business knowledge; then the fact that they areon average (due to lengthy education, and above all as a result of the trainee period) three or four yearsolder; and finally, related to age, their limited mobility because of family ties.

There has to be another reason for the great number of lawyers in the banking branch. All the bankinglawyers interviewed agreed that the specific working methods a lawyer employs represent the secondimportant plus-point for lawyers as compared to the other graduates and non-graduate professional groups.They are said to be often just as much, or sometimes even more of, a decisive factor than the knowledge oflegislation, court decisions or other legal rulings, in determining when and where to use lawyers.

Lawyers’ ability to dissect an issue, isolating its components in rigorous analysis and disclosing theirmeaning and inherent system in order to reach a final decision, is what, in the eyes of lawyers and non-

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lawyers, constitutes their strength compared to other qualifications. They are able to familiarize themselvesquickly with new subject matter, ‘get to the bottom of things quickly’ and demonstrate ‘orderly thinking’—this is the tenor of the statements. With these abilities, they have an advantage over business experts andbanking businessmen in those cases where the work consists to a large degree in coping with legalproblems, for example in syndicate business, and are, at least in some ways, their equal, where not fewerlegal questions crop up, but instead systematizing abilities are required. For, in the former case, it becomesevident that a lawyer usually has less trouble acquiring a certain amount of business knowledge than thebusiness expert or banking businessman has acquiring legal knowledge. In the latter case, the lawyer cancompensate for the lack of legal demands and the handicap of weaker economic knowledge by superiorworking methods.

Consequently, lawyers are in the majority where larger-scale complexes containing a certain amount oflegal questions have to be structured and evaluated. They are primarily occupied in headquarters’departments, many of which display the characteristics of staff departments according to the proverb ‘goodthings come in small packages’, and are less frequently located in the business area departments of branchoffices where the direct business with masses of customers is done. Thus, all three strongholds of lawyersare set up within business departments at the headquarters: handling syndicate business; carrying out largerforeign projects; and evaluating larger-scale loans. The uneven distribution of lawyers in banks alsobecomes evident when the overall picture is examined. First, with a share of 2.5–3 per cent, the number oflawyers in proportion to the total number of employees in all three headquarters is much higher than in thebranches, where the percentage lies between 0.4 and 0.6 per cent. And then, the largest group of lawyersfrom the business departments are also employed in the headquarters.

CAREER PROSPECTS

The career prospects of bank lawyers have, up to now, been favourable, especially in the central legaldepartments. Here approximately two-thirds of lawyers are classified as directors, and the rest are mostlyclassified as authorized signatories (see Table 8.1).

Two facts are responsible for the good promotion prospects. First, the levels in the hierarchy are notconnected to the performance of any management duties, but rather to qualifications regarding the subjectmatter. This means that there is no pyramid with a specific distribution of positions between those managingand those carrying out instructions. Thus, a promotion to director is not dependent on ‘how many chiefs andhow many Indians there are in the departments as a whole’ (as a senior legal officer of a bank put it), butrather on personal performance and qualification.

But whether the pace of the professional advancement will remain the same is questionable. For thesecond reason for the favourable career prospects is to be seen in the enormous expansion of the banks. It ishardly surprising that a legal department, as in the case of bank A where twenty to twenty-five years agoonly a third of the number of lawyers currently employed were needed, offers good opportunities toadvancement, in light of such expansion. In future it will hardly be possible, however, to maintain this rateof increase, which is too high compared to the increase in the total number of employees, which has onlydoubled.

For the individual lawyer, this may be connected to a lengthier sojourn on the lower levels of thehierarchy. Lawyers still move up the ladder, but not as quickly as they once did. At the same time, thismeans that the proportion of lower positions in the hierarchy will probably, in the long run, grow a bit, sincethe longer duration of the stay will naturally strengthen these levels in relation to the higher echelons. Theoverall high level will nevertheless be preserved. This is due to the fact that top lawyers, who are necessary

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because of the high professional requirements, can only be recruited when high salaries and acorrespondingly high hierarchical position can be offered.

Although the situation in the commercial departments is not so favourable, it is basically comparable.Because the banks themselves emphasize that the lawyers they employ should, because of theircomparatively high age upon entry, make a relatively steady climb up the professional ladder, at least to thelevel of authorized signatory, the typical career of bank lawyers in the first five to ten years in a commercialdepartment looks approximately like this: they begin as trainees or (less frequently) as normal officeworkers. In this phase, if they have also completed a student apprenticeship in a bank, they are classified inpay grade 8, otherwise in pay grade 7, but advance within the first two years to the highest pay grade, grade9. After another two to three years they then normally slide over to the category of employees workingunder conditions negotiated individually where, after another six- or seven-year stint, a large number arethen promoted to authorized signatory. This, however, is where the first real bottleneck occurs, and manynever make it through. The level of authorized signatory remains then the position which is virtuallyattainable by all lawyers. Classification as a normal office worker covered by collective agreement is rarelya lasting fate. This position is, even in the branches, only a transit station for the climb to the position ofauthorized signatory or transfer to the headquarters.

For lawyers, the promotion to the position of authorized signatory, which is the last level in the hierarchybelow the ‘real executive’ level, is at present the normal case. Recently, however, changes similar to thosein the legal departments are becoming discernible in the commercial departments. Most of all, the pace ofthe climb up the ladder has become slower, as it has in the legal departments. The lawyers employed theresuspect that the banks, faced among other things with the drop in returns due to the stock market crash, havedecided to follow the advice of business consultancy firms and reduced the number of promotions per year.Hence, one can assume that the general advancement prospects for lawyers in the commercial departmentswill remain what they have been, but that the speed with which the professional career takes its course willdecrease.

INTERNATIONALIZATION OF COMMERCE, CHANGING DEMANDS ANDPROFESSIONAL RESPONSIBILITIES

In parallel with changes in commerce the work of bank lawyers is changing too. As far as the legaldepartments are concerned, the scope and complexity of legal demands are increasing, while those functionsnot belonging to the legal area of responsibilities in the strict sense are being turned over to other departments,and the workload is increasing.

The increase in legal questions is primarily connected with changes in business, in the form of stiffercompetition and growing internationalization, and with changes in the legal situation, above all in the formof improved consumer protection. With regard to the altered economic framework of conditions and thecorresponding business policy of the banks, the points which are important for lawyers depend first andforemost on three developments. First, the banks’ willingness to take risks and to be accommodatingtowards the potential customer has increased noticeably, whereas the reliability and solvency of Germanborrowers, but especially of foreign borrowers, has simultaneously dropped. Loans which used to becovered solidly by real estate leins and collateral assignments are now-adays often not covered nearly aswell against eventual risks. This has two legal consequences: for one thing, the increased necessity toconstrue contractual arrangements of growing complexity in order to be able to conclude business at all;furthermore, legal action must increasingly be taken against defaulting or dilatory payers. Second,automation in normal financial transactions are accompanied by an increased need for legal arrangements

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between financial institutions, regardless of whether POS-accounts or payment transaction networks areconcerned.

Finally, the third development is to be seen in the growing internationalization of the business, which addsto the demands placed on the legal departments, in the sense that more emphasis must be placed oninternational law in general, but also that international law is becoming more complicated in the area offinancing. Hence, not only is it necessary to have someone who is relatively familiar with Japanese law, inorder, say, to negotiate with the Japanese Ministry of Finance on questions of admission, but also theinternational legal material has in general become more difficult. Thus, in the area of international bill andcheque transactions, several international institutions are romping about at the same time, each with its ownproposals as to legal determination which are insufficiently co-ordinated. The debt crisis in the Third Worldcontinually leads, in the scope of constant debt rescheduling, to new contract problems. The rising numberof financial innovations, especially on the international finance markets, create additional legal consultationrequirements. The list could be extended indefinitely. The changed business situation and policy isincreasing the demands on the legal department of the banks at every turn.

With regard to changes, some of which have already occurred and some of which have yet to occur,concerning the tasks lawyers in the commercial departments will be confronted with, it can be said withconfidence that, on the one hand, all those developments which presented the legal departments with a growthof the workload will also have an impact here too, albeit more or less weakened. On the other hand, onemust recognize that the growth in demands of a commercial nature is clearly surpassing this process.

The increase in, and increasing complexity of, commercial tasks is essentially the result of threeinterconnected developments. Competition in the finance markets has become stiffer, theinternationalization of commerce is constantly increasing, and the effects of these processes of change are,primarily, a flood of innovations in financing techniques, increased pressure on the bank from the customersto extend loans, and greater effort on the part of the banks to offer their services to the customers.

The last factor is especially significant in connection with the issuing of shares. The banks are constantlyon the lookout for healthy businesses, especially with a middle-sized structure, whose size might allow themto be launched on the stock market. Skill in negotiation, for one thing, and solid knowledge of businessmanagement, for another, are what is needed here, if the customer is to receive sound advice and thus beconvinced. Increasingly, much the same is true of credit transactions with corporate customers. The bankcustomers here, who are more and more frequently from the commercial middle class, want considerablymore consultation than the bigger companies which often used to dominate this branch of activity. Here, astransactions become increasingly difficult and international, entrepreneurs are dependent, at least as far asspecial issues are concerned, on the advice of the bank. Hence, the authorized signatory or branch managerto whom they turn must have economic tools such as balance analysis, market forecasts, etc. available inorder to be in a position to advise sensibly and thus reach a conclusion acceptable to both parties. Since theattitude of banks has generally changed to the effect that they no longer wait for customers, but ratheracquire them actively, because they ‘sell, in money, a service just like any other’, this trend towardscustomer acquisition and consultation will continue in future. If anything, it will become even morecomplicated, since not only a substantial expansion of investment banking but also a considerable expansionof the range of services offered is being pursued as part of this aggressive strategy on the part of the banks.

The increase in services offered, in the last ten to fifteen years, has led, especially in the internationalsphere, to really far-reaching changes. In this area, the increasing competition among the big financeinstitutions and markets has led to a vast number of innovations in financing techniques. Today there are nolonger only two or three investment or loan forms, but a large number of different types. This expansion andthe increased complexity of the offer has, from its starting point in the USA, spread everywhere. Every big

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bank has to follow suit when another bank creates a new product, regardless of whether it establishes itselfor, like so many innovations, sinks into obscurity after a short while. The multitude of possibilities to beconsidered is thus constantly rising and, along with this, the requirements for commercial knowledge. Thisdevelopment is reinforced by the fact that many companies have their funds transferred, on ever shorternotice, from one bank to another in order to take maximum advantage of interest and currency differences.At short notice, available funds in amounts of hundreds of millions are being transferred within a few daysfrom Berlin to Paris, from there to New York, and from New York to Singapore. This trend is alsoincreasing constantly since, in the face of such terrific amounts of so-called wandering capital, the financemarkets are just as much in movement as are world currency relations.

In addition to the two important changes mentioned above, the third is the growing pressure from clientsurging the banks to be accommodating even in risky transactions. This is the case with regard to theextension of loans directly, as well as with regard to project financing or export prefinancing. Here, too,additional commercial knowledge is required of the responsible employees. As far as the demands of the jobare concerned, the lawyer is falling noticeably behind the business manager or banking businessman.

As a result of the developments described here, that is true in those cases where the legal requirementsconnected with international finance transactions are also on the increase due to complicated contracts. Forone thing, the greater number of legal issues are, to a considerable degree, assumed by the legaldepartments, and for another, the growth in this field is substantially less than in the commercial field, sinceespecially in international commercial trade or in eurolending business, quite a lot is done according topractices which require less legal knowledge than experience in commercial banking. As a whole, the‘explosive development’ of banking activities favours the businessman more than the lawyer.

Lawyers therefore are losing ground in the commercial departments in all those places where their statusas experts has little or nothing at all to do with specific legal qualifications, but rather is due to theiracquired familiarity with the field of banking and to their competency compared to the businessmanagement experts and graduates of banking academies. In the commercial departments, lawyers are onlyable to achieve a significant degree of professional jurisdiction in those areas where, as in the syndicatebusiness, a greater number of legal problems have to be faced. Otherwise, such jurisdiction is completelyabsent. The employment of a lawyer then depends primarily either on coincidence or on the personalcommitment of the individual. There are no ‘ancestral estates’ here which might be defended by lawyers.As a rule, more positions will be lost than new ones gained.

The declining competitiveness of lawyers in specialized commercial departments is also reflected inplanning in the personnel departments. The share of lawyers among the trainees, which in the 1960s stillreached around 40 per cent, has in the meantime dropped in all three large banks, parallel to the generalshrinkage in the number of graduates, to the 20 per cent mark; sometimes slightly above, sometimes slightlybelow. In personnel departments there has been a reaction to the increased demand for businessqualifications and the, at best, stagnating demand for legal qualifications.

GRADUATES AND LAWYERS IN THE HIERARCHY

As the different trends in the commercial and legal departments already suggest, lawyers are, on the whole,losing ground in relation to other graduates, but they seem to be able to maintain their high hierarchicalstatus none the less.

Graduates have traditionally held a high hierarchical position in the field of banking. At the end of the1960s, as 2.7 per cent of bank employees held a degree from an institution of higher education, only a totalof 15 per cent of them were classified as salaried office workers covered by collective agreements. The rest

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consisted of office workers with individually negotiated salaries, authorized signatories and directors (seeTable 8.2). According to the usual categorization, in the top management level, middle management andlower management level, at that time 39 per cent belonged to the upper categories, 46 per cent were locatedin the lower management levels, and 15 per cent were not included in this hierarchy at all. When thesefigures are then compared with the current and essentially representative figures supplied by Bank A, quiteconsiderable changes are discernible, even at first glance (compare Table 8.3).

Table 8.2 Hierarchical positions of graduates (excluding trainees) in banking

Position Percentage at 31.12.1968

Owner, member of board of directors, fully authorized representative 9Directors 16Assistant directors 5Department directors 9Authorized signatories 15Oberbeamte (senior clerks) 31Office workers covered by collective agreement 15Total 100Source: Survey of the private banking employers’ association

Table 8.3 Management structure in Bank A (percentage of total number of employees, 1987)

Members of the board of directors (number) 12Directors of headquarters and main branches 0.32Assistant directors of headquarters and main branches 0.46Highest executive level (Graduates 54%=0.42%) 0.78Directors of smaller branches 0.53Department directors of headquarters and main branches 1.09Assistant directors and department directors of smaller branches 0.42Middle management (Graduates 37%=0.75%) 2.04Authorized signatories 3.77Oberbeamte (senior clerks) 6.40Other office workers with individually negotiated salaries (not covered bycollective agreement)

0.57

Lower management level (Graduates 21%=2.26%) 10.74 (incl. partic. qualified experts)Total executive positions: 13.56%, thereof graduates: 3.42% Positions covered by collective agreement: 86.44%,thereof graduates: 1.92%.

The percentage of graduates who are placed in positions covered by collective agreements has risen from15 per cent to 36 per cent, more than twice the previous figure. The percentage of lower management hasdecreased slightly, falling from 45 per cent to 42 per cent. The relative weight of both upper managementlevels has, in contrast, dropped substantially. Whereas in 1968 they accounted for 39 per cent, today it isonly 22 per cent, a little more than half what it was.

The average hierarchical position occupied by graduates in banks has thus dropped quite considerably. Inthe meantime, more than a third of graduates of an institution of higher education is only employed in a

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position covered by collective agreements. The expansion of employment of graduates in banks has led to aconsiderable erosion and the partial collapse of the former elite position, although the share of executivepositions which graduates hold is still rising. The decisive fact is that the percentage of graduates as a wholeis rising faster than their share of executive positions, as the developments in Bank A clearly indicate (seeTable 8.4).

As these figures clearly verify, the growth of graduates’ share on all executive levels remains more orless markedly behind the growth of the total proportion of graduates. Whereas the increase between 1976and 1986 amounts to 53 per cent, at the levels beginning with employees with individually negotiatedsalaries it proves to be considerably lower, with 24 per cent (employees with individually negotiatedsalaries), 6 per cent (directors), and 38 per cent (upper executives).

Two circumstances here seem to be especially remarkable. For one thing, the step up to the directingpositions, the real executive positions in the middle-management area, proves to be a bottleneck which, firstof all, eight out of ten graduates are never able to make, and where, secondly, the percentage of graduateshas remained almost unchanged this decade. Thus, with the exception of the highest executive level, wherestagnation is, however, also to be noted, graduates have not been able to expand quantitatively their share ofthe real executive positions. When these figures are compared with the frantic growth in the total number ofgraduates (in 1988 it was already 5 per cent), it shows a considerable drop in the hierarchical level.

Table 8.4 Percentage of graduates in Bank A

1976 1979 1985 1986

Total personnel 3.0 3.3 4.2 4.6Employees with individ. 17.0 18.0 21.0 21.0negotiated salariesDirectors 35.0 37.0 38.0 37.0Upper executives 39.0 47.0 55.0 54.0

This is because the development is clearly taking a course which is increasingly disadvantageous for thegraduate—and that is the second noteworthy point. Not only is stagnation or even slight decline registeredon all executive levels in the recent past but even the increase in the percentage of graduates which tookplace before 1980 (from about 2.5 per cent at the end of the 1960s to 3.3 per cent in 1979) has not resultedin a noticeable increase in the proportion of graduates on the executive levels. There is thus no occasion tohope that the strongly rising percentage of graduates will, in a delayed reaction, be reflected in the higherechelons. The sharp increase in the importance of the areas covered by collective agreement systems doesnot mean, for the graduate, a mere way-station which has to be traversed at the beginning, but rather that thelevels covered by collective agreements are becoming a permanent location for a continually increasingnumber.

The average graduate of a higher education institution may very well be just able to penetrate the basiclevels, surpassing those covered by collective agreement and even the level encompassing signing authoritymay well become increasingly unattainable for the majority. Instead of only every seventh graduate, as wasthe case twenty years ago, in the foreseeable future almost every second will be employed in an areacovered by a collective agreement.

In the light of the development described above, the question is the degree to which it affects lawyers.Thus far, the analysis seems to contradict the assumption that lawyers are also declining substantially withregard to their hierarchical classification. A closer look at the quantitative proportions confirms the bottom

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line of this assumption. For instance, in the banks (not including trainees) around 50 per cent of lawyershold the position of director, the scale in the branches being about the same as in the headquarters (seeTable 8.1). A further 30 per cent to 40 per cent are classified as authorized signatories or employees withindividually negotiated salaries, the majority belonging to the former category. On the other hand, only amere 20 per cent are in positions within the standard pay scale.

For the most part, lawyers have been able to maintain their elite status. They have been more successfulin doing so, the higher up the hierarchical scale they are. Thus, in banks every second board member is alawyer, i.e. as many as in 1969, and a large number of the division managers, for example around 40 percent in Bank B. Compared with other graduates, lawyers have even extended their role as an elite. Whereastoday only every sixth graduate holds a position as director, this is true of every second lawyer. Lawyers areto be found in high concentrations on the highest hierarchical levels. They account for more than 10 percent of branch directors, and are also in strong numbers in the commercial departments. Like the creditdepartment at headquarters or syndicate business, those departments are characterized by clearly aboveaverage numbers of graduates and unusually high hierarchical classification. And finally, they constitute thelegal department which has the highest hierarchical level of all, with over 50 per cent of directors andaround 30 per cent of authorized signatories.

