Sunday, January 31, 2010

France's Vision for Planetary Governance: Sarkozy's Davos Dream and the G20 as the Harbinger of Global Governance

Well over a year ago, after the current economic crisis became "official" with its acknowledgment in media and government circles, I suggested that the crisis presented a great temptation (and opportunity) for states to attempt to (1) reclaim their former position as the supreme point of governance tin the global order, and (2) to reclaim a primacy of governance through positive law conventionally adopted by states or groups of states.  Larry Catá Backer, (Un?)Intended Regulatory Consequences of the Financial Crisis: Multinational Corporations and Sovereign Wealth Funds, Law at the End of the Day. October 5, 2008 ("But the crisis itself may provide either a cover for, or the excuse necessary, to revisit the issue. It seems likely that the "market failure" analogy will be resurrected and the ideology of political control will become much more palatable even to those states, like the United States, that had served as the principle obstacles to direct regulation based on those notions."  Id.).

Now comes Nicolas Sarkozy, the current President of the French Republic offering a vision of the framework for that governance.  And it cannot come as a surprise that France is destined to play a significant role in that enterprise.  In a speech delivered on the opening of the 40th Worlds Economic Forum at Davos on January 27, 2010, Sarkozy unveiled a quintessentially European vision for preserving the state at the apex of global regulatory hierarchies, and the position of the former colonial powers (no in cahoots with their most successful colonies or client states) within that ruling clique. 

The G20 foreshadows the planetary governance of the 21st century. It symbolises the return of politics whose legitimacy was denied by unregulated globalisation.
In just one year, we have seen a genuine revolution in mentalities. For the first time in history, the Heads of State and government of the world's 20 largest economic powers decided together on the measures that must be taken to combat a world crisis. They committed themselves, together, to adopting common rules that will radically change the way the world economy operates.
Without the G20, trust could not have been restored. Without the G20, we would have had the triumph of "every man for himself." Without the G20, it would not have been possible to envisage regulating bonuses, closing down tax havens and changing the rules of accounting and prudential standards.
These decisions will not solve every problem, but just one year ago, would anyone have thought they were possible? Now, however, they must be implemented!

M. Nicolas Sarkozy, Speech by M. Nicolas Sarkozy President of the French Republic, 40th World Economic Forum, Davos, Switzerland, January 27, 2010.   Mr. Sakozy's speech has been met with a fair amount of gentle ridicule ans skepticism by the media.   See, e.g., Sarkozy lays down gauntlet with reformist speech at Davos, CNN, Jam. 27, 2010; Angela Charlton, Sarkozy calls for tighter regulation at Davos, AP, Jan. 27, 2010; Sarkozy Sipports Bank Limits in Opening Keynote Speech, France 24, Jan. 27, 2010; Paul Maidment, Sarkozy's Unpragmatic Vision, Forbes, Jan. 27, 2010; William L. Watts, G20 Must Lead Crackdown on Banks, Says Sarkozy, Market Watch, Jan. 27, 2010.

What emerges from Mr. Sarkozy's speech, of course, is a very European model of collective governance.  When formerly strong states weaken (in the case of Europe as a consequence of a long period of suicidal internal warfare in the 20th century) then union of some kind effectively reconstitutes power, and retains the illusion of sovereignty.  More importantly, in the face of a loss of power to former colonial or exploited states (at one point either barbarian states or incapacitated members of the Family of Nations within which Europe once occupied pride of place)  then, again, power can be retained by welcoming former subordinates to the exclusive global power club.  And the once subaltern states appear more than willing to play (as long as a substantial line of states remain beneath the new collective).  Lastly, in the face of severe strains on the power of state centered positive law as a regulatory mechanism, then absorption of new modalities of governance beneath a superstructure of conventional law preserves the legal superstructure in which "law" transposed into the domestic legal orders of communities of states occupies the superior place.

This is a successful formula for collective governance that preserves what it can of the old legal order and seeks to dominate emerging systems fo governance.  The governance apparatus that will emerge from the development of this system remains to be seen.  But Mr. Sarkozy's reference to the G20 as  template on which global governance will be craeted is worth a closer look.   I recently noted that
the G20 has acknowledged its role as a vehicle through which its members might work through regulatory matters for transposition within their respective national legal orders through a commitment to "deepen cooperation to improve the regulation, supervision and the overall functioning of the worlds financial markets." G