And yet, despite these impressive figures, very important and in part decisive changes have occurredsince the 1960s. The most significant change is the clear overall loss of influence which accompanied thepreservation of the high hierarchical status. The loss of influence is unmistakably indicated by the fact thatlawyers, although 50 per cent of them still hold the position of director, account for scarcely 16 per cent ofall bank directors, whereas in the 1960s, with just about 30 per cent, their share was almost twice as high.That is a very substantial decrease. It reflects the fact that, although lawyers have been able to maintaintheir hierarchical level as well as their 1 per cent share of the total number of bank employees, they havenot participated proportionally in the strong expansion of leading positions and the enormous increase in theemployment of graduates. They have only participated in this expansion in the upper hierarchical levels—instead of less than 2 per cent, as in the 1960s, in the meantime almost 3 per cent of all bank employees areclassified as directors: the extent of the general increase in the number of employees. The increased rate atthe level of directors which reaches, in relation to the total number of employees, about 50 per cent, haspractically passed them by completely. The additional positions have been occupied almost totally by othergraduate professionals and banking businessmen trained within the bank or at banking academies. Here, thelatter are becoming increasingly important, since the banks are adhering to the maxim of personnel policy,that at least 50 per cent of all executive positions are to be reserved for qualified ‘home-grown’, as thebanking businessmen whom they educate are called. In this manner, a professional career prospect is keptopen for the best-qualified applicants from this spectrum. This serves, on the one hand, to prevent the talentand knowledge available here from lying fallow, from the enterprise’s point of view. Furthermore, anincentive is thereby provided for particular efforts and performance, thus setting certain limits to theprofessional frustration of especially qualified personnel with practical experience rather than an academictitle.

The relative loss at the director level represents, however, only one of two aspects of the loss of influenceon the part of lawyers. The other consists of the undermining of the general special status of graduates,caused by the rapid increase in the numbers of graduates (and of those employed in banks). For, althoughlawyers have thus far been able to a large extent to maintain their elitist position and even expand it incomparison to other groups of graduate professionals, they are also feeling the negative influence of theincrease in graduates. It is simply becoming much more usual to possess a degree—it has lost the aura ofthe extraordinary. This has meant the end of the claim that a graduate has to be, at the very least, placed in a

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position with an individually negotiated salary, i.e. not covered by collective agreements. He doesn’t haveto be placed there. It is only a possibility. It seems very doubtful that lawyers in general will in the long runbe able to escape this change in the attitude towards them.

CONCLUSION

The facts and developments in the field of banking described add up to the following picture. Lawyers havenot only been able to maintain their high hierarchical status in the legal departments, but also in otherbanking departments. Although the legal departments are still exceptional to the extent that the percentage oflawyers in positions covered by collective agreement is clearly below the average, which is low in any case,and in contrast with other departments authorized signatories are already considered executives, these aremerely slight differences. Banking lawyers, of whom 50 per cent are classified as directors, are in generalpresent at the upper executive levels in numbers far exceeding their proportion; this is increasingly so, thehigher up in the hierarchy one goes.

Despite the defence of their elitist status, however, lawyers have lost influence. They have not, in contrastto other groups of graduates, surpassed their traditional share of the total number of employees. In thecommercial departments they have lost ground and professional jurisdiction compared to the businessmanagement experts, particularly because of the changes on the international finance markets. They thusrepresent a continually diminishing share of the graduates in the field of banking and are accordingly losingtheir monopolistic claims. Furthermore, they have not participated in the above-average growth inmanagement positions, so that while their overall classification remains high, their influence has on the wholealso decreased noticeably here as well.

In spite of the losses with regard to their position, banking lawyers have nevertheless been successful inaccomplishing what has been out of reach for other lawyers in the economy. They have been able tomaintain their status as an elite and their considerable influence to a large extent. Neither the lawyers inindustrial enterprises nor those in insurance companies have been successful in this regard. Althoughlawyers in industrial enterprises have been relatively successful with regard to their hierarchical position, inso far as they have been able to hold on to a status level comparable particularly to the legal departments inthe banks, they have nevertheless lost considerable ground as far as their influence is concerned, since theyhave been for the most part forced to surrender the reins of power. Lawyers in insurance companies havehad an even worse time. Even though, in the big companies, they still occupy many positions on boards ofdirectors, they are nevertheless only present in relatively modest numbers on the executive levelsimmediately below that, and 80 per cent of their work consists of qualified office work not involving anymanagement responsibilities or any expert status (Hartmann 1990).

Lawyers in the economy have thus, as a whole, not only suffered decisive losses in power and influence,despite the still exceptional position of banking lawyers, but have in contrast to the past, been subjected as aprofessional group to a powerful internal division. There now exist two fractions which are as yet ofapproximately the same size; one consists of the greater percentage of lawyers in banking and business,whereas the other is made up of the mass of insurance lawyers as well as smaller numbers from the twoother groups. The rift between the two is pronouncedly deep with regard to income, status and power.Professional elite and normal office workers—those are the names of the two groups. Hence, principally thesame fate confronting German graduates as a whole awaits lawyers in the economy who represent a coregroup among lawyers. Shared qualities and conditions have eroded and are crumbling away even further. Aconstantly growing number are sinking down to the level of normal, even though qualified, office workers.

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A shrinking number remain more or less closely connected to the dominant classes in society, itselfexercizing power and influence.

NOTE

1 The following remarks are based on an empirical study of three leading big banks in Germany.

REFERENCES

Abel, R.L. (1985) ‘Comparative sociology of legal professions: an exploratory essay’, American Bar FoundationResearch Journal, 1.

Abel, R.L. (1986) ‘The transformation of the American legal profession’, Law and Society Review, 20.Abel, R.L. (1988) The Legal Profession in England and Wales, Oxford: Basil Blackwell.Abel, R.L. and P.Lewis (eds) (1988) Lawyers in Society: A Comparative Perspective, vol. I: The Common Law World;

vol. II: The Civil Law World; vol. III: Comparative Theories, Berkeley and Los Angeles, Cal., and London:University of California Press.

Curran, B.A. (1986) ‘American lawyers in the 1980s: a profession in transition’, Law and Society Review 20:19.Dezalay, Y. (1990) ‘Big Bang’ sur le marché du droit. Le restructuration du champ des professionels des affaires,

Vaucresson: Centre de Recherche Interdisciplinaire de Vaucresson.Halliday, T.C. (1986) ‘Six score years and ten: demographic transitions in the American legal profession, 1850–1980’,

Law and Society Review, 20:53.Halliday, T.C. (1987) Beyond Monopoly, Chicago, 111.: University of Chicago Press.Hartmann, M. (1988) ‘Juristen in der Versicherung’, Kölner Zeitschrift für Soziologie und Sozialpsychologie 40:706.Hartmann, M. (1989) ‘Zwischen Stabilität und Abstieg—Juristen als akademische Elite in der Wirtschaft’, Soziale Welt,

40:437.Hartmann, M. (1990) Juristen in der Wirtschaft—Eine Elite im Wandel, Munich: C.H.Beck.Heinz, J.P. and E.O.Laumann (1982) Chicago Lawyers, New York and Chicago: Russel Sage.Powell, M.J. (1985) ‘Developments in the regulation of lawyers: competing segments and market client and

government controls’, Social Forces 64:281.Rothmann, R.A. (1984) ‘Deprofessionalization: the case of law in America’, Work and Occupations, 11:131.Spangler, E. (1986) Laywers for Hire, New Haven, Conn., and London: Yale University Press.

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Chapter 9Who colonized whom?

Historical Reflections on the Intersection between Law, Lawyers andAccountants in England

David Sugarman

INTRODUCTION

This chapter is concerned with the interface between lawyers, law and accountancy in England in the periodfrom 1850 to 1950. In particular, it attempts to explain why the legal profession (principally, solicitors)seemingly yielded up to their great rivals, the accountancy profession, much work which they had hithertoundertaken and also much new work which they might reasonably have hoped to capture. Although theissues raised by the interface between law, lawyers and accountants are of great contemporary as well ashistorical interest they have received surprisingly little attention.

Recent advances in the sociology of the professions have rightly stressed the importance of studying theprofessions comparatively, as a network of intricate relations, continually doing battle to defend and extendtheir respective jurisdictions (Abbott 1988). My goal in this paper is to begin to map out how this body of workmight be complemented and recast so that it is more sensitive to the cultural and political dimensions ofprofessional interaction and its larger economic, cultural and political significance. Thus, I have tried toavoid portraying the jurisdictional battles between law and accountancy in zero-sum terms: of clear-cutwinners and losers, and with overdrawn differences between lawyers and accountants (while recognizingtheir undoubted distinctions). An examination of the intersections between lawyers and accountants requiresa sensitivity to their mutual interdependence and co-operation as well as their on-going conflicts. Inparticular, my ultimate concern is to transcend the confines of traditional institutional accounts of the riseand fall of professions, and instead build a bridgehead between the new history and sociology of theprofessions and the new history and sociology of culture. In short, the goal of this chapter is to use thejurisdiction battles between solicitors and accountants as a case study for illuminating and refining our senseof the cultural and political significance of lawyers and accountants as distinct but interdependentinterpretative communities. This, in turn, requires a greater sensitivity to the cultural, political, linguisticand visual components of professional struggles, to the battles between and within professions over ideas,ideologies, alternative conceptions of society, and the construction of social and professional identities andof the multiple ways in which they help to constitute each other as well as the state and civil society.

COUPLING, CONFLICT AND THE CONSTRUCTION OF ‘FOLK DEVILS’

It would be easy, and to some extent accurate, to describe the history of the intersection between law,solicitors and accountancy during the last 250 years in terms of the rise of the accountancy profession andthe corresponding decline of the solicitors’ profession. According to this story, the solicitors of theeighteenth and much of the nineteenth centuries had ensconced themselves as the principal advisers to the

middle classes in their personal affairs. However, by the 1950s it was accountants rather than solicitors whooccupied this paramount position. The basic elements of this metamorphosis are as follows.

Until the late eighteenth century accountancy was a skill rather than an occupation as such. Accountinghad long been regarded as an integral part of business and the competent merchant and artisan was expectedto keep accounts. When persons who called themselves accountants appeared in the late eighteenth centurythey were often general agents who undertook bookkeeping among their many other tasks. Accountancyand law frequently went hand-in-hand. Solicitors were often entrusted with the keeping of accounts. Indeed,they were frequently employed as land agents, managing landed estates, the principal and most valuableform of wealth in eighteenth- and nineteenth-century England (Mingay 1990:127). As a leading businesshistorian put it, ‘Inside the eighteenth-century attorney [solicitor], half a dozen later professional men—accountant, company secretary, and others—were struggling to get out’ (Reeder 1966:43).

The 1830s and 1840s provided the crucial opportunities for a significant increase in the accountancyprofession. The creation of large public utilities, notably the railways, the rise of the limited liabilitycompany and the high levels of insolvency that accompanied these developments forced the state to enactlegislation requiring and policing the preparation of accounts. The Bankruptcy Act of 1831 enabledcreditors to appoint ‘official assignees’ to liquidate the estates of bankrupts on their behalf. The Actprescribed that those eligible for these posts were accountants, merchants and brokers. Perhaps it was feltthat these people would have the necessary business competence to persuade creditors to entrust them withthe job of recovering their monies and possibly to run a business as a going concern. Perhaps, too, theanticipated remuneration was thought insufficient to attract established solicitors (Napier and Noke 1992:34).Whatever the reasons, lawyers were not expressly included. Further legislation, such as the Relief ofInsolvent Debtors Act 1842 and the Bankruptcy Law Consolidation Act 1849 contained stipulations whichfurther encouraged the use of accountants to ensure the accuracy of accounts. And legislation, firstbeginning with the regulation of railway companies (the Railway Companies Clauses Consolidation Act1845, s.108), made provision for the appointment of auditors who could be and usually were accountantspaid for at the expense of the company, a regime which was extended to joint stock companies in 1856. Inshort, by the late nineteenth century bankruptcy, insolvency and auditing constituted major fields of workfor accountants. The accountants of this period were, however, often of doubtful reputation and limitedprofessional competence. In a celebrated case in 1875, Mr Justice Quain said: ‘The whole affairs in bankruptcyhave been handed over to an ignorant set of men called accountants, which is one of the greatest abusesever introduced into the law’ (cited in Woolf 1912:177).

The development of professional associations and the entrance and qualifying examinations thataccompanied them gradually began to address the issue of accountants’ competence. Moreover, after theFirst World War a new and lucrative market developed in taxation and estate planning, and from at least the1950s accountants became increasingly involved in management services. In these ways, accountants joinedwith and in some cases supplanted solicitors as the principal counsellors to the middle classes.

Most historical summaries of the rise of the accountancy profession stop at this point. Yet this is tooverlook certain important features of the interconnections between law, accountancy and solicitors. First,there is a definitional problem. The boundaries that today we take more or less for granted distinguishingthe province of the solicitor from other agents and advisers was not clear in the minds of manycontemporaries until as recently as the 1950s (and even today it is still a matter of controversy). Unqualifiedpeople continued to advertise their legal advice services until the late nineteenth century, while what todaywe would call estate agents, debt collectors, auctioneers, general agents, law stationers, barristers,arbitrators, accountants and a host of public officials competed with each other as well as with solicitorsover certain fields of work. In their own minds and in the minds of many members of the public these

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vocations were in certain respects and specific situations blurred and interchangeable. Areas such as debtcollection and the enforcement of debts in the courts was the sort of bread-and-butter work which wascharacterized both by intense competition and by mutual co-operation between several rival constituenciesincluding solicitors and accountants. Despite the growth of accountancy, solicitors continued to undertakeaccounts and bookkeeping.

Second, this blurring of roles is compounded because the relevant professions were far from like-mindedmonoliths. The professions of the accountant and the solicitor were riven with regional and social divisions,in terms of the work undertaken and professional affiliation (or lack thereof). Accountancy spawned manycompeting professional bodies which seemed unable to agree about many key issues concerningprofessional boundaries. With respect to solicitors, while there were fewer professional associations, theLaw Society’s pre-eminence is a recent phenomenon: as late as 1870 only a quarter of the profession weremembers. The proportion rose to a third in the 1880s and to a half by the turn of the century (Abel 1988).London rather than country firms dominated the membership and the governance of the Society, which wasa source of much intra-professional conflict. In these circumstances, understanding the territorial boundariesas contemporaries perceived them is more complex than most institutional accounts acknowledge.

The popular professional literature for both solicitors and accountants reveals cycles of complaints andrecriminations concerning the one invading the territory of the other. While these were particularly intensein the period 1855–80, they are a recurrent feature of their relationship. As regards solicitors, most of thecriticism seems to come from non-elite firms, often provincial rather than London-based. The Law Societycountered by proposing an expansion of the solicitors’ monopoly to embrace ‘the drafting of “instruments”for or in the expectation of fee, gain, or reward’ (Abel-Smith and Stevens 1967:59). But Parliament threwout the clause prepared by the Law Society. This seems to have had a chastening effect on the managementof the Society, although not on its grass-roots members, who continued from time to time to press forlegislation to curb accountants.

When the Law Society could not silence its competitors with legislation, other tactics were utilized. Underlegislation first enacted in 1729, anyone other than a solicitor was prohibited from undertaking legal adviceor the drafting of legal documents for financial reward. The Society ensured that penalties for breach ofthese provisions were increased in 1860 and 1874. In a calculated attempt to secure maximum publicity, theSociety regularly prosecuted offenders under this legislation. The average number of prosecutions was aboutten per year; however, several of these were unsuccessful, and generally this activity represented but a smallpart of the work of the Professional Purposes Committee of the Law Society.

For some solicitors ‘the accountant’ became a ‘folk devil’, the generic term for the outsider invading theprofession, the ‘other’ against whom they must combine. It was this potent symbol and the anxieties that itrepresented that the Law Society was trying to address and appease in its limited prosecutions—especiallygiven the profession’s tendency to blame its ills on almost anyone but itself.

Yet people are notoriously contradictory and inconsistent. Alongside the bouts of belligerence towardsaccountants the Law Society (in collaboration with its accountancy counterparts) also successfullyestablished market divisions between the two professions. More generally one is struck by their mutualdependency and their close collaboration. Solicitors and accountants channelled business to each other. Incrucial respects, especially in the early days of the accountancy profession, accountants were dependent forbusiness on the paid assistance of solicitors. For example, solicitors would oblige accountants to pay whatwere claimed to be exorbitant commissions for the introduction of business, and would dispose of certainbusiness to accountants for a high consideration. It was also alleged that some solicitors would swearaffidavits concerning the fitness of accountants to act as receivers in situations where these gentlemen hadclearly ‘left their consciences in safety and solitude at home’ (Worthington 1895:74). Moreover,

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accountants lived in the shadows of the law. The law (and therefore the lawyers) provided the regulatorycontext within which they worked, some of the core categories, assumptions and languages of theirprofessional lives.

WHY SOLICITORS SEEMINGLY LOST OUT TO ACCOUNTANTS: ANASCENDENCY OF ACCOUNTANTS AND SLIDING OF SOLICITORS?

Despite these qualifications, it is clear that accountants have increasingly dominated jurisdictions which inthe United States are the province of the lawyer. How might we explain this contrast? In the spaceavailable, this large, complex and fascinating question will receive a rather summary treatment.

First, there was little incentive for solicitors to defend some of their long-standing markets and developnew ones, given their lucrative monopoly in conveyancing (the art and science of validly creating,transferring and extinguishing rights in land by written deeds). This monopoly, when allied to the strongpolitical influence wielded by the Law Society, the major professional association for solicitors, may haveencouraged a certain complacency within the profession.

The sale, purchase and management of land gave rise to numerous legal problems and entrenched the‘better’ solicitor as a key figure in the local community. For most solicitors, conveyancing generated thelion’s share of their income. It afforded them much inside information, local influence and, in the case ofthose solicitors who worked for landed gentry, a vicarious respectability and status higher than that of thedoctor. The dynastic ambitions of the landed gentry were executed by their trusted solicitors, while thesesame solicitors sought to retain the business of the same family over several generations. Of course, not allsolicitors had clients who were landed gentry and they had to make do with debt collection and such. Nonethe less, some of the core notions that defined what it was to be a solicitor derived from the culture of thelanded aristocracy, in part because this also defined what it was to be a barrister.

Second, the education of solicitors and the structure of qualifying as a solicitor were probably ill-suited toadapting to rapid change in legal services and the need to increase output generated by the rise of thecorporate economy and the regulatory state. Until the 1960s the vast majority of solicitors learnt their lawnot at university but in practice: that is, from private coaches and the profession’s own narrowly basededucational system exclusively geared to passing the profession’s entry examinations. This differs markedlyfrom both continental Europe and the United States where postgraduate university legal education becamethe major route into the profession by the first decade of this century.

The narrow confines of legal education were reinforced by the structure and culture of the English lawfirm. For example, ‘the necessity of articled clerkship under a certificated solicitor tied the profession’sfuture size directly to its present one’ (Abbott 1988:251–2). The structure of training and organizationinhibited a more flexible and adventurous response to changes in the demand for legal services, as did thepoor training and pay that were a feature of much professional training in the law. This contrasts starklywith the so-called Cravath system of recruitment, training and work organization which became the norm inmajor American law firms by the 1920s (Abbott 1988:252).

The third point is that even solicitors sometimes acknowledged that they themselves were at least partlyresponsible for their failure to develop lucrative fields of work that came to be largely dominated byaccountants. Some solicitors attributed the ascendency of accountants in bankruptcy and liquidationproceedings to the profession’s apathy. Typical were the following observations published in the Law Timesin January 1874. Under the heading, ‘Our Invaders—Bankruptcy Accountants’, one J.Seymour Salamanopined that before the Act of 1869 bankruptcy work was in very few hands:

166 WHO COLONIZED WHOM?

In London it was mostly in two or three offices, who also acted as agents for other solicitors, tooimportant or too lazy to acquire the practice…. The remedy, if the Profession desire it, is in its ownhands, let them co-operate in an effectual manner, throw off that apathy where their own interests areconcerned, which distinguishes them above all professions.

(Salaman 1874)

Salaman went on to invite like-minded readers to join the newly formed Legal Practitioners’ Society, whosefirst meeting he chaired in January 1874. The meeting, specifically called to consider whether legislationwas required to arrest ‘the encroachments of the Profession by unqualified persons’, recommended thatfurther legislation be initiated without delay (Legal Practitioners’ Society 1874).

Fourth, some solicitors even conceded what accountants had long asserted, namely, ‘that solicitors arenotoriously bad book-keepers’ (Holmes 1874). For some lawyers, their ignorance of accountancy was abadge worn almost with pride. Thus Lord Chancellor Halsbury remarked that accounts were ‘the one subjecton which lawyers are supposed to know nothing’ (Lord Halsbury, quoted in Napier and Nokes 1992:31). Forsome solicitors the remedy lay in their hands: that they should make it their business. Yet here too the LawSociety’s efforts seem in retrospect to have been half-hearted.

Having introduced an examination in accounts and bookkeeping, the Law Society withdrew therequirement in 1876, and only after a thirty-year lapse was it reinstated into the solicitors’ IntermediateExamination. Accountants mocked the low standard of the exams. As the Accountant wryly observed:

[The] Committee have not erred upon the side of expecting too much from law students… [It] isdifficult to see how any student possessed of the requisite amount of knowledge could fail to verycompletely answer the questions set in somewhat less than half the allotted time.

Accountant 1906

And when it came to the books set by the Law Society for the purposes of the examination on Accounts andBookkeeping, one encounters an air of disbelief not only from members of the accountancy profession. Likemany provincial universities with law departments, Leeds University offered courses for the solicitors’examinations. In 1911, at the unanimous insistence of the law staff concerned, the University wrote to theCouncil of the Law Society to inform them that the system of keeping accounts adopted in one of itsprescribed texts on trust accounts for the Accounts examination was inadequate for all but small trusts, andantiquated when compared with the double-entry system adopted by the accountancy profession. In effect,the University was asking the Law Society to adopt and ratify the practices of the accountancy profession.The Law Society would have none of this. They said that the book concerned adopted the system prescribedby the Court for accounts ordered by the Chancery Division of the High Court and that in their opinion thissystem should be extended to all trust accounts even though it was contrary to contemporary accountingpractice. The Accountant, which modestly described itself as ‘the recognised weekly organ of charteredaccountants throughout the world’, could barely conceal its delight. It used the opportunity to reiterate theview expressed four years earlier in its critical view of the book concerned: ‘[That] lawyers as a body havelittle knowledge of, and little sympathy with…[the] modern requirements…[of business]’.

By this was meant that the Law Society was seeking to perpetuate a system which was ‘as unintelligibleto the ordinary business man as it is to the most ignorant person’. This unusually strong language,exceptional when discussing lawyers, is partly attributable to the fact that the Accountant resented that thewhole episode had been carried on without reference to the expertise and assistance of the Council of the

DAVID SUGARMAN 167

Chartered Accountants. For this organ at least it was the Council of the Institute of Chartered Accountants,and not its counterpart at the Law Society, that should have the final say (Accountant 1911).

What was true of accounts and bookkeeping also applied in relation to taxation, tax avoidance and estateplanning, company law, negotiable instruments, and other new areas of work that arose in the second half ofthe nineteenth century. Thus, in a series of papers to the Annual Provincial Meeting of the Law Society inthe 1920s, a future government minister lamented that most solicitors were not adequately equipped with aknowledge of taxation and company law; and that valuable work was increasingly being monopolized byaccountants (Burgin 1924, 1929). He pointed to the increasingly significant role played by the auditor as ageneral counsellor to business, and called for solicitors to play a more active role in business managementso as to meet this challenge (Burgin, 1929).

It was only in 1938 that commercial law, company law and taxation were added to the solicitors’ finalexaminations. While specialists and some of the larger city firms did work closely with business in theseareas (Slinn 1987; Dennett 1989) many solicitors left company and tax work to accountants.

Fifth, solicitors were subject to duties and taxes which did not apply to accountants (Law Times, 1853).Certainly it was frequently claimed that accountants were generally cheaper than solicitors, and this wasmanifested by the increasing flight by business from litigation to arbitration from the 1880s, if not earlier.

Finally, solicitors’ commitment to the culture of the gentleman, in particular their use of the barrister asrole model, encouraged both an ignorance of and a certain suspicion of ‘business’ within some of thediscourses of the profession. Thus it might be regarded as ungentlemanly to be seen to be too closelyinvolved in the management of business. In other words, solicitors were judged by the work and socialstanding of their clients. Professional culture mirrored and sustained this facet of Victorian ‘Englishness’,one which it has been claimed was hostile to industrialization and economic growth (Wiener 1981;Sugarman 1987).

However, Englishness took many and varied forms. The converse of the gentleman was the image of theaccountant as the hungry street-fighter, closer to the coal-face, who could and would be able to run abusiness. Accountants had access to and knowledge of the financial affairs of their clients, tending them ona regular basis. Thus when it came to advising on the conversion of a business from an unincorporatedassociation to a limited company it was the accountant’s advice that was most frequently sought.

THE POWER OF THE LAW

It would be misleading, however, to conclude this chapter with the usual celebration of the victory ofaccountancy over law. This would be to underestimate the continuing force of the law, as a crucialenvironment, role model, language, intellectual influence and culture ‘civilizing’ (to use Elias’s notion;1978, 1982) accountancy and perpetuating the necessary dependency of accountancy on law, lawyers andthe culture of the law.

First, the legal system and lawyers continue to play a crucial role in constituting the field of accountancy,its work, boundaries and many of its core categories (Miller and Power 1992). Self-regulation and thedelegation of authority to the profession is ultimately sustained by the legal order. As accountancy hascolonized ‘legal’ fields, so law has colonized the ‘life world’ of accountancy.

Ideas and experiences are constituted by language, words and non-verbal representations, external tothose ideas and experiences. The power of the law stems in part from its ability to do things with words(Bourdieu 1987) and to operate as a meta-language and the language of the state. The language of the law iscentral to accountancy and the formation of professional subjectivities.

168 WHO COLONIZED WHOM?

Second, intellectually and culturally, law, especially the solicitors’ profession and its governing body theLaw Society, have had and continue to have a signal influence on accountancy. For example, the characterand form of professional organization, the invention of ceremonial forms, the iconography of theheadquarters (the ‘halls’) of its professional associations, the homosocial character of its culture of dining,drinking and speech-making (cf. Goodrich 1992), the nature and form of accountancy textbooks andprofessional periodicals, the nature and form of the profession’s examinations (Napier and Noke 1992) arejust some of the areas which testify to the significant influence of the solicitors’ profession on accountancy.Important here was the shift, pioneered by the Law Society, from a coffee house to a professional pressuregroup attempting to construct a’professional’ body in a public sphere (Habermas 1989) that was itselfrapidly changing (Sugarman 1995).

Third, related to this is the significance of the languages of awe and deference with respect to law andlawyers within the everyday life and experience of accountants. This in part derives from the general powerof law and legal ideology in England, whereby law and lawyers are perceived as the guardians of state andsociety. Thus to criticize or contradict the law and the judgements of the legal community came close toimpugning the authority of the law, the Rule of Law, and therefore the very basis of English society.

More specifically, accountancy developed out of and long after the establishment of the solicitors’profession, and was the model which it eagerly embraced. To this must be added the arrogance andcondescension of the legal community with respect to accountancy and accountants. We have alreadyencountered some of the many instances where solicitors and the law confidently established practices ofaccountancy which contradicted the practices and understandings of business and the accountancyprofession. One might also point to those speeches by legal notables at accountancy dinners and publishedin the professional press in which accountants are told to know their place. Like children, accountantsshould be seen but not heard.

A comparison between the discursive practices of the popular professional press in law and inaccountancy is revealing. In their treatment of law and lawyers, the dominant language of accountancyperiodicals is that of deference and courtesy, occasionally coupled with irony and anger. In contrast, thepopular legal press tends to speak of accountants and accountancy in language that is often disdainful andpatronizing.

Finally, hand-in-hand with the patronizing discourses and culture of the law is its coercive might ever-threatening legislation here and prosecutions there to keep accountants in line. Nowhere is this more evidentthan in the Law Society’s success in thwarting the registration of accountants. It is evident that majorlegislative changes with respect to accountancy were often mediated by and required the active assistance ofthe Law Society. Hence the close and symbiotic relationship that developed between the Law Society andthe major professional bodies in accountancy. This was cemented by their common ideological inclinations,their commitments to laissez faire and individualism and their mutual hostility to the state, their commonenemy.

CONCLUSION

In this chapter I have tried to tell the story of the supposed ascendancy of accountancy over law in a waythat begins to address the cultural features of their relationship and their larger cultural and politicalsignificance, and thereby supplement those accounts which focus exclusively on jurisdictional conflict. Onemight conclude that the fates of accountancy and law are so intrinsically bound together that accountancycannot cut loose the lawyers without cutting off its own head.

DAVID SUGARMAN 169

Yet the discourses of the law were not the only discourses central to the emergence of accountancy andthe professional subjectivities of accountants. There are invariably conflicts among and within discursivesystems, and multiple possible meanings for the concepts that they deploy. Like all individuals,professionals inhabit multiple worlds characterized by multiple discourses which offer counter-images andquite distinct identities. The challenge for those investigating the interface between law, lawyers andaccountancy is to explore the ways in which competing discourses collided and were contested. To assertthe power of the language and the culture of the law over accountancy is not the same as specifying themeanings that were attributed to such dominance at specific times and places by professional communities.

REFERENCES

Abbott, A. (1988) The Systems of Professions, Chicago, 111.: University of Chicago Press.Abel, R. (1988) The Legal Profession in England and Wales, Oxford: Basil Blackwell.Abel-Smith, B. and Stevens, R. (1967) Lawyers and the Courts, London: Heinemann.Accountant, The (1906) ‘Solicitors and bookkeeping’, The Accountant, 3 February: 129–31.Accountant, The (1911) ‘The Law Society and trust accounts’, The Accountant, 29 July: 133–6.Bourdieu, P. (1987) ‘The force of law’, Hastings Law Journal, 38:814.Burgin, E.L. (1924) ‘The problem of double taxation’, The Law Society, Annual Provincial Meeting, 1–10.Burgin, E.L. (1929), ‘The solicitors’ profession and the new Companies Act 1929’, The Law Society, Annual

Provincial Meeting, 1–11.Dennett, L. (1989) Slaughter and May, Cambridge: Granta.Elias, N. (1978) The Civilizing Process, vol. I, Oxford: Basil Blackwell.Elias, N. (1982) The Civilizing Process, vol. II, Oxford: Basil Blackwell.Goodrich, P. (1992) ‘Eating law’, Journal of Legal History, 12:246–67.Habermas, J. (1989) The Structural Transformation of the Public Sphere, Cambridge: Polity Press.Holmes, R. (1874) ‘Our invaders’, The Law Times. 2 May: 14–15.Law Times (1853) ‘Accountants and attorneys’, 1 January: 149.Legal Practitioners’ Society (1874) Law Times, 24 January: 240.Miller, P. and Power, M. (1992) ‘Accounting, law and economic calculation’, in M. Bromwich and A.Hopwood (eds),

Accounting and the Law, Hemel Hempstead, Herts.: Prentice-Hall.Mingay, G.E. (1990) Rural Life in Victorian England, Stroud: Alan Sutton.Napier, C. and Noke, C. (1992) ‘Accounting and law: an historical overview of an uneasy field’, in M.Bromwich and

A.Hopwood (eds), Accounting and the Law, Hemel Hempstead, Herts.: Prentice-Hall.Reeder, W.J. (1966) Professional Men, London: Methuen.Salaman, J.S. (1874) ‘Our invaders and bankruptcy accountants’, The Law Times, 24 January: 24.Slinn, J. (1987) Linklaters and Paines, London: Longman.Sugarman, D. (1987) In the Spirit of Weber: Law, Modernity and ‘The Peculiarities of the English’, University of

Wisconsin Institute of Legal Studies Working Paper 2:9.Sugarman, D. (1995) ‘“The best organised and most intelligent trade union in the country”: the private and public life of

The Law Society, 1825–1914’, in E. Skordaki (ed.), Social Change and the Solicitors’ Profession, London: OxfordUniversity Press.

Wiener, M.J. (1981) English Culture and the Decline of the Industrial Spirit, Cambridge: Cambridge University Press.Woolf, A.H. (1912) A Short History of Accountants and Accountancy, London: Gee.Worthington, B. (1895) Professional Accountants: An Historical Sketch, London: Gee.

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Chapter 10Creative lawyering and the dynamics of business regulation

Joseph McCahery and Sol Picciotto

LAWYERS AND LAWYERING, FROM STRUCTURE TO PROCESS

The recent spate of work on the practice of business lawyering has begun belatedly to make up for thesurprising neglect of the topic by sociologists of law, or social theorists generally. An important reason forthe neglect of the consideration of lawyering as a process has been the predominance of structuralistperspectives in the sociological study of the legal profession. Furthermore, both theoretical perspectives andpractical factors have led those sociologists who have attempted to analyse lawyer-client relations toconcentrate on encounters with individual clients rather than the work of lawyers for business. The image ofthe lawyer as dealing essentially with the private problems of individual clients has become harder tomaintain with the increased prominence, first in the US and then in many other countries, of the large,bureaucratized law firm specializing in commercial and business law (Galanter 1983; Galanter and Palay1991), and the sharpening of the division between lawyers who serve corporate clients and those with apractice predominantly of individuals (Heinz and Laumann 1982).

Theories of the professions

The predominance of structuralism is noticeable, despite the continual flux of theoretical perspectives inthis field over the past twenty years. The focus of sociologists, stemming from the study of the social role ofprofessions and professionalism generally, has been on the control of specialized expertise. Initially thedominant viewpoint was functionalist, assuming the utility of specialized knowledge and of the ‘bargain’ bywhich society was said to grant professional groups self-regulatory autonomy. From the 1970s this came tobe criticized as ignoring questions of power and the role of the state (Larson 1977; P.Lewis, in Abel andLewis 1989; Rueschemeyer 1983). Professionals such as lawyers were seen as trying to achievestatus, prestige or power, on the basis of claims to specialized knowledge resulting from the mobilization ofresources. A more complex picture was then further developed, which included the importance of otherfactors such as access to state power, and the need to consider the historically specific conditions ofdevelopment of particular societies (Luckham 1981). However, studies in the field became dominated bydiscussion of the thesis originated by Magali Larson and most forcefully put forward by Richard Abelwhich, in brief, argued that the legal profession has generally aimed to secure monopolistic markets for itsspecialized services by controlling the production both of and by the producers, or by seeking to createdemand for these services (Abel, in Abel and Lewis 1989: vol. 3, ch. 3). This argument was in turncriticized by studies showing that professionals often have little control over their markets or their clients(e.g. Paterson, in Abel 1989: vol. 1). While undoubtedly the profession tries to establish and maintain

market control, such measures are often reactive, and it is not clear that market control is the source of thepower or privilege of lawyers.

What is clear is that most of these discussions have tended to leave out any examination of the nature andprocess of lawyering itself.1 This lack was stressed in relation to the study of professions more generally byan important new work by Andrew Abbott, who pointed out that existing studies had talked ‘less aboutwhat professions do than about how they are organized to do it’ (Abbott 1988:1). For Abbott, the maindifficulty with the prior concept of professionalization was its ‘focus on structure rather than work’ (ibid.:19). He defines professions loosely as ‘exclusive occupational groups applying somewhat abstractknowledge to particular cases’ (ibid.: 8), and emphasizes that it is the control of the abstractions whichgenerate the practical techniques that distinguishes professions from other occupational groups such ascrafts, since ‘only a knowledge system governed by abstractions can redefine its problems and tasks, defendthem from interlopers, and seize new problems’ (ibid.: 9). Abbott provides an interesting analysis ofprofessional work, organized around ‘the sequence of diagnosis, inference, and treatment [which] embodiesthe essential cultural logic of professional practice’ (ibid.: 40); and he explores the relationship betweenprofessional practice and the academic knowledge which formalizes these skills and gives professionalscultural legitimacy by the essentially symbolic power with which it links those professional skills to majorcultural values, usually of rationality, logic and science (ibid.: 52–4). By starting from the characteristics ofprofessional work, Abbott’s approach redirects attention from the structural concerns of organization to theinteraction between the competitive system of professions and their environment. However, he himselfperhaps over-emphasizes the structural character of the ‘system of professions’, which he sees as essentiallyreacting to external forces which cause a competitive struggle over the reshaping of professional tasks(ibid.: 33), leaving little space for the dynamic role of professionals in helping to construct the social world.

Studies of lawyering

Despite the limitations of the general theories of professionalization, a handful of pioneering sociologicalstudies have been made of the actual process of lawyering. In addition, others have put forward variousanalyses of the process, calling upon diverse types of evidence,2 including contemporary accounts both ofthe major exploits of big business lawyers and direct experience of its more routine aspects, as well ashistorians’ reports of the role of lawyers in the creation of corporate capitalism based on studies of thearchives of major law firms and memoirs of leading practitioners.

The issue that is posed by shifting the concern from structure to process is the nature of the‘transformation’ that takes place in lawyer-client interaction (Felstiner et al. 1980–1). Studies of lawyeringgenerally agree that the lawyer’s task is to convert the requirements of the client into legal solutions, andemphasize that this is by no means limited to litigation or dispute-settlement. But once the lawyer isrecognized as ‘gatekeeper to legal institutions and facilitator of a wide range of personal and economictransactions’ (ibid.: 645), many issues arise as to the nature of the conversion or transformation that takesplace between the client’s concerns and the lawyer’s solutions.

Some studies still see the lawyer-client relationship simply as a structured power relation, in which theextent to which the client can obtain the lawyer’s specialized knowledge or skills depends on the client’swealth and other related factors, such as the likelihood of repeat business or other connections through thisclient, perhaps weighed against the lawyer’s loyalties and ties to other actors (other clients, the opposinglawyer, and so on). In this perspective, the lawyer as ‘gatekeeper’ to the legal realm is motivated mainly byfinancial reasons, but also social and cultural ties such as loyalty, in deciding whether and with what degreeof assiduity to venture on behalf of the client into that realm to bring back the desired legal outcomes. Thus,

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Abraham Blumberg argued that important procedural rules laid down by courts as a protection for criminaldefendants are in practice rendered nugatory because defence lawyers do not act as adversarialrepresentatives on behalf of (mainly indigent) clients, but are ‘bound in an organized system of complicityin which covert, informal breaches and evasions of due process are institutionalized, but denied to exist’(Blumberg 1966–7:22); the strong ties of criminal defence lawyers to court personnel and their involvementin the unwritten rules and routines of the system mean that what they do is not really private practice butbureaucratic practice (ibid.: 31). Similarly, Stewart Macaulay argued that consumer protection legislationwas ineffective, because he found that lawyers were generally reluctant to utilize legal provisions andprocedures in a serious way, preferring conciliatory negotiation, since they regard consumer cases asunimportant as well as unlikely to generate lucrative repeat business (Macaulay 1979). Although thesestudies focused on the characteristics of lawyering in practice, they adopted a rather simple model oflawyer-client interaction, and reinforced the view of the lawyer as possessor of privileged knowledge.

A radically new approach was put forward by Maureen Cain, who rejected the perspective of socialcontrol by the lawyer of the client based on their positions in the social structure, emphasizing instead theneed to study lawyering as a specific practice, centring on lawyers’ role as ‘conceptive ideologists, whothink, and therefore constitute the form of, the emergent relations of capitalist society’ (Cain 1979:335).This was based on two central points. First, that lawyers act typically as agents for the bourgeoisie (in itsvarious forms), and far from controlling their clients, they are often highly dependent on them, or at leastmust compete to offer services for which clients are willing to pay. Second, Cain focused on the specificpractice of lawyering as translation:

Clients bring many issues to the solicitor, expressed and constituted in terms of a variety of everydaydiscourses. The lawyer translates these, and reconstitutes the issues in terms of a legal discoursewhich has transsituational applicability. In this sense law is a meta-language. Its material significance,however, derives from the fact that it is also the workaday language for certain state authorizedadjudicators.

The combination of these two points provided an important new perspective, supported by the detailedaccounts resulting from her pilot observational study.3 Cain’s argument integrates some elementsemphasized in previous studies to help explain the relative dependencies in the lawyer-client relation, suchas whether a client represents an important source of repeat business. However, an important newdimension was introduced by refocusing on the specific practice of lawyering as an ideological mediationand translation between the needs of the client, expressed in everyday discourse, and the specializeddiscourse of the law, which the lawyer also helps to create.

This perspective introduces a more differentiated approach to the analysis of lawyer-client interaction.First, it recognizes that the conversion of the client’s problem into legal terminology and the search for alegal solution which can be reconverted into an acceptable one in the client’s world, is a common concernof both parties. Although the lawyer’s professional expertise may entail some socio-psychologicaladvantages in the immediate relationship (some lawyers may be able to browbeat some clients), this is notstructurally determinative, for the lawyer must compete with others in the provision of this service. Thequestion is, rather, the nature of the interaction between the realm of the law and that of ‘everyday’ socialrelations in which it is primarily the client who initially defines the problem.

Certainly, this entails a ‘legal construction of the client’, and the lawyer may take the lead in ‘educating’the client as to the law’s requirements. Sarat and Felstiner have provided a detailed micro-study illustratinghow a client conference involves the ‘construction of a legal picture of the client, a picture through which a

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self acceptable to the legal process is negotiated and validated’ (Sarat and Felstiner 1986:116). Theyprovide a valuable account of the way legal professionals behave as if it were natural to separate out thoseaspects of human behaviour with which the law is willing to deal, thus implicitly legitimating parts ofhuman experience and contributing to the ‘reification’ characteristic of law (Gabel 1978). However, thisbegs the question of legitimation of the law itself.4 If the client has a readymade, practical, sociallyfunctioning self, whence comes the need for its legal reconstruction? If this need is considered to beexternally imposed, as part of a social power-structure involving the state, how is it validated or legitimated,if it involves distortion of a previously whole ‘self’?

It seems necessary to accept that the client’s social self is constructed by intersecting social processes, ofwhich legal discourse is one. After all, if a person has become a client it is by some sort of prior recognitionthat there is a legal dimension to the social circumstances in which the problem arises to which a solution issought. Further, and this involves the second important aspect of Cain’s argument, the lawyer carries outnot only the translation of the client’s problem into legal terms, but also (once a legal solution has beenfound) a retranslation back into the client’s everyday discourse. Hence, the solution found in the legal realmmust in turn be validated by successful interaction with the other social processes contributing to the socialconstruction or reproduction of the client’s self.

Business lawyering

This point is more clearly brought out through consideration of business lawyering, for several reasons.First, it focuses on the client as an organization rather than an individual, thus de-emphasizing the socio-psychological aspects of lawyer-client interaction. This brings more sharply into focus the point that boththe skill of the lawyer, and the legitimation of the legal process generally, depend on the extent to whichthey make an effective contribution to the ensemble of processes interacting on the business enterprise. Thishas been very effectively analysed from an economic perspective, in particular by Ronald Gilson (1984).From this point of view, it is clear that business enterprises will not resort to lawyers, nor request themto seek legal solutions, unless lawyering ‘adds value’ to the business trans-action in question. Gilson showsin detail, through an analysis of the drafting of the complex acquisition agreements common in (US)corporate mergers and acquisitions (M&A) practice, that the lawyer acts as a ‘trans-action cost engineer’,assisting the parties in pricing the transaction at the lowest cost. In other words, from the internalperspective of economics, the lawyer adds value to the transaction as a whole if transaction costs can bereduced or eliminated, for example by maximizing the availability of relevant information to parties andguaranteeing its veracity, to assist the establishment of homogeneous expectations and thus a successfuleconomic exchange. However, other professions (notably accountants and investment bankers) also performbroadly similar functions, so an economic analysis cannot explain the existence of a specifically legalfunction, although it may provide criteria for testing its efficiency. Interestingly, Gilson is driven to acceptthat the existence of such a specifically legal function in economic transacting cannot be shown byeconomic analysis, but depends on the existence and character of state regulation of such transactions (ibid.:296–8).

Gilson characterizes the role of ‘transaction cost engineer’ as not a specifically or traditionally legal one,even when it entails the drafting of immensely lengthy and complex contracts, since ‘when lawyers playthis role well, the courts and formal law generally, shrink dramatically in importance’ (ibid.: 294).However, one of the important points which results from the study of lawyering is that lawyers in practiceengage in a wide variety of activities broadly concerned with the facilitation of transactions, and are notexclusively or even primarily concerned with litigation. In the UK for example, the bedrock of the market

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for solicitors’ services, even for individual clients, has long been, and despite many changes still remains,house conveyancing and wills-and-probate; even the Bar, which defends its monopoly of rights of audiencein the higher courts, relies for most of its work on drafting documents and opinions. Disputes and litigationare in any case better understood as the pathology of a regulatory system. This makes it all the moreimportant to try to develop an analysis to help us understand whether there is any specifically or inherentlylegal function in facilitating economic and social transactions.

Hence, it is necessary to consider the characteristics of the private ordering which lawyers carry out forclients, and its relationship both to formal law and to the economic or social aspects of the client’stransactions. Returning to Gilson’s analysis of a corporate acquisition agreement, it seems clear that theneed for a lengthy contract embodying a very detailed specification of the business being acquired resultsfrom low-trust factors in the relationship of the transacting parties: a corporate acquisition is usually a one-shot operation, and the potential gains from opportunism or cheating outweigh any long-termdisadvantages, hence the need to juridify the relationships.5 Of course, in a different social setting theremight be far less need for detailed contracting. Indeed, the increased research into business lawyering in theUS results partly from concern about the loss of competitiveness of US business, especially in relation toJapan, and the accusation that the US system over-invests in non-productive professional activity(particularly lawyering) while Japan concentrates on professions such as engineering, which make apositive contribution to production.6 Hence, it is said, not only does Japan have many fewer lawyers, but atypical business contract will not be thick and detailed, but rely essentially on a general good faith provisionleaving any disagreements which may subsequently arise to be worked out by the parties.7 This comparisonraises manifold considerations: perhaps Japan is a more homogeneous society where even business relationsare less prone to opportunism; or perhaps the opportunism is constrained by other factors, notably a morestable (or even rigid) managerial system together with other factors (such as the role of the zaibatsu andkeiretsu) which cement longer-term relationships between firms and the senior managers representing them,but which may also carry their own costs such as loss of entrepreneurial spirit (Gilson 1984:307–12).

However, our concern in this chapter is rather with the relationship of business lawyering to the formsand institutions of formal law. In particular, we want to explore the interaction between lawyering and thedevelopment of the regulatory forms in and through which corporate capitalism develops. This entailsconsideration of the extent to and ways in which lawyers themselves contribute to the creation anddevelopment of the legal forms regulating business.

THE INDETERMINACY OF LEGAL RULES AND LAWYERING AS A SOCIALPRACTICE

The lawyer’s specialized knowledge is of the more or less abstract and formalized rules which are theobject and product of legal discourse; and it is the practising lawyer who acts as the mediator between thisfield of formal rules and the arena of economic and social relations inhabited by the client. Thecharacterization of the legal sphere or field and of its relation to economic relations and social life moregenerally is a central concern of social theories of law. In this section we consider in what ways the study oflawyering as a social process can illuminate this central question.

We focus on the characterization of legal rules as unclear or indeterminate, and the role of lawyering inrelation to that indeterminacy. One result of the increasing global competition in the field of professionallegal services is a concern that lawyers may excessively exploit the loopholes and abiguities of the law onbehalf of clients, and that as a result ‘creative compliance’ with regulatory requirements may undermine theefficacity of regulation. This has been the subject of academic analysis (e.g. McBarnet 1988; McBarnet and

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Whelan 1991; Power 1993), as well as broader political concern. Thus, in 1992 the Legal Risk ReviewCommittee set up by the Bank of England proposed a number of measures to deal with difficulties that maybe caused for London’s financial markets by legal uncertainty. This was due to concern caused by the lossesto financial institutions following appeal court decisions holding that local authorities were acting outsidetheir powers in engaging in ‘swap’ transactions; although the Committee identified other problems ofuncertainty in the regulation of dynamic and constantly changing markets (Bank of England 1992a; 1992b).More broadly, however, there is concern that the globalization of financial markets means that traditionalpractices based on understandings among closed City networks are inevitably being replaced by a morejuridified approach, and City of London regulators have shown themselves to be, at the least, unaccustomedto dealing with this environment, as evidenced by a string of ‘regulatory failures’, such as the Guinness,BCCI, and Maxwell affairs.

However, the question of ‘compliance’ with rules and ‘creativity’ in relation to them involves somefundamental philosophical concerns. Thus, we must first consider the various ways in which thisindeterminacy has been characterized in jurisprudence and in social theories of law.

The indeterminacy critique

While there is considerable debate and controversy regarding the indeterminacy thesis, even some positivisttheories accept that rules are not altogether certain. Indeed, it is central in the work of H.L.A. Hart that ruleshave a core and a penumbra.8 However, for Hart this indeterminacy is merely linguistic: his theory is basedon a distinction between the core and penumbra meaning of words. There is a settled area, the core, inwhich the meaning of words (and therefore of rules) is uncontroversial, and a realm of uncertainty which ischaracterized as penumbra where there can be disagreement due to the vagueness of terms and the open-textured quality of language. In Hart’s view, these disagreements can be resolved by reference to the settledcore of meaning which limits the boundaries of all disputes over the meaning of a word or term.

The issue of the indeterminacy of law has been put most strongly by critical (CLS) and post-modernistlegal scholars, although the origins of this perspective lie in Realist legal theory.9 These theorists argue thatlegal doctrine is internally contradictory, and as a result the legitimacy of legal decisions is suspect and therule of law undermined. The antinomies, inconsistencies or contradictions of legal doctrine and legalreasoning mean, for some, that judges, by engaging in legislative decision-making, impermissibly usurp therole of the legislature and the efficacy of consent.10 For the most part, critical legal theorists, in theiranalysis of the indeterminacy of legal doctrine, attempt to demonstrate that the law is incoherent andcontradictory and that there is no meta-principle or norm which is capable of reconstructing the unstable andhighly contingent ‘patchwork quilt’ that comprises legal doctrine (Altman 1986; for a critique of Altman,see Balkin 1991:1145–53). As a result, liberal law is contradictory and there are no foundations for legaldeterminacy.

Thus, for CLS scholars, the indeterminacy critique is central to their attack on liberal legalism andformalism. Formalism is based on the idea that law is a closed system which contains all the resourcesnecessary to justify its actions.11 It is predicated on the claim that there is an internal principle of unity thatstructures and controls the legal system; thus, Kelsen (1967:299) considers that the law regulates its owncreation. Formalism has tended to support law’s claims to objectivity, neutrality and consistency, because itimplies that the mechanical application of legal rules provides a basis for constraining interpreters andjustifying the values purportedly embodied in the rules. The radical critique aimed, by exposing theindeterminacy of rules, to show that the process of adjudication reflects and embodies deeper differences atthe level of society. Thus, Duncan Kennedy, in his celebrated analysis of the difference between rules and

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standards in the context of contract and tort law, aimed to deconstruct the form of law and to show that rulestend to serve individualism while standards are consistent with altruist viewpoints (Kennedy 1976).

By showing the struggle between two competing and opposed conceptions of doctrine, Kennedyattempted to show that there are both individualist and altruist arguments that might be employed by a judgein every legal decision. Thus, for him, adjudication involves a choice between two competing politicalvisions: self-reliance, as reflected in rule-like forms, and altruism, reflected in the resort to standard-likeforms.12 The implication of Kennedy’s analysis is that deep structures of cultural meaning ensure thatindividualist or altruist arguments will support their respective positions. Hence, his argument appears todepend on the view that there is a deep system of structures, in which the elements are defined in terms ofdifference, and that each vision is dependent upon the other and, at the same time, denies its existence. Thethrust of the indeterminancy critique is that it is impossible to generate principled, coherent doctrine.

From a different perspective, Unger (1987) offers a sociologically informed critique of liberal legalismwhich stresses the importance of the indeterminacy of both legal doctrine and social context. Unlike theindeterminacy critique advanced by Duncan Kennedy, which posits an irreducible conflict between world-views, expressed in the divergence between rules and standards, Unger’s theory rejects structuralism; heopens up the possibility of social-structural change, accepting that there is no constant human nature. ForUnger the law is contradictory and indetermin ate because the liberal forms cannot be maintained as a resultof the transformation of the state into a modern regulatory state. Unger argues that the breakdown of thenineteenth-century liberal legal order, and the transition to the regulatory law of the welfare state, leaves thelaw caught in a contradictory logic: on the one hand, the political requirements of the welfare state havebeen absorbed into the law in terms of goals and purposes which are realized through administrativediscretion; and, on the other hand, the classical private rights complex functions with different techniques topenetrate the community to accommodate the institutional framework of society. The introduction of socialwelfare law subverts the formal qualities of classical law (symmetry, certainty, generality, and so on). Thiscombination produces an inability to balance the political demands for results with the classical formalistrequirements of the rule of law model. For Unger, paradoxically, the private rights complex originallyrepresented one side of an earlier institutional compromise, one which involved the state granting the elitemore control over land, labour and wealth in exchange for allowing the state to develop an administrativesystem based on taxation and war. Unger’s hypothesis is that the origin of the private rights complex isbased on a different vision of society from the principles and aspirations embodied in the present system.

The indeterminacy thesis advanced by Unger suggests that an alternative vision of society can be workedout from the implications of indeterminacy, which he defines in terms of conventions and context beingindeterminate and the dislocation of objectivity from representation in language. Locating thetransformative potential in the notion of ‘negative capability’, Unger maintains that it is our capacity tobreak through a specific context of action which presents the possibility for us to reappropriate the alienatedpolitical and economic spheres and, at the same time, guarantees the possibility of personal transformationand freedom. Unger insists that the formative institutional context can be transformed through an exercise indeviationist doctrine which involves drawing out the alternative legal vision of the private rights complex inorder to demonstrate that certain elements were embedded in deviant forms in past legal arrangements andthat these counter-forms avoided instability and, as a result, form the basis of a transformed socialinstitution. However, Unger’s deviationist doctrine, and the subversive potential in exploiting contradictionsthat might shatter the liberal legal order, is limited by the fact that it relies upon the existing norms andideals in society as the basis for social-structural change.13

The concern of all these theorists focuses on how indeterminacy affects the authoritative decision-maker,usually the judge. There is little or no consideration of the way in which the characteristics of legal rules

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affect the social behaviour of legal subjects, nor for how this is mediated by lawyers, whose prime role it isto adapt and develop the forms of legal rules and concepts to the social transactions of their clients. Weargue that it is important to integrate some of these considerations regarding the indeterminacy of rules withthe recent sociological perspectives which emphasize the social structures and function of competitiveprofessions in exploiting paradoxes and inconsistencies in law.

The reality paradox and systems theory

Indeed, this point has been advanced, albeit from a different perspective, by Teubner, who argues that theproblem with the radical critique offered by critical legal studies scholars is that it ‘is not radical enough’(Teubner 1990:404). The general doctrine of indeterminism, as developed by critical legal studies scholars,focuses only on superstructural phenomena, such as legal norms, doctrine, institutions and decision-makingand, as a result, fails to expose the deeper point that law itself is based on a fundamental paradox.14 Theparadox of legality is that, in order for law to be determinate, it must be grounded in some super-norm.15

The problem for the rule of law is not to locate a ground (or foundation) of law, since there is no grounding,but rather to suppress the fact that we can generate paradoxical situations, and can accept contradictoryopinions as being both right and wrong, which unmasks the disturbing reality that we must invent excuses inorder to give authoritative answers. For Teubner, the work of law is to accept paradox, and that reality isparadoxical. The intuition here is that we are always already embedded in a paradoxical world and it wouldbe itself deeply paradoxical to attempt to locate or construct a de-paradoxical reality. Thus, the best way toavoid the perversion of paradox is to suppress the fact that law is founded on originary violence or power.

For Teubner, legal decisions are not based on any super-norm of justice; the system merely sorts claimson the basis of a simple binary code, legal-illegal. The simple process of differentiating legal from illegalacts necessarily involves the suppression of the paradox of self-reference. That is, the judge must suppressthe truth that there is no right or wrong, in order to follow the dictate of the binary code that a wrong beconstructed. The proper role for the interpreter is to avoid the problem of locating a transcendental groundfor law. The fact that the legal system is able to process these demands routinely, and without creatinglegitimation problems in every instance, is what makes it function.

Teubner argues that the function of contemporary theory is not to offer a general account of legalcontradiction or paradox. No such theory is possible since there are no practical solutions to thefundamental indeterminacy of law. For Teubner, the proper task for the radical indeterminacy critique is toextend it to understand that there are classes of legal indeterminacy which arise from other sources than theparadox of the legal system. Teubner understands the emergence of the new indeterminacy as beinginstantiated in balancing tests, the increased propensity to employ general clauses in contracts, and theemergence of sociological and economic-based jurisprudence (Teubner 1990:410). For Teubner, the relevanttheoretical perspective for extending the indeterminacy critique is autopoietic theory, since the problem ofindeterminacy is important at the level of the system’s own communicative contexts. In this regard,Teubner, unlike critical legal studies theorists, attempts to ground the indeterminacy analysis at the level ofreal operations within society. For Teubner, indeterminacy is created when a communication sub-systemadapts to another system’s self-description. Indeterminacy is a function of the interaction of autonomousbut overlapping communicative contexts; while the internal codes which ensure self-reproduction remainintact, the interference that results creates conflict between the system and operation of its environment, andthe influence of the environment within the system.

Teubner views the legal system not as a coherent whole, but a series of self-enclosed sub-systemsreflecting the functional differentiation of society; thus, conceptual and normative conflicts between the sub-

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systems are unavoidable. It is the very indeterminacy of legal principles, such as general clauses incontracts, that provides the mechanism for reconciling the conflictual logics of sub-systems. The highdegree of flexibility mani-fested in these clauses, for example ‘good faith’ clauses, provides an efficientmechanism for reconciling the legal disputes between the various sub-systems (Teubner 1990). Diversesocial demands and conflicts, resulting also in state intervention, produce the materialization in private lawof general clauses, which provide the legal means for co-ordinating contradictory social demands. Unlikecritical legal scholars, Teubner concludes that legal indeterminacy is a functional mechanism whichameliorates the disabling effects of the paradox that there is no foundation for law. That is, the legal systemis capable of creating internal mechanisms which stabilize the intersystemic conflicts, through the recursiveself-generation of ‘eigenvalues’ which creates the potential of social regulation through law (Teubner 1990:408–9, 420–5; see also Teubner 1992).

However, the systems theory approach concerning indeterminacy is problematic in several respects.While indeterminacy is clearly a prominent feature of regulatory systems, this does not mean that realityitself is inherently paradoxical. Zolo argues that ‘[a]ttributing to “reality” a circular structure not dependenton (the circularity of) knowledge amounts to violating the premise of the circular and “closed” nature of thecognitive process’ (Zolo 1991:77). As regards the claim that law is a closed system —closed off fromexternal sources and capable of reproducing its own operations through its own structures—the basicquestion is whether autopoietic systems are indeed self-regulating.16 To suppose that reflexive autopoieticstructuring can obtain stability suggests, as Frankenberg has argued, the emergence of an invisible handwhich operates to produce stability and order from chaos (Frankenberg 1989:382). Accordingto Frankenberg, systems theory, by employing the concepts of structural coupling and interference, createsthe possibility of reforming self-contained systems. The problem is that Luhmann and Teubner, on the onehand, wish to enclose the legal system, but on the other hand, insist that it be sufficiently open to differentoperating principles in order to create the conditions for internal reconstruction. Nevertheless, despite thelimitations of systems theory, the attempt to locate indeterminacy within the material realm constitutes insome ways an advance over critical legal studies’ formulations.

Bourdieu: the generation of normativity through social practices

A sophisticated post-structuralist sociological approach is provided by the work of Pierre Bourdieu. ForBourdieu the autonomy of law results from the competitive struggle of lawyers to assert their influence inthe social system by asserting the right to declare or state the law. Thus, lawyers generate the abstract andformal principles characteristic of legal norms and doctrines, and their special knowledge of theseprinciples, and skill in operating the distinctive linguistic processes of the law, guarantee both the autonomyof the legal field and the monopoly of lawyers’ access to it.

The body of legal doctrine is, for Bourdieu, a symbolic order which at any particular moment delimitswhat is possible; although legal doctrine appears, due to its autonomy and its abstract and formal nature, tobe a closed and coherent system which generates outcomes from its own internal logic, it does not,according to him, possess the principles of its own dynamic. Both this dynamic, and the conditions ofexistence of legal reasoning, derive from the operation of the objective relations between agents and of theinstitutions of the legal field. Thus, the legal test is the focus of straggles because its interpretation is ameans of appropriating and influencing the symbolic power which it contains; however, this is not a closedhermeneutics, since the interpretation of legal texts must have a practical effect. Although jurists can putforward competing interpretations, they must operate within the hierarchy both of institutions and norm-sources which defines the authority of legal decisions.17 At the same time, the competition between

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interpreters in putting forward their versions and developments of legal doctrine is limited by the necessityof presenting them as rational interpretations of recognized texts. Bourdieu describes the ways in which thetwo major effects of neutralization and universalization are produced by the characteristic linguisticprocedure of law, such as the use of passive constructions and impersonal phrases; far from being a simpleideological mask, this rhetoric is the result of the continual process of rationalization which has overcenturies constituted the universalizing posture which is the spirit of law.

While Bourdieu provides a very strong explanation of how the legal sphere is constructed, he is muchless clear on why abstract formal rules play such an important part in the reproduction of social relations.He presents a very Weberian view that legal rationality offers predictability and calculability (Bourdieu1987:833). Yet Bourdieu himself accepts the Legal Realist critique that rules can never be merely applied tonew cases, and that texts ‘can go so far as complete indeterminacy or ambiguity’ (ibid.: 827). For him, it isthis indeterminacy which gives not only judges, but more importantly the various groups of competing legalprofessionals, the power to explore and exploit it by using their resources and techniques to generatealternative rules which they can wield as symbolic weapons. If the promise of consistency and predictabilityoffered by the formal-rational nature of the legal universe is illusory, whence comes its legitimacy?

For Bourdieu the power of law seems to derive from the effectiveness of legal symbols in giving the ‘sealof universality’ to social practices (ibid.: 845). Legitimacy is imposed in the social order through symbolicdomination. In explaining how the promise of predictability is fulfilled, Bourdieu again emphasizes thesocial practices of professionals. Here he introduces his key concept of the ‘habitus’:

the juridical field tends to operate like an ‘apparatus’ to the extent that the cohesion of the freelyorchestrated habitus of legal interpreters is strengthened by the discipline of a hierarchized body ofprofessionals who employ a set of established procedures.

(Bourdieu 1987:818–19)

The habitus is defined as ‘the system of dispositions to a certain practice… an objective basis for theregulation of behaviour, and thus for the regularity of modes of practice, and if practices can be predicted…this is because the effect of the habitus is that agents who are equipped with it will behave in a certain wayin certain circumstances’ (Bourdieu 1990:77). Note that the habitus, which is constituted by second-orderobjective structures, is the repository for the strategies of distinction which various actors employ in theirstruggles with and against other actors within the autonomous field.18 Serving as the mediation betweenexternal structures and action, the habitus ‘est createur, inventif, mais dans les limites de ses structures’(Wacquant, in Bourdieu and Wacquant 1992:26).

Thus, the repertoire of behaviour is structured and limited by the habitus, although it permits a range ofcreative invention which obeys a practical logic. Bourdieu argues that the notions of the field and of habitusmust be understood as interactive concepts in order to avoid the twin charges of determinism andfunctionalism (e.g. Bourdieu 1992:102–15). Thus, he states that the habitus becomes active only in relationto the field and that the habitus may generate a different trajectory of strategies depending on the state of thefield (Bourdieu 1990:116–19). However, it has been argued that Bourdieu presents an ‘unrealisticallyunified and totalized con cept of habitus, which he conceptualizes as a vast series of strictly homologousstructures encompassing all of social experience’ (Sewell 1992:16). The habitus, which is responsible forthe social dispositions of agents and for framing the range of possible actions has a strong conservative bias.This rather static concept is unable to explain how change occurs internally to itself. Thus, Sewell argues,‘Bourdieu’s habitus retains precisely the agent-proof quality that the concept of the duality of structure issupposed to overcome’ (ibid.: 15). Bourdieu’s requirement that these structures are all homologous is far

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too demanding, because society is not so cohesive and there is a range of competing and overlappingstructures. Hence, a more dynamic account of change would loosen the strict requirement for homologybetween the symbolic struggles within the juridical field and the political and economic transformationsoccurring outside it.19

Within the juridical field, Bourdieu argues that it is the legal scholars and theorists who generate the formalabstractions whose universalizing tendency is the source of the symbolic power of law. Judicialinterpretation adapts these general rules to particular cases.20 But above all, Bourdieu emphasizes the role ofcompeting groups of practising lawyers and other professionals, who mediate the application anddevelopment of formal rules to social practices and reality, by marshalling varying degrees of technical skilland social influence.

For Bourdieu the indeterminate nature of legal rules is central, since it is the source of the power ofprofessionals as mediators between the realm of formal law and the economic and social practices of theirclients. Bourdieu’s focus on the practices of competing professional groups, with varying degrees of skilland symbolic capital, provides a very different perspective from that of critical legal scholars. As Coombe hasargued, Bourdieu’s position avoids the problem of essentialism which besets the structuralist theory offeredby Kennedy, and by interpreting the legal field in terms of conflicting straggles among competing legal actors,Bourdieu achieves a dynamic notion of legal practice; one that is defined in terms of the social dispositionsand norms of the competitors which are shaped and structured by struggle (Coombe 1989:103–11).Bourdieu’s theory of the juridical field constitutes an advance on the views advanced by critical legalstudies because he examines the practices and dispositions of habitus and explains them in terms of theobjective elements of social life. Bourdieu clearly understands that the juridical field shapes and structuresthe dispositions of legal actors and that legal rules are predictable largely as a result of the homogeneity ofthe habitus. Thus, the law is determinate to the extent that diverse groups within the juridical field acceptthe legal conventions. In this respect, Bourdieu offers a theory of legal constraint based on the culturalpractices that shape the legal habitus (cf. Balkin 1991:1149–53).

Bourdieu acknowledges that Luhmann’s notion of self-reproduction of a sub-system is superficiallysimilar to his own concept of the autonomy of fields (Bourdieu and Wacquant 1992:79), in thatdifferentiation and autonomization are central to the respective approaches. However, he parts companywith systems theory by rejecting its functionalism and organicism.21 Bourdieu considers that Luhmannmakes a simple category mistake by confusing the symbolic domain with the social field in which it isreproduced. Bourdieu’s claim is that the juridical field is only potentially autonomous since, on the onehand, it is structured and shaped by its own norms and practices, but on the other hand, it is influenced bysocial, cultural and economic forces outside it. In this regard, Bourdieu’s account, unlike systems theory, iscapable of explaining how legal actors are affected by extra-legal forces and how struggles outside thejuridical field are refracted into the field. While we have seen that Luhmann and Teubner see law as aclosed system which is in contact with the external environments, but only learns and re-structures fromperturbations produced within the system, Bourdieu’s notion of the autonomous field requires a socialprocess of intermediation in the confrontation of texts and procedures with the social realities that they aresupposed to express or regulate (Bourdieu 1987).

Bourdieu’s theory of the legal field offers an important approach for understanding indeterminacy since itaccounts for regularity and predictability in legal doctrine largely in relation to the social structures whichconstrain and structure legal rules and their application. Bourdieu’s approach avoids the structuralism ofcertain critical legal studies approaches while at the same time it does not reify the legal system or suppressthe importance of possible external sources of critique.

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Beyond Bourdieu

Bourdieu provides a powerful account both of the characteristics of legal reasoning and of the conditionsand processes of its production, which goes a long way towards an explanation avoiding the dilemmabetween idealism and economism. However, we would like to indicate what we consider to be weak pointsin the argument, and develop the analysis in the context of the study of business lawyering. The centralproblem is with Bourdieu’s account of juridification and of the relation of the lay person and of social‘reality’ to the legal field. His claim is that this relationship is structural, in that the process which heidentifies as the main dynamic of autonomization of the legal sphere is the ‘spontaneous logic ofcompetition’ between agents asserting specific competences. We argue that Bourdieu over-stresses the roleof the professional in the autonomization of the legal field, and under-emphasizes the social need for lawand the contribution that law makes in the reproduction of social reality.

In Bourdieu’s account, the world-view of order offered by law is powerful yet illusory. The social powerof legal professionals derives from their ability to create a demand for their services by offering a world-view of an order based on universal norms and the neutralization of particularisms, and in transformingirreconcilable conflicts of interest into an appearance of exchanges between equal subjects regulated byrational argument between independent professionals before a neutral arbiter. But the offer is a spurious one.First, the capacity to perceive an incident as an injustice, which is the source of the demand for law, is not‘natural’, but the result of a construction of social reality mainly by professionals generating the feeling ofentitlement, the revelation of rights (Bourdieu 1987:833). Second, the elasticity and ambiguity of legal textsmeans that judicial decisions involve an element of choice which is either arbitrary or derives its contentexternally, from the social or economic preferences of the judge. The conformity of decisions with thesystem of abstract rules is essentially an ideological matter, reinforcing the symbolic power of the legalsphere, which is exerted by the social acceptance of the decision as legitimate despite its arbitrariness. Thepractical efficacy of a legal decision, for Bourdieu, rests in its applicability in the everyday realm where thematter originated. This double function of law produces two poles around which the types of lawyercoalesce: on the one hand, the theoreticians, whose role is the elaboration of pure doctrine, and on the other,the practitioners, who take care of the necessary adjustment of pure principles to social reality and for whomthe interpretation of law must be evaluated by its applicability to the particular case.

To begin with, an empirical objection can be made, that this distinction in roles appears based on thecontinental European tradition, in which judges or magistrates tend to decide on the basis of thepracticalities of the situation, while academic lawyers are the guardians of the purity of doctrine. Incontrast, in the common-law tradition, particularly in English law, it is the judiciary which tends toemphasize legal autonomy, especially from politics, and the importance of basing decisions on doctrinalexegesis, whereas academics often criticize their judgements for failing to take into account social ‘reality’or practical implications.22 However, the existence of two ‘poles’, of pure and practical law, is a structuralrequirement according to this theory, hence it is not of major concern which particular group carries outeither function.

A more fundamental difficulty is that, in identifying power with the control of access to legal resources,Bourdieu treats control as concerned exclusively with the ability of certain social agents to appropriateconflict. In contrast, an examination of situations in which social actors actually do invest resources toimprove their access to the legal sphere shows that by doing so they do not challenge the autonomy of law,although they may increase their control over lawyers. Though members of the dominated classes generallyhave low access to law, they can in some circumstances become specialized in aspects of concern to them:for example, in the case of ‘jailhouse lawyers’ who develop specific skills in the filing of appeal petitionsand other procedures (Milovanovic 1988). More central to our concern with business lawyering is the

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growth of in-house corporate law departments, which permit a large firm to internalize routine legal aspectsof its transactions and create a better basis for it to evaluate and control its external legal contracts (Chayesand Chayes 1985). To be sure, it can be said from a Bourdieuian perspective that this ‘competition’ from theperiphery of the legal field merely pressurizes independent lawyers to invest further in legal autonomy andrationality. Our point, however, is that such investment must show an economic return and cannot be basedon a merely ideological power. Large corporations, especially when they have their own in-house counseland are dealing with others similarly situated, do not resort to outside lawyers only due to acceptance of theideology of professional autonomy. The in-house counsel movement has certainly had a strong disciplinaryeffect on the legal profession in the US, and probably does so also in other countries, such as Germanywhere bank lawyers play an important part in business lawyering (Hartmann 1991). In the US the evidenceis that internalization of legal services was part of the general trend of pressures on corporate managementfrom capital markets to reduce costs, with the end of the era of uninterrupted corporate growth.Internalization reduced the costs of much routine work and capped expenditure on some outside work,notably litigation, but stimulated new areas of work for the independent firm, in specialized transactions,regulatory work and the breakdown of business relationships (Chayes and Chayes 1984). This has led to theemergence of new ‘boutique’ firms and undermined the old general-purpose commercial law practice,creating new tensions between the professional ideal and the increasingly bureaucratic organization of theelite law firm (Nelson 1988).

Both the example of the jailhouse lawyer and the corporate in-house counsel show that the client is notstructurally excluded from the legal field, but can develop independent legal expertise, either where it iseconomic to do so, or where there may be another gain, for example in social prestige (e.g. in the jail).Bourdieu’s account offers a distorted characterization of the power of the juridical field to exclude laypersons. In our view it is necessary to accept that, since social relations are reproduced partly through law,social actors are always already (partly) within the juridical field; but they possess varying degrees of skills,time, resources and inclination to monitor the legal professional.

For Bourdieu, the main effect and purpose of creation of the legal space is to secure a monopoly forlawyers, who have invested in the acquisition and the generation of the specialized knowledge andtechniques, and to exclude the lay person, whose everyday, common-sense understanding is confronted by asharply different mental universe. Largely a by-product of this alchemy is the neutralization effect, in whichirreconcilable con flicts of interest are transformed into regulated and rational arguments between equalsubjects or parties. This embodies a vision of social order, backed by state powers and sanctions, which byits symbolic force consecrates and helps to create the social world. Its force is symbolic, in that it can onlybe effective if it is accepted even by those whom it dispossesses. In Bourdieu’s account there is a dual basisfor this effectiveness. On the one hand, it is essentially ideological, in that the vision of order projected bylaw, which is a universalist one transcending particularisms, is merely a deception since its pure principlesmust be adjusted to reality by arbitrary or political judgements. On the other hand, he accepts that there is asocial reality to the symbolic efficacity of ‘formal rational’ law, and that it does provide predictability andcalculability, as argued by Weber. However, these features of the formal rigour of law are only available tothose who can gain access to the specialized realm of pure law.

Hence, the powerful reinforce their positions through law in two ways. First, because the judges andothers with legal competence come from the same social stratum and share their ethical and politicaldispositions, their interests are more likely to be reflected in the process of adjustment of pure law to socialreality. But second, to the extent that pure law can offer a realm of formal rationality, access to theseadvantages is the privilege of those who can purchase legal advice. Although a shift in the balance of socialforces in favour of dominated groups can produce a differentiation in the legal sphere, by the introduction

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of consumer law, labour law and social law more generally (with an emphasis on public as against privatelaw and the creation of special tribunals as against the general civil courts), this is essentially integrative. ForBourdieu, law is essentially conservative; although he says law creates the social world, it does so on thebasis of existing structures, since its effectiveness depends mainly on its being adjusted to those existingstructures. A creative or prophetic vision is possible, especially in periods of revolutionary crisis, but generallyeven a creative vision of law can only consecrate a process which is under way. Hence a critique of law, andthe generation of a basis for social change, must be sought outside it. So for Bourdieu, as for many othersociologists of law, law is internally coherent and in its own terms rational; the problem lies with restrictedaccess. His position is on the radical wing, in that the implications of his position are not that access shouldbe improved but that law should be abolished.

We argue that Bourdieu’s picture of the realm of law can be brought into a different focus, with differentimplications, by accepting that the legal sphere plays its part in the reproduction of social reality byinteractions with other equally fetishized spheres, notably the economic realm, which is mediated by money.To the extent that the legal sphere contributes to the reproduction of social relations it has a functional andnot merely illusory role; however, there are deep structural contradictions in this role, a distorted reflectionof the broader social contradictions. The process of abstraction by which legal reasoning produces andelaborates formal legal rules results in norms which purport to regulate social conduct; as Bourdieucorrectly points out, their abstract nature entails indeterminacy, since they can only receive substantivecontent by interaction with other social spheres. Nevertheless, this indeterminacy is functional, in that itprovides the flexibility and adaptability which permits law to contribute to the dynamic of social change.We do not say that this is necessarily a positive or ameliorative dynamic; simply that social change isgenerated partly through law, and hence that lawyers can play a creative or contributory role in suchchange.

THE REGULATORY PROCESS AND THE DYNAMIC OF BUSINESSLAWYERING

In this section we pull together some of the points made until now, and sketch out a framework for theanalysis of business regulation and lawyering, which will be applied in the final section to the specific exampleof the regulation of financial market transactions and the prohibition of insider trading.

Markets cannot exist without rules, and the regulation of market transactions takes place through layersof rules, formal and informal. Rules emerge through the need to mediate economic transactions by referenceto a framework of generally understood and articulated expectations about behaviour and conduct.Regulation is essential to the operation of any system of social organization; but the generalization of socialrelations mediated by commodity circulation resulted in the autonomization of the state, which legitimizesthe definition and allocation of property rights, and ultimately guarantees the enforcement of those rightsand their circulation. It is the combination of economic relations mediated by markets, and politicalprocesses dominated by the state, through which social relations are reproduced. That combination ismediated primarily by money and by law.

This is not an automatic process, nor one that flows logically from the development of economic andsocial relations. Hence, it is important to understand the ways in which the forms taken by social andeconomic activities have developed historically, and the role that regulation has played in that development.There is no space here to give more than a brief indication of the main phases of development of theregulatory frameworks which have helped mould the institutional and transactional patterns of corporatecapitalism. The key formative period of 1865–1914, between the American Civil War and the First World

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War, was marked by the great depression of the late 1870s and early 1880s, which stimulated theconcentration of capital and the establishment of the first large-scale major com panies. During this period,the leading capitalist countries established the basic legal framework for the institutionalization of corporatecapital, through the liberalization of the right to incorporation and of the main institutions of propertyownership and transfer, including industrial and intellectual property rights. Although there was significantinternational discussion and debate, and cross-jurisdictional transplantation and emulation, there weresignificant national divergences. Notably, while the US, during the ‘progressive era’ evolved a liberal‘regulated corporatism’ (see, e.g., Sklar 1988), elsewhere the state played a more direct role: in Germany,within a formalized framework, which included state-supervised cartels, whereas in the UK the longerhistory of the centralized state and greater homogeneity of its ruling groups permitted much more informalsupervision of business and industry. These patterns were generally further consolidated during the 1930s,following the crash of 1929, notably with a significant revamping of the US regulatory arrangements duringsuccessive Roosevelt administrations, especially the establishment of the Securities and ExchangeCommission in 1933–4, and the revitalization of antitrust law enforcement after 1937. After 1945,American influence led to some regulatory transplantation, especially of antitrust laws (for example, toJapan and Germany), but as the post-war boom gathered momentum after the end of the Korean War, theregulation of the institutions, structures, practices and transactions of business was of relatively smallconcern. The period since the mid–1960s has seen a trend towards formalization or juridification ofbusiness regulation in many fields. It has also been marked by international conflicts of regulation, resultingfrom the application of national regulation to increasingly internationalized business (Picciotto 1983).Finally, during the 1980s, although there has been a significant process of national deregulation, it has beenaccompanied by equally important patterns of and attempts at re-regulation, to establish internationally co-ordinated controls over global business.

From this brief outline it should be clear that the development of regulation takes place in response toboth political and economic processes. While major events, such as war or depression, have broad politicalrepercussions and often lead to radical changes in regulatory forms, the continual operation of economic andpolitical processes also produces changes, generally at the micro level. A key failure of legal regulationwithin capitalist market economies generally is that they aim to produce and maintain equalization of theconditions of competition: hence their basic ideal or feature is equal treatment or rule-fairness in relation tosimilarly situated economic actors. However, competition is not a static state but a process. Furthermore,economic actors are quite different in their factor endowments, market power and sunk investments, sorules affect them differently. Moreover, the very operation of a regulatory system produces inequalitiesresulting from competitive advantage. Hence, an important function of the process of interpretation,application and enforcement of rules is to resolve the persistent antinomies resulting from rule-structuredmarket transactions. For that reason, a regulatory system by nature is not a static but a continually evolvingand dynamic process. The interpretation involved in the application of rules to specific transactionsgenerates modification, supplementation and amendment.

A key role in this process is played by the private lawyer whose job is to structure a client’s businessstrategies and transactions to optimal advantage in relation to the regulatory framework. This often involvesroutine ‘compliance’ work, ensuring that transactions conform to the bureaucratic formalities of theregulatory arrangements, or are kept within the accepted understandings of the regular players. Notinfrequently, however, often in small and sometimes in major ways, the lawyer may play a ‘creative’ role.This may entail, for example, achieving an economic objective desired by the client, which is impeded by aregulatory obstacle, by devising a new legal means; or the lawyer may find significant cost-savings for aclient by new ways of structuring a transaction, by creating new legal forms or adapting existing ones to

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new ends. Such creativity can lead to the development of major new legal and institutional forms (such asthe holding company), as devices become generalized through competitive legal practice. However, legal‘creativity’ raises constant ethical, political and economic (as well as legal) issues, as it probes the limits ofthe existing regulatory patterns.

The problem of regulatory compliance is the chief concern for state officials. As we have seen, legaltheorists and economists have addressed the problem of rule avoidance and compliance in terms of theconflict between rules and their interpretation. Until recently, regulatory theorists assumed that legal ruleswere common knowledge and that there were static incentives for compliance. The static rule frameworkwas based on the view that legal rules were fixed and assertable and that parties self-select, given theirpreferences, to follow the rule. As we have noted above, modern legal theory has pointed out that legal rulesare moderately indeterminate, and that the uncertainty in legal rules results from the competitive struggle todefine the rule and the fact that interpreters can, within certain boundaries, select an interpretation. In thisperspective, legal rules are the result of interpretations of regulators and judges who justify their decisions withthe aid of rhetorical practices (Fish 1993). This contingency of law leads some CLS theorists to infer thatlaw must therefore be politics and hence illegitimate; whereas it delights pragmatists, like Fish, who arguethat it reflects the inherently contingent and historical quality of interpretation generally. The implicationfor regulatory theory is that indeterminacy permeates the regulatory domain and there is always movementin the juridical field to assert new interpretations in order to modify the impact of legal rules.23

THE REGULATION OF INSIDER TRADING

Against this background, we now turn to discuss the role played by business lawyers in mediating some ofthe changes in the financial services sector, focusing especially on the major scandals in the US during the1980s and the debates about the interpretation and enforcement of the ‘insider trading’ rules.

Risk, trust and property in information

As in any area of economic regulation, the role of legal rules in mediating financial transactions is expectedto be to ensure a ‘level playing-field’. The demands for fairness, in this context, result from expectationsunderpinning the functioning of financial markets (Giddens 1990:24–7) and their accompanying regulatoryinstitutions. Financial market transactions, like all exchanges, require a basis of trust between the parties;this is especially important since such trading is particularly impersonal, taking place between parties whomay not even know each other’s identities, and particularly abstract, since it concerns subject-matter withlittle content other than price. In such circumstances, trust is only possible if risk is kept within acceptablelimits (Luhmann 1988a:36–46).

Perhaps the most important force driving financial markets is information. It is not surprising, therefore,that rules governing the disclosure of information should be central to the stabilization of expectationsabout risk, and thus to the maintenance of the basis of trust necessary for the functioning of such markets.However, the issue of information disclosure involves a central contradiction. Profitable trading results fromcapturing the value of private information, which would be negated by disclosure; hence, an obligation todisclose removes the economic incentive to acquire information, and would impede the flow of activetrading (Fischel and Ross 1991:509) by participants who believe they have advantageous knowledge orsuperior analysis. On the other hand, many investors would be repelled from markets if they perceive themto be ‘rigged’ by privileged knowledgeable insiders.

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Hence, it is in the characteristics of financial market transactions themselves that can be found both theneed for rules, as a means of reconciling expectations and creating trust, as well as the reasons for theirinstability. The market requires a regulatory framework, inter alia to define the legitimate limits of propertyin knowledge. The abstract and formal nature of the rules helps to legitimize the terms of trading, whiletheir relative indeterminacy provides the flexibility which can accommodate divergent expectations betweenthe parties. The particular skills of legal professionals lies in acting as intermediaries between the realm ofabstract-formal legal rules, where the general interests of market participants is debated and reconciled, andthe practical realm of specific transactions, where the professional can and must exercise the creativitypermitted by the ambiguities and indeterminacy of the rules to facilitate a deal or resolve a conflict causedby a failed transaction. As this creativity is also used on behalf of clients in the competition between marketparticipants for competitive advantages, it can contribute to the destabilization of the regulatory systemwhich results from the dynamic of the markets.

The origins and basis of the prohibition of insider trading

Historically, trading in financial securities was regulated only under the general law of contract and fraud.The emergence of a more specific regulatory regime took place in the US, following the general loss ofconfidence due to the collapse of the stock market in 1929, and the resultant widespread lack of trust andgeneralized belief that dishonesty permeated the financial markets. The need for regulation to restoreconfidence was argued by eminent lawyers who were also public figures, notably Brandeis, who published acritique of Wall Street (Other People’s Money) in 1933. Congress enacted legislation in 1933 and 1934which regulates the issuing and registration of securities (Securities Act of 1933), and the purchase and saleof securities (Securities Exchange Act of 1934). The 1934 Act also established the Securities and ExchangeCommission, a regulatory body of a fairly classical corporatist type: the Commissioners are eminentprofessionals who direct the policy, while the official staff are charged with its implementation.

The main target of the legislation was market ‘manipulation’. However, this is a far from precise concept,and defining its scope involves significant economic and political issues, as well as affecting numerousvested interests. The legislation of 1933–4 included several specific provisions outlawing particularpractices. Thus, s.16(a) of the 1934 Act required corporate executives to register their holdings of thecompany’s stock, while s.16(b) introduced the ‘insider’s short-swing profit rule’ requiring such insiders todisgorge to the company any profits from trading in its securities within a period of six months. The 16(b)rule was very narrow and easily avoided, since it did not cover trading in the shares of related companies,nor tipping, nor ‘stringing out’ trades beyond the six-month limit. In addition to such relatively specificrules, the 1934 Act also included a sweeping provision (s.10(b)) making it unlawful in connection with anysale or purchase of securities to ‘use any manipulative or deceptive device or contrivance in contravention ofsuch rules and regulations as the Commission may prescribe’.

Whether and to what extent trading with privileged or inside information might amount to or should betreated as fraud was unclear, and had been the subject of some academic and judicial debate. Common lawfraud generally required a deliberate and explicit misrepresentation. Hence, mere silence or the failure todisclose was not actionable, unless there was a basis for an obligation to speak, such as a confidential or afiduciary relationship. Although the Supreme Court in Strong v. Repide (1909) had found that theconcealment of his identity by a manager purchasing from a minority shareholder did amount to fraud, thisseemed based on the special circumstances of a close relationship rather than the mere manager-shareholderlink, which made the concealment fraudulent. Some argued that company executives were in a fiduciaryposition by virtue of which any trading by them in the firm’s securities should be regarded as tainted;

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however, it seemed too extreme to prohibit all trading by executives, and other theorists preferred to point tothe need for disclosure by any person (not only managers or employees) trading on privileged information,which could also make avoidance more difficult by limiting the passing on of the information (Manne 1966:ch. 1).

In the face of the inadequacies of narrow anti-fraud rules such as 16(b) and 17(a), the SEC in 1942approved regulations under the broad powers of s.10(b), including Rule 10(b)–5, which much later becamea key and hotly contested provision. Within the framework of a still very general rule against fraud, Rule 5made it unlawful:

To make any untrue statement of a material fact or to omit to state a material fact necessary in order tomake the statements made, in the light of the circumstances under which they were made, notmisleading.24

Initially, this provision was very little used. Overall, the rules and their enforcement merely routinized andnormalized the disclosure of holdings by executives, as well as others purchasing large blocks of shares;this favoured larger issues of securities (Easterbrook and Fischel 1991:277–9). The 1930s New Dealreforms, which involved the delegation of regulation to self-regulatory bodies, including the stockexchanges and dealer organizations, served to eliminate competition and restore political legitimacy to themarkets (Moran 1991:30–1).

It was only in the 1960s, and based on private actions by shareholders and purchasers, that the issue ofconcealment of privileged information was brought to the fore. By 1965 there had been an appreciableincrease in the number of private actions citing s.10(b)–5: in 1962–4 the number of cases citing 10b–5 wereover 50 per cent more than those for the two prior decades, 1942–62 (Manne 1966). From the 1950s to theearly 1970s the SEC contributed very little in the way of control of insider trading, even though it was clearfrom the empirical studies that there was significant non-disclosed trading on insider information;particularly in the context of unannounced merger plans.25

The uncertainty of the disclosure rule and the conflict over the misappropriationtheory

The activation of the obligation to disclose by means of civil actions brought by the SEC, as well as majorcriminal prosecutions by the Department of Justice, began in the late 1970s,26 resulting from major changesin financial markets. In particular, the opening up of trading in share futures substantially increased thepotential value of privileged information, since very little capital outlay was needed to take a position on thepossibility of a price movement. At the same time, the financial boom, creating much greater marketcompetition, led to major institutional changes and the arrival of large numbers of newcomers both asemployees and major traders. These changes destabilized the previous regulatory regime based onunderstandings among the WASP leaders of the major financial institutions and professional firms.

While the vast bulk of cases initiated were resolved by out-of-court settlement (as is usual in white-collarinfringement actions),27 some key actions were litigated to conclusion, exploring the ambiguities and limitsof the legal rules. The basis for more active enforcement had been laid in the early 1960s, when WilliamCary, as Chairman of the SEC, supported the deployment of the fiduciary duty concept to establish anobligation on corporate insiders to ‘disclose or abstain’ from trading.28 The SEC’s reasoning was that therewas a duty to disclose material information obtained by company executives, employees and others, sincesuch information is obtained in the course of their work which should be to the benefit of shareholders. This

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still left very open the extent of the prohibition on the exploitation of such an informational advantage.While the more specific rules governing disclosure of share ownership and trading by executives might betoo narrow and easily avoidable, a broader rule dealing with privileged information could strike to the heartof the quest for informational advantages which provides an important dynamic for the markets.

Despite considerable doctrinal debate and some major litigation during the 1980s, including severallandmark Supreme Court cases, there remains a lack of clarity both in the formulation of and in the rationalebehind the insider dealing rule. In Chiarella v. United States (1980), the Supreme Court accepted that parityof information between trading parties could not be the aim, stating that ‘not every instance of financialunfairness constitutes fraudulent activity under s10(b).’29 The Court noted that the legislative intent of s10(b) did not support the parity of information rule and that ‘the problems caused by misuse of marketinformation had been addressed by detailed and sophisticated regulation that recognizes when use of marketinformation may not harm operation of the securities market’ (ibid.: 233). The SEC had secured convictionsagainst Chiarella, a ‘markup man’ employed by a well-known Wall Street financial printer, who by virtueof handling confidential documents for a takeover bid, was able to discern the names of the targetcompanies from information contained in the documents. Acting on these deductions, and withoutdisclosing his knowledge, Chiarella immediately purchased shares in the target companies and thereaftersold them after the takeover attempts were made public. The Supreme Court overturned the lower courts’decision, stating that since he was not in a relationship of trust to the shareholders he was under no duty todisclose.

The Chiarella decision sparked a heated theoretical debate, and obliged the authorities to shift to abroader-based theory that the duty to disclose was based on ‘misappropriation’ of information. Chief JusticeBurger, in a strong dissenting judgment in Chiarella, had argued that, in the context of Rule 10(b)–5, whatmatters is whether a party obtains information through fair means or simply misappropriates it unlawfullyfor personal gain, since such a party should not profit from ‘his ill-gotten informational advantage bypurchasing securities in the market’ (1980 445 US at 245). This appeared to provide a better grounding for aduty to disclose than the existence of a fiduciary relation, which covered only a limited circle of directemployees.

The major test of the misappropriation theory occurred in the litigation following the admission by a WallStreet Journal reporter, R.Foster Winans, that he had shared pre-publication information of the details of hiscolumn ‘Heard on the Street’, with a broker in a major Wall Street firm, in exchange for payments tohimself and his room-mate, David Carpenter. Winans argued that although he knew that his actions were aviolation of journalistic ethics, they were not illegal (Winans 1987:260). The information essentiallyconcerned the contents of forthcoming columns, hence the decisive moment in the pre-trial tacticalmanoeuvres was the production by the Journal’s officers of a 3½–page document stating the paper’s policyrelating to confidential information; despite Winan’s denial that this policy had never been made known tohim, this was the basis on which he and all those who benefited from the information he disclosed wereconvicted. Although the convictions were upheld by the Supreme Court, on the grounds that the Journal hadbeen defrauded of confidential use of its business information, the Court was divided 4–4 on whether themisappropriation theory was a valid approach (Carpenter v. United States, 484 U.S. 19 (1987)).

The enforcement process and restabilizing of the regulatory regime

Within the framework of the loose and developing doctrinal rules, the regulators conducted a processcombining guerrilla war and strategic bargaining with the major Wall Street houses, mediated by thevarious groups of lawyers involved. By the mid–1980s Wall Street was in the middle of an unprecedented

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merger wave and a raging bull market. The premium fees that investment banking houses were charging fortheir services in control contests created further competition and much public debate. There existedconsiderable public pressure on SEC Commissioners to step up their enforcement against insider trading,especially after the well-publicized Winans case and the persistent rumours circulating in the financial pressthat insiders were trading on confidential information in most of the hostile takeovers, which were occurringin greater frequency (Grunfest et al. 1988:311–32). Increasingly, critics of Wall Street’s freewheelingapproach had begun to link insider trading with hostile takeovers. Congressional democrats were makingsoundings to step up regulation against takeovers.

A new consensus gradually emerged that financial institutions, in order to promote further competitivegains, required an environment which was free from scandal and based on investor trust. This change inattitude resulted from the recomposition of the investment banking sector which occurred in the 1970s andearly 1980s. Stimulated by the competition which resulted after the 1975 SEC decision to deregulate thefixed-rate commissions on stock transactions, investment bankers, affected by the loss of secure profits,struggled to create new markets (Moran 1991:35–63). As a result, the established investment bankers joinedin with the newer investment bankers, like Drexel Burnham, to compete for other firms’ clients and to moveinto the financing of hostile takeovers. These changes upset many of the traditional social and professionalrelations on Wall Street; but at the same time, the changed commercial environment was threatened byallegations of unfairness which the practice of insider trading promoted in the minds of the public andlegislators.

The story of the chain of investigations leading from Dennis Levine through Ivan Boesky to MichaelMilken and others, involving a series of major prosecutions, has been widely recounted (see notably Frantz1988; Stewart 1991; as well as Oliver Stone’s film Wall Street). Although the underlying issue in thesecases concerned inside information, many of the prosecutions were on other charges, such as stock parkingor even registration failures. Virtually all the cases were settled out of court on the basis of plea bargains,the negotiation of which is the speciality of the white-collar defence attorneys, who are generally formerprosecutors.30 The outcome of these, and many other less-publicized cases, has generally been to punishprominent scapegoats, mostly Wall Street newcomers. Nevertheless, this was clearly a traumatic process,not only for the individuals who fell from positions of great financial power and immense wealth toimprisonment and obloquy, but also for their firms, which included some of the leading names of WallStreet.

That said, it is clear that the outcome has been the restabilization of a new regulatory regime based ongreater bureaucratization and juridification: the ‘increasing codification of rules, a more prominent role forformally constituted organizations, both public and private; and growing penetration of law into theregulatory system’ (Moran 1991:13). Thus, into the gaps left by the indeterminacy of the general legal ruleshave been inserted detailed codes of practice, patrolled by corporate compliance officers, who cultivate aclose relationship with the official regulators.31 Naturally, their prime task is to ensure that no harm comesto the institutions, and to minimize the number of individuals who may have to be sacrificed. The majorfinancial institutions and market professionals in general terms have an interest in safeguarding theirinvestments in more regularized processes of access to unique information, and in discrediting the moreunorthodox and informal channels used by the likes of Levine and Milken.

It is important to stress, however, both that the transition has not been smooth or predictable, and alsothat the new regulatory regime is far from being a model of formal rationality. In both these respects,therefore, we consider that it is necessary to go beyond a neo-corporatist theory such as that of MichaelMoran, who locates the cause of juridification in the institutional structures of meso-corporations andargues that the regulatory struggles of the 1970s and 1980s reflect the response to the ascendancy of

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multinational financial services firms, which operate increasingly in all major world markets. In Moran’sview, the regulatory changes, orchestrated by decisive state interventions, are shaped by the alliance withlarge market players (Moran 1991:124–35). While it is no doubt the case that the shifting alliance of privateactors and the state is responsible for the changes in regulatory form, we find that Moran’s thesis placesundue emphasis on almost deterministic changes in state structures, which fails to capture the dynamic andcontingent nature of the processes of change. We argue that a key focus must be the interactions of governmentand private-sector lawyers. Hence, juridification is the result of the strategic competition amongst differentplayers within the juridical field. On this account, the shape of the formal legal rules and the constitution ofthe juridical field depends, in part, on the specific power of the legal professionals to manipulate power fortheir interests. It is, however, the competitive interaction between the state and the professionals around thedefinition of the legal regime which creates juridification. The power of these professionals lies in thespecific skills which they control, of mediating the processes of legitimization entailed in relating the realmof abstract rules of law to the specific practices of economic actors. It is the indeterminacy of the abstractrules that leaves the space for creativity, which enables the reshaping of the regulatory regime.

NOTES

1 This was belatedly recognized by the inclusion in the massive three-volume comparative study edited by Abeland Lewis of a final chapter called ‘Bringing the Law Back In,’ which sketched some considerations for the studyof lawyers’ work. However, this project did not include any actual studies or analyses of lawyering.

2 The confidentiality of lawyer-client relations has been a serious barrier to access for a researcher, since anobservation study requires initial cooperation from the lawyer and then permission from each client, entailingpractical problems which may prevent a study taking place (Danet et al. 1979–80) as well as meaning that theinterviews observed are likely to be a highly selective sample. Nevertheless, some observation studies have beencarried out (Cain 1979; Sarat and Felstiner 1986). Research based on participant-observation has focused less onthe process of lawyer-client interactions and more generally on lawyers’ strategies (Mann, 1985; Flood 1991). Aninteresting study by K.Mann concerned a relatively small group of white-collar criminal defence attorneys in theSouthern District of New York, and began with in-depth, open-ended interviews, but was supplemented byparticipant observation, the researcher taking employment as an associate with one of the lawyers being studied(Mann 1985). Others have used their personal experience of law practice, focusing on a specific type oftransaction for which documentation is available, e.g. Gilson’s (1984) analysis of the role of lawyers in mergersand acquisitions focusing on the drafting of a corporate acquisition agreement.

3 Regrettably, the importance of this study was not recognized, and funding for a full-length study was notforthcoming.

4 Robert Gordon, in his important essay on the effects of the turn to corporate law practice on New York lawyersafter 1870 argues that law itself entails a legitimizing ideology, by offering ‘an artificial utopia of social harmony’(Gordon 1984:53); he argues that this universal vision was embodied in an ideal of law practice, rooted in liberalindividualism, which was undermined by the fragmentation of that order, a process to which lawyers contributedconsiderably, especially through their service of corporate power. This created a disjuncture between the oldideal of the law and the practical tasks lawyers were called upon to perform on behalf of clients, which was onlypartly remedied by the attempt to reconstitute a new progressive vision of the corporate lawyer, since the newsynthesis was too liberal-reformist to be acceptable to clients and the courts.

5 Gilson additionally points out that the major law and accountancy firms involved also act as reputationalintermediaries since, unlike the primary parties, they will expect future mutual dealings.

6 This was forcefully expressed in the Report of Derek Bok (himself formerly a business law teacher) as Presidentto the Board of Harvard University, cited both in Gilson (1984) and by several of the contributors to thesymposium on corporate law firms published in Stanford Law Review, 34 (1984).

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7 Gilson 1984:308, citing Akio Morita, former chairman of Sony.8 In his exchange with Fuller, Hart argued that words have a settled core meaning, but that in cases where there is

no core meaning the law is ‘incurably incomplete’ and interpreters by discretion decide penumbral cases. Thus,he states, ‘If a penumbra of uncertainty must surround all legal rules, then their application to specific cases inthe penumbra cannot be a matter of logical deduction, and so deductive reasoning, which for generations hasbeen cherished as the perfection of human reasoning, cannot serve as a model for what judges, or indeed anyone,should do’ (Hart 1958:607–8). Thus, Hart’s argument was that borderlines must be drawn, whereas Fuller arguedthat meaning is always tightly connected to the aim of the legal rule. Recently, Dennis Patterson has triedto reconcile the Hart-Fuller divide, arguing that while Hart is correct to draw hard lines in the law, Fuller is alsocorrect in claiming that the line should be drawn based on the ‘settled context of use.’ Hence, for Patterson, whatcounts is the formal element of the rule which makes the rule intelligible to an interpreter (Patterson 1990:961–3).However, Patterson’s perspective remains within linguistic philosophy, although emphasizing a Wittgensteinianview of context.

9 The Realists attempted to show that formalism is an impossible project. For the most part, the Realists claimedthat law is deeply subjective and contradictory and therefore a purely formal system is implausible to justifysince it is rooted in the values and assumptions which it purports to exclude, viz., politics, morality, etc. Severalauthors have pointed to the continuities between the Realists and CLS: see e.g. Brigham and Harrington 1989.

10 Ken Kress (1989) examines the work of Altman, Singer and Kennedy, to show that, like liberals, CLS theoriststhink that legal determinacy is necessary to ground consent: Kress argues there are other grounds to uphold justinstitutions.

11 Recently, Richard Posner has stated that formalism has three features: (1) a scientistic element which defines lawin terms of a set of principles and a form of legal reasoning which produces certain outcomes; (2) a formalistelement which is static and treats legal principles as if they were timeless and have no chronological ordering;and (3) a conceptual vision which separates life from law. While there are both natural law and positivist versionsof formalism, Posner argues that the common thead is the view that one’s conclusions follow from one’spremises (Posner 1990:15–16). For a critique, see Fish 1990:1458–9.

12 Kelman (1987) offers a powerful critique of Kennedy’s distinction; for a sustained analysis of Kelman’s ownversion of the indeterminacy thesis, see Kress 1989:310–20.

13 For the most part, Unger’s deviationist doctrine is perceived as the least threatening, and hence most attractive,version of indeterminacy critique, since it provides a foundation for the legitimacy of law within certain aspectsof the present normative order (Collins 1987). For a view that Unger is actually a deconstructionist, see JackBalkin (1990:1688 n. 55, 1689 & n. 57).

14 Teubner, following Luhmann, argues that the legal system has no foundation and that paradox, self-reference,indeterminacy, etc., are part and parcel of the operation of the legal system (Teubner 1990:408–9). Hence,paradox can be grasped by a theory which contends that reality has a circular structure and there is no insightgained from attempting to seek solutions by avoiding paradox.

15 Interestingly, Luhmann and Derrida both refer to Walter Benjamin’s classic essay, ‘Zur Kritik der Gewalt’ tosupport their claim that ‘there is no such right above right and wrong, no such superright’ (Luhmann 1988b; 154;Derrida 1990).

16 Teubner acknowledges that the recursivity of the legal system creates a problem for societal regulation. Briefly,the problem is that external intervention within the legal system creates a regulatory trilemma: i.e., regulationcreates disintegration (institutional death); is irrelevant; or corrodes the social sphere (see Teubner 1987:21).

17 Also, the juridical field has its own rules and conventions which must be accepted by all participants. Itsfundamental principle is that all conflicts must be resolved juridically; beyond this, the three main requirements,Bourdieu says, are (1) that decisions are binary (e.g. guilty/not guilty), (2) claims must be couched in the proceduralterms which have become historically accepted, and (3) precedents are authoritative (Bourdieu 1987:832).

18 Bourdieu states: ‘Between the system of objective regularities and the system of directly observable conducts amediation always intervenes which is nothing else but the habitus, geometrical locus of determinisms and ofindividual determinations, of calculable probabilities and of lived-through hopes, of objective future and

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subjective plans. Thus, the habitus of class as a system of organic and mental dispositions, of unconsciousschemes of thought, perception and action is what allows the generations, with the well-founded illusion of thecreation of unforeseeable novelty or of free improvization, of all thoughts, all perceptions and actions inconformity with objective realities, because it has itself been generated within and by conditions objectivelydefined by these regularities’ (Bourdieu 1968:706).

19 To take a comtemporary example, Dezalay argues that the internationalization of capital and the deregulation offinancial markets in the 1980s have stimulated a response by the most powerful players in the legal field(Dezalay 1992). The new technological developments, and the movement of firms across jurisdictions, is linkedto the relative position of each group of lawyers in the juridical field, and their ability to obtain sufficientresources to create new devices for exploitation by their clients. This appears to function as a structuralexplanation, without sufficient regard either for the improvizational activities of lawyers, which help to mediatethe social conflicts, or for the structurally complex role of states.

20 In certain respects, Bourdieu is influenced by Wittgenstein’s work on rules, although he often says that the realityof practices is a richer source for understanding the social fields (e.g. Bourdieu 1990:59–75). We believe thatBourdieu’s notion of indeterminacy is broadly consistent with the community consensus reading of Wittgensteinsince it looks to the social-cultural features of rule-following over the internal, grammatical aspects (Bourdieu1986:826).

21 Elster has argued that Bourdieu’s symbolic theory also has functional explanation at its core (Elster 1983:105–6);but see Bourdieu (1990:106–19).

22 These differences caused similar difficulties for Weber’s theory of legal formalism, the famous ‘Englandproblem’. Bourdieu himself argues that the French and German Professorenrecht is based on the primacy ofdoctrine over procedure, whereas the Anglo-Saxon case-law system emphasizes procedural fairness and aims fora solution to the particular case without much concern for its basis in a moral or scientific rationality; thisdistinction he sees as rooted in the greater importance of practice both in legal training and in the recruitment ofjudges (Bourdieu 1987:822). The argument is further developed by Dezalay, (1986) who argues that thetheoreticians of pure law have a stranglehold over the reproduction of law, which they codify and rationalize onthe pretext of drawing out general and abstract rules by purifying them of ordinary language, dispossessing anddowngrading practitioners, a picture which does not easily fit the common-law world.

23 Even law-and-economics scholars have tried to integrate some of the insights of the post-realist jurisprudence;thus, Jason Scott Johnston has examined the problem of legal uncertainty, and argues that legal form oscillates‘from precision to generality, between rules and balancing’ (Johnston 1991:365).

24 SEC Securities Exchange Act Release No. 3230 (21 May 1942), 7 Fed Reg. 3804 (1942) (17 CFR S240.10b–5).25 Early studies showed a strong relationship between insider trading and large price movements (see e.g. Lorie and

Niederhofer 1968:50–2; Pratt and De Vere 1972; Jaffe 1974a). For recent discussions of the statistical evidencesee, e.g., King and Roell (1988:173–7); Suter (1989:912). Susan Shapiro’s study of the SEC analysed data onsecurities violation prosecuted by the agency from the late 1940s to the early 1970s, and showed that the vastmajority were apparently technical misrepresentation and registration violations; however, while most of thecommon types of violation were remarkably stable, some offences, such as professional technical violations andself-dealing, increased. Shapiro concluded that ‘[t]hese trends reflect some mixture of the effect of changingeconomic conditions, growing sophistication among wayward capitalists, shifting SEC priorities, and the ubiquityof certain generic modi operandi of securities fraud and cover-up’ (Shapiro 1984:27 & n. 4).

26 The Commission brought fewer than fifty actions in the two decades 1949–1977, but seventy-seven casesbetween 1982 and 1985, equivalent to all the cases brought in the previous forty-seven years (information fromthe SEC: see also testimony of its Chair, John Shad, to the Subcommittee on Telecommunications, ConsumerProtection, and Finance, of the Committee on Energy and Commerce of the House of Representatives, Hearingson Insider Trading, June-July 1986; Naylor 1989). The first criminal prosecution was brought in 1980, afterwhich about 40 per cent of cases were criminal in nature (Naylor 1989:88).

JOSEPH MCCAHERY AND SOL PICCIOTTO 193

27 Of the twenty-two Department of Justice prosecutions between 1981 and 1984, twenty-one were guilty pleas;however, of the fifty-five cases brought in the Southern District of New York up to 1987, sixteen defendantspleaded guilty (Naylor 1989:88; see also Flynn 1992:109 & n. 8.

28 The disclose or abstain rule developed in Cady, Roberts & Co. 40 S.E.C. 907 (1961) was later upheld by theSecond Circuit Court of Appeals in SEC v. Texas Gulf Sulphur Co. 401 F.2d 833 (2d Cir. 1968), cert. denied, 404U.S. 1005 (1971).

29 Chiarella v. United States, 63 L.Ed. 348, 359 (1980) (citing Santa Fe Industries, Inc. v. Green, 430 U.S. 462,474–477 (1977)).

30 Mann (1985). In these cases a key part was played by Harvey Pitt, a former SEC attorney, who defended BankLeu in the Levine investigation (in the process helping to identify Levine as the scapegoat), and negotiated thepleabargain for Ivan Boesky which was denounced as a ‘sweetheart deal’ (Stewart 1991:296).

31 Prior to the massive publicity given to the high-profile insider trading prosecutions, Congress had been satisfiedwith an enforcement consisting of obey-the-law injunctions and administrative remedies imposed by the SEC.How-ever, the 1984 Insider Trading Sanctions Act provided for fines up to three times the profit gained or lossavoided. Even more significantly, the 1988 Insider Trading and Fraud Enforcement Act provided for civilpenalties for organizations which fail to take affirmative measures to prevent insider trading by their employees.These powers have produced record sums in terms of disgorgements obtained from defendants (see McLucas et al.1992:88–9).

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JOSEPH MCCAHERY AND SOL PICCIOTTO 197

Index

ABA see American Bar AssociationAbbott, A. 6, 7, 56, 57, 58, 64, 65, 66, 68–9, 72, 129, 140,

171, 226, 231, 239Abel, R.L. 17, 146, 205, 229, 239;

and Lewis, P.S.C. 6, 8, 197, 205, 238, 239, 270Abel-Smith, B. and Stevens, R. 15, 17, 229accountancy 9–10, 16, 72, 140–1;

calculative technologies 52, 54, 56–7, 69–70;and corporate failure 66–7;fragmentation of 70;in France 68–9;globalization of 25;internationalization of 156–8;and intra-professional competition 67–8;rise of 65–6, 71;in USA 68

accountants, ambitions of 13;and lawyers 8;multidisciplinary services 26;see also lawyers/accountants intersection

acquisitions see mergers and acquisitionsAirs, G.J. 26Albert, M. 4, 10, 99Albrow, M. 147Allen & Overy 149Alpha, G. 173Altman, A. 246Alworth, J.S. 47American Bar Association (ABA) 43American Challenge 145, 184, 192American corporate law model 14American Express 147anti-monopoly board 107, 108anti-trust, legislation 9, 85, 86, 90, 93, 129–30;

‘missionaries’ 90–4‘Arm’s length principle 38–9, 42, 61Armstrong, P. 66

Arnold, B.J. 47Arthur Andersen 157–8Ashton, R.K. 29Ashurst & Sidley 186Ashurst Morris Crisp 149Aubert, W. 173, 180Auerbach, J. 6, 8Australia 140autopoietic systems theory, and corporate law 128–32,

176

‘back-to-back’ financing 36Bahamas-Curaçao (Netherlands Antilles) 35, 47Balkin, J. 252, 272Bancaud, A. and Boigeol, A. 195Bank of England 63, 95, 98, 245Bank for International Settlements (BIS) 63bank lawyers 205–6;

career prospects 213–15;changing demands and responsibilities 215–18;fields of work 206–8;graduates in 218–21;lawyers in 207–8, 221–3;in legal and commercial departments 208–12;legal method 212–13;losses and successes of 223–4

bankruptcy 7, 9, 16, 80, 81Bankruptcy Acts 66, 227–8banks 75;

changes and developments in 215–18;credit business 210, 211, 221;crisis in 63;in Germany 60;globalization of 26;project financing 212;syndicate business 209–10, 211–12, 221

Barker, E. 141

198

Basle Committee 63‘beauty parades’ 141Beaver, W.H. et al. 60Benjamin, W. 272Bernard, M. 190Bezzenberger 124Big Bang 143, 173, 185Big Six 3, 9, 13, 56, 142Bihr, A. 4BIS see Bank for Internaitonal SettlementsBishop, W. 148BK see BundeskartelamtBlack, D. 182‘Black Wednesday’ 142Blandin, C. 99Blankenburg, E. 124Bliss, J.H. 59Blumberg, A. 240Boden, D. 146Boesky, Ivan 265Boigeol, A. 153Bok, Derek 271Boltanski, L. and Thévenot, L. 53, 88Bolze, C. 108Bourdieu, P. 1, 5, 6, 15, 44, 59, 88, 128–9, 171, 200, 234,

250–7, 272–3;and de St Martin, M. 15;and Wacquant, L. 7

boutique firms 255Boyer, R. 2, 6Bracewell-Milnes, B. 45Braudel, F. 18Brent Walker plc 54–6, 62Breton, A. 110bridge loans 83Brigham, J. and Harrington, C. 271‘bright line’ rules 36Brill, S. 147–8, 157Brown, R. 66Brownlee, W.E. 46Bruck, C. 18, 81Bruckhaus, Westrick & Stegemann 124Bundeskartelamt (BK) 92–3Burchell, G. 52Burgin, E.L. 233Burnside, A. 150, 151Burough, B. and Helyar, J. 18Burrage, M. et al. 171business lawyers 12–13, 14, 100;

see also corporate lawyersbusiness/state, mediation between 43–5

Cain, M. 241–2, 270calculative technologies, use of in corporate failure 51–72Calvet, H. 107Canada 158, 159Cancaud, A., and Dezalay, Y. 15capital, adequacy 63;

flight 39;symbolic 79

capitalism 10;casino 18;monopoly 85;state 98

Carr-Saunders, A. 140Carrington, P. and Murphy, B. 143Carroll, Mitchell 38, 41–3Carrone, L. 99Cary, William 263Castel, R. 53Castells, M. 6Cayman Islands 45Cazenove 96CCAB see Consultative Committee of Accountancy

BodiesCFCs see controlled foreign corporationsChamber of Attorneys (Rechtsanwaltskammer) 117, 118,

127Channel Islands 33Charle, C. 17Chartered Association of Certified Accountants 67Chayes, A. and Chayes, A.H. 255Chernow, R. 18Chiarella 263–4China 140, 161Chirot, François 88Chouraqui, A. 177Church, T. 145, 178City Code 96–101City of London 11, 14, 147, 192;

and takeovers 94–9, 100–101civil law 13–18, 146–7, 183Clarke, C. 141Clarke, M. 6, 52Cleary Gottlieb 142, 152COB (Securities Exchange Commission, France) 105–7,

108‘Coca-Cola world’ 139

INDEX 199

Cockfield, F. 175Cohen-Tanugi, L. 15, 177Collins, H. 272Commaille, J. 180, 181common law 146, 183, 254Companies Acts 66Company Directors Disqualification Act (1986) 76Company Pathology (County NatWest) 57company residence 28–30, 29competition 10, 36, 83, 188, 255;

and corporate lawyers 124–8;expansion 172;in finance markets 216;inter-professional 67–8

competition law 90–4;in Germany 92–3

compliance work 259Conseil des Barreaux de la Communauté Européenne

(CCBE) 141Conseil d’Etat (Supreme Court for administrative justice)

106, 107, 110Consolidated Gold Fields 160Consultative Committee of Accountancy Bodies (CCAB)

68controlled foreign corporations (CFCs) 30, 37–8Coombe, R. 252Cooper, D. and Hopper, T. 62Cork Committee 76corporate failure 51, 71–2;

calculation of 51–2, 54, 57–65;calculative expertise and government of 65–71;negotiability of 54–7;pragmatic dimension of 53;as problem for government 52–3;transformation of practice 69

corporate law firms (organization), flexible, international,multidisciplinary 119–20;monopolization and specialization 118–19;work ethic and image 120–2

corporate lawyers 255;American 192;autopoietic perspective on 128–32;competition or co-evolution? 124–8, 130–1;development 114–15;dilemma of professional regulations 117–18;in Europe 192–3;and European legal professionalization 187–90;in Germany 114–32;growth of 122–4;

organization of 118–22;social closure of 115–28

corporate rescue 56corporatism 98Council of Chartered Accountants 233Council of the Institute of Chartered Accountants 233Courts and Legal Services Act (1990) 197Credit Lyonnais 89Crook, C. 142, 144cross-border legal relations 154, 180, 190–6Crouch and Marquand 190Crozier, M. 179cultural identity 175, 179–80culture, concept of 145Curran, B.A. 205

Dahrendorf, R. 16Daimler Benz 205Danet, B. 270De Beers 28Delaunay, J.-C. 146Delors, Jacques 1, 150Dennett, L. 147, 233Department of Trade and Industry (DTI) 92, 95Derrida, J. 272Deutsche Bank 88, 205Dev, S. 59, 60, 62Dewhurst 29Dezalay, Y. 1, 2, 6, 13, 17, 18, 26, 56, 58, 69, 70, 105,

172, 174, 181, 188, 205, 272, 273;and Garth, B. 4

Dias, C.J. et al. 189Dicken, P. 145DiMaggio, P.J. and Powell, W.W. 145Dingwall, R. and Fenn, P. 181disclosure rule 263–4Domhoff, G. 17double-deontology 193, 194double-dip leasing 43Drago, R. 106Drai, P. 104Dresdner Bank 205Drexel Burnham 84, 265DTI see Department of Trade and Industrydu Pont Company 59Dumez, H. and Jeunemaître, A. 78duty of ‘interprofessional concertation’ 195

Easterbrook, F. and Fischel, D.R. 262

200 INDEX

Eburne, A. 26, 140, 157economic regulation 104;

judge’s role 108–12;recomposing the system 104–8

Economides, K. 175Edwards, J.R. 66Ehrlich, J. and Rehfeld, B. 18, 82Einaudi, L. 39, 40, 45Elias, N. 234Elster, J. 273Ernst & Young 157Ernst & Young Juridique et Fiscal 161Espeland, W.N. and Hirsch, P.M. 65Europe, diversity, identity, loyalty 179–81;

and legal professionalization see legalprofessionalization;process of unification 175–8

European Community (EC) 140;directives 95, 190, 193–6

European Court of Justice 107European Monetary System (EMS) 142European Single Act (1987) 178expertise, concept of 72external growth 78, 79

Fairburn, J. and Kay, J. 78Farmers Group 158Federal Income Tax Code 61–2Federal Reserve 60, 62Felstiner, W.L. et al. 240finance, competition in 216;

internationalization of 14financial markets 142–3Financial Services Act 101Finkelnburg 124Fischel, D.R. and Ross, D.J. 260Fish, S. 259, 272Flom, Joseph 152Flood, J. 140, 149, 150, 181, 270;

and Skordaki, E. 143Foreign Sales Corporation (FSC) 47formalism 272forum shopping 3Foucault, M. 52, 170, 172, 180, 200fragmentation 70France 41, 68–9, 139, 140, 184, 192;

economic justice system in 104–12;law in 153–4

Frankenberg, G. 249

Frantz, D. 265Freedman, J. and Power, M. 70freedom, notion of 189Freidson, E. 171, 198Friedman, L.M. 179, 180Frost, David 46FSC see Foreign Sales Corporation

Gabel, P. 242Galanter, M. 140, 152, 238;

and Palay, T. 1, 189, 238Gallaher 96GATS see General Agreement on Trade and ServicesGATT see General Agreement on Trade and TariffsGaudemet, Y. 107–8Geertz, C. 140, 173General Agreement on Trade and Services (GATS) 193General Agreement on Trade and Tariffs (GATT) 1German Association of Lawyers (Deutscher

Anwaltsverein) 117, 127Germany 60, 76, 92–3, 99, 139, 140, 192;

corporate lawyers in 114–32;law in 154–5

Gessner, V. and Schade, A. 180Giddens, A. 260Gide Loyrette Nouel 149Gillman, S. 59Gilson, R.J. 242–4, 271Glass-Steagall Act 143Glendon, M.A. et al. 146Glenn, H.P. 188global market 2global village 5globalization 4–5, 8, 14;

of accountancy 25;of banks 26;constraint on 144;and culture 142–6;development of 139–42;and the law 146–61;limits of 158–60;of ‘productive’ activity 172;professional restructuring of 145;struggle for 146;synonymous with Americanization 160

Gneist, Rudolf von 200golden parachutes 83Goldenberg, S. 146Goodrich, P. 234

INDEX 201

Gordon, R. 9, 87, 93, 271Gouldens 150government see the stategraduates, in banking 218–21Granovetter, M. and Swedberg, R. 6Griffiths, J. 10Greenhouse, S. 162Grieves, John 160Griffiths, J. 10Griggs, J. 162Group of Seven 144Grunfest, J. et al. 265

Habermas, J. 178, 188, 234habitus 251–2, 272Hague Academy of International Law 40Halliday, T.C. 205;

and Carruthers, B.G. 58Hancher, L. and Moran, M. 6Hanson, Lord 150Harms, H. 192Hart, H.L.A. 245, 271Hartmann, M. 127, 205, 224Hebdige, D. 140Heinz, J.P. and Laumann, E.O. 15, 205, 238Hermann, A.H. 92, 100Hobson, D. 18, 96, 143Holland 140Holmes, R. 232Holzapfel, H.J. 92Hong Kong 140, 142, 150Hopwood, A.G. 63Horrigan, J.O. 59, 61hostile takeovers 10, 81, 82–3, 91, 99;

see also mergers and acquisitionsHuyse, L. 178

Icahn, Carl 81ICC (International Chamber of Commerce) 31, 32, 38, 40IFA 42, 43IFA see International Fiscal Associationindeterminacy critique 18, 245–8, 249, 252Industrial Reorganization Corporation 88, 96Ingham, G. 10, 94, 98Inland Revenue 33–4, 46insider trading 18, 274;

and conflict over misappropriation theory 264;enforcement process 264–5;origins and basis of prohibition of 261–3;

restabilizing regulatory regime 265–6;risk, trust and property in information 260–1;uncertainty of disclosure rule 263–4

insolvency 56–7, 62–3, 67–8, 71, 76;institutional regulation of 58;legal definition 57–8

Insolvency Act (1986) 57, 67, 68insolvency practitioners committee (IPC) 67, 68Institute of Chartered Accountants in England and Wales

(ICAEW) 67, 68Institute of Chartered Accountants in Scotland 67Institute of Professional Accountants (IPA) 67, 68Interjura 140, 184, 186International Chamber of Commerce (ICC) 43International Fiscal Association (IFA) 42, 43internationalization, and accountancy 156–8;

of commerce 215–18;growth of 142–4;and law 146–56, 158–61;strategy 14–15

IPA see Institute of Professional AccountantsIPC see insolvency practitioners committeeIreland 35Irti, N. 172Italy 14, 140, 184, 198;

law in 155–6ITT 43

Jacobi, O. 191Jaffe, J.F. 273‘jailhouse lawyers’ 254, 255Japan 139, 146, 154, 158, 159Johnson, C. 142Johnson, T. 141, 172, 200Johnston, J.S. 273Johnston, M. 82Joint Insolvency Examination Board 76judges, position of 104–5;

power of 107;redefining role 108–12

junk bonds 81, 83, 84

Kahn, P. 182Karpik, L. 104, 186Kelman, M. 272Kelsen, H. 246Kennedy, D. 246, 252King, M. and Roell, A. 273Krause, E. 180

202 INDEX

Kress, K. 271

Lacoumes, Pierre 104Landwehrmann, F. 31Larson, M.S. 6, 8, 17, 238, 239Latour, B. 64law, Americanization 3–4;

autonomy of 250, 252–3;behaviour of 182–7;commercialization 4;competition in 5–6;descriptors of 140;diplomas in 153, 195–6;in French economy 104–12;internationalization of 7–8, 9, 146–56, 158–61;local 172, 174, 177, 185, 196, 198, 199–200;national 173, 177, 186, 195, 196, 199–200;notarial 183;paper 178, 197;power of 251;reform of 148–50, 161–2;submission in 110, 111;transformation of 6;transnational 199–200

law firms, and accountants 25;growth of corporate business 26;as multidisciplinary/multinational 171–2

Law Society 229, 230, 232–3, 234–5‘law-in-action’ 197lawyer-client relationship 240–2, 259, 270lawyering, business 242–4;

and insider trading 260–6;regulatory process and dynamic of 257–9;as social practice 244–57;structure to process 238–44;studies of 240–2;as translation 241

lawyers, and accountants 8, 25;in banks see bank lawyers;corporate 44;as ‘gate-keeper’ 240;increasingly marginalized 13;influence 15–16;and international market 3–4;and international taxation 26–7;as lobbyists in Brussels 150–2;status 2–3, 8, 15–16, 17

lawyers/accountants intersection 8, 226–7, 235–6;ascendancy of latter over former 230–3;

blurring of role 228–9;history of 227–30;and power of the law 234–5

Lazard 88, 89League of Nations 38, 40, 41–3, 45, 48Lederman, L. 18Lee, R.G. 149, 192Legal Practitioners’ Society 231legal professionalization, change, resistance and

transformism 182–7;and corporate lawyering 187–90;and EC governmentality 199–200;and EC policy-making 190–6;and European unification 175–8;‘one- dimensional’ framework 171–3;process of 170–1;prospective trends 196–9;redefinition of European framework 178–82;theoretical guidelines 173–5

legal rules, Bourdieu’s approach 250–3;creative compliance 244–5;uncertainty of 271

legislative armistice 189–90, 193level playing fields, philosophy of 51–2leveraged buy-out (LBO) 79, 84Levine, Dennis 265, 266Lewis, M.K. 18, 143–4;

and Davies, J.T. 142Lewis, P. 238Lipton, Marty 83, 84Lisagor, N. and Lipsius, F. 152‘local discretionary legal system’ 172, 178Lorie, J.H. and Niederhofer, V. 273Luckham, R. 239Luel, Simon 89Luhmann, N. 129, 179, 180, 187, 252–3, 260, 272

M&A see mergers and acquisitionsMaastricht Treaty 1, 178Macaulay, S. 83, 240–1McBarnet, D. 245;

and Whelan, C. 2, 245McCullough, V. 142, 143, 150MacFarlanes 149McLucas, W.J. et al. 274management buy-out (MBO) 83Mann, K. 270, 271, 274Mann, M. 139Manne, H.G. 262

INDEX 203

Martines, L. 6Maxwell publishing 143MDPs see multidisciplinary practicesmega-law 152, 155Merger Task Force 92mergers and acquisitions (M&A) 8, 10–11, 11, 185;

advising on 94;American style 78, 80, 90, 100, 101;Continental and Anglo-Saxon models 98–100;cyclical 81, 88;decisions concerning 79;emergence of European market 85–90;in Germany 99;‘one-stop shopping’ 79, 91;regulation of 78, 80, 88, 90–2, 95–101

mezzanine financing 83Milgrass, P.R. et al. 2Milken, Michael 83, 84, 265, 266Miller, P. 61;

and O’Leary 63;and Power, M. 69, 234;and Rose, N. 52, 61, 71

Milovanovic, D. 255Mimin, P. 110Mingay, G.E. 227Minorco 160Mintz, B. and Schwartz, M. 6Miranti, P. 68misappropriation theory 264Mittelstand 93MMC see Monopolies and Mergers CommissionMNCs see multinational corporationsMNPs see multinational practicesMonopolies and Mergers Commission (MMC) 92, 94Montagna, P. 13, 53, 65, 156, 157Moore, S. 176Moran, M. 262, 265–6Morgan Grenfell 88, 96Morgan Guaranty Trust 43Morita, Akio 271Mortin, E. 199‘multi-door-courthouse’ system 176multidisciplinary practices (MDPs) 148, 150, 157multinational consultancies 79multinational corporations (MNCs) 141, 142, 157multinational practices (MNPs) 148, 150

NAFTA see North American Free Trade AreaNapier, C. and Noke, C. 227, 232, 234

nation-state 143, 176, 177National Credit Office 59national ‘sovereignty’ 44Naylor, J.M. 274Neate, F.W. 143Nelson, R.L. 188, 255Netherlands 35Netherlands Antilles (Bahamas- Curaçao) 35, 47New Deal 262‘new legal press’ 181Nora, D. 81, 83North American Free Trade Area (NAFTA) 1, 140North, D.C. 2, 6

OECD countries 37–8, 46‘off-the-shelf’ companies 29Office of Fair Trading (OFT) 92OFT see Office of Fair TradingOhmae, K. 145Olgiati, V. 176, 180, 182, 183;

and Ioppa, P. 183Olympia & York 143O’Melveny & Myers 149‘one-stop shopping’ 79, 91Own Funds Directive 64

‘pacman’ method 83Page, N. 26, 146Paris Court of Appeals 105, 107, 111, 195Parkin, F. 126Parsons, T. 129, 140Pashigian, P. 140passive income 37Patterson, D. 271pension funds 81Perkin, H. 6, 17Perks, R.W. 140, 141Piccioto, S. 142Pickens, T. Boone 81Piniot, M.C. 105, 111Pitt, Harvey 274Pizzorno, A. 179poison pills 79, 83Polanyi, K. 170political loyalty 175, 179, 181Posner, R. 272Powell, M.J. 17, 181, 205‘power to enjoy’ income 34Pratt, S.P. and de Vere, C.W. 273

204 INDEX

Price Waterhouse 158principle of mediation (Salandra doctrine) 198‘principle of reciprocity’ 182private economy, and calculative expertise 53professionalism 187professions 1–2;

class rivalries and power 17;competition between 140;development of 141;regulation of 141;reshaping of 13–18;theories of 238–40

Prot, B. and de Rosen, M. 78, 81, 82Prussian Income Tax Law 46–7

quick assets 60

raid psychosis 83ratio analysis 56, 58–65, 71–2;

accounting ratios 9;calculative technologies of 61–3;criticisms of 62, 75–6;in Germany 76;history of 59–60;industry-wide ratios 61;performance ratios 60–1;solvency ratios 64;in USA 63–4

reality paradox, and systems theory 248–50reconversion, strategy of 4Reeder, W.J. 16, 227regulation 6;

of corporate lawyers 117–18;development in lawyering 257–9;European 11–12;of M&A 78, 80, 88, 90–2, 95–101;of the professions 141;social 180;and tax 36;technologies of 9–13;theories of 18;see also rules and regulations

regulatory shopping 3Rice, R. 149, 151‘robber barons’ 86Rockefeller Foundation 38Rogowski, R. 192Rohatyn, Felix 84Roosevelt, F.D. 33

Rose, N. and Miller, P. 53, 56Rothman, R.A. 205Rousselet, M. 109Rozen, M. 150Rueschemeyer, D. 16, 58, 147, 238rules and regulations 77;

juridical- political basis 78;in M&A 78–80;see also regulation

Saatchi & Saatchi 149Salais, R., and Thévenot, L. 6Salaman, J.S. 231Salandra doctrine 198Salomon Brothers 143–4Sampson, A. 18, 82, 95, 96Sander, R.H. and Williams, E.D. 140Sarat, A. and Felstiner, W.L. 242, 270Sassen, S. 14, 142, 145Schlesinger, R. et al. 146Schrage, M. 144Scotland 65, 146, 178SEC see Securities and Exchange CommissionSecurities Exchange Acts 261Securities and Exchange Commission (SEC) 59, 60, 61,

84, 95, 98, 141, 263, 265, 273, 274Seligman, E.R.A. 39, 40service, notion of 189Sewell, W.H. 252Shad, John 273Shapiro, S. 273Shearson Lehmann 147Sherman Act 86Sidley & Austin 141Siegrist, H. 183Silbey, S.S. 145Singapore 35Single European Act (1986) 122Singleton-Green, B. 68Skadden Arps 152, 157, 158Sklar, M.J. 86, 258Slaughter & May 152, 161Slinn, J. 152, 233Smigel, E. 85Smith, R.J. 140, 144, 145social closure 12;

and corporate law 115–28, 130Society of Practitioners of Insolvency (SPI) 67socio-legal systems 173–4, 176

INDEX 205

Soeters, J. and Schrueder, H. 145Solvency Ratio Directive 64Sontag, S. 150Sousa Santos, B. 179, 180, 181South Africa 146Spain 140, 184, 192Spangler, E. 205specialist lawyer (Fachanwalt) 118SPI see Society of Practitioners of Insolvency‘sporting theory of law’ 187Sri Lanka 146Stacey, N.A.H. 66the state, intervention and obligation of 52–3Stewart, J.B. 18, 265, 274Steyger, E. 178stock exchanges 84, 105, 142–3Stone, Oliver 265Strange, S. 6, 18Streek, E. and Schmitter, P. 176structuralism 238–9, 252Sugarman, D. 147, 149, 233, 234Suleiman, E.N. 183Sullivan & Cromwell 147Sumption, A. 34Suter, J. 273Sutherland, Peter 90, 91Sweden 140systems theory, and reality paradox 248–50

Tait, N. 97Takeover Panel (TOP) 11, 94, 95, 96–8, 100takeovers see hostile takeovers;mergers and acquisitionstax, avoidance 25, 33–5, 36–7, 45;

and corporate law 125–6;evasion 39;havens 35–8

Tax Institute 35Tax Reform Act (1986) 47tax-driven deals 43taxation 9;

double 28, 31–2, 39–40, 48;in France and USA 31;in Germany 30–1, 46;global approach 38;in Great Britain 28–30

taxation (international) 46–8;background 25–7;company residence or citizenship 28–31;

development of 27–39;dynamics and ideology of 39–5;havens and transfer pricing 35–9;mediation between business and state 43–5;tax treaty system and planning 31–5

technical diversity 175, 179, 181Teubner, G. 14, 70, 179, 180, 248–9, 253, 272‘thickness’, legal 173, 183Thomas, P.A. 173, 192, 198Thompson, E.P. 78TNCs see transnational corporationsTomasic, R. 90TOP see Takeover PanelTrachtman, J.P. 4trade 1transfer price evaluation 38–9transnational corporations (TNCs) 25, 27, 29, 30, 31, 39,

42, 45Treaty of Rome 91, 122, 172, 189–90, 193Trubek, D. et al. 3Turton, R. 67

Unger, R. 246–7, 272Unilever 43USA 60, 63–4, 68

Vacca, C. 189, 192Vann, R.J. 39Vestey Brothers 33–5Viandier, A. 105‘vitamin pill’ defence 160

Wacquant, L. 251Wade, R. 2Walker, D. 142Wall, A. 61Wall Street, and invention of new expertise 80–4, 87, 88Waller, D. 158Wallerstein, I. 139Waters, R. 156Watts, R.L. and Zimmerman, J.L. 63Weber, Max 2, 115, 126, 145, 147, 256, 273Weber-Fas, R. 47Weir, M. et al. 17Westerik und Eckoholz 192Whelan, C. and McBarnet, D. 187Whincup, M. 146‘white knight’ 83‘white-shoe’ law firms 83, 85

206 INDEX

Wiener, M.J. 233William Hill 54–5Williams, R. 140Willmott, H. 68Winans, R.F. 264Wittgenstein, L. 273Wolfe, T. 152Woodiwiss, A. 199Woolcock, S. 78Woolf, A.H. 228Worthington, B. 230

Yerbury, P.D. 30yuppies 1

Zolo, D. 249

INDEX 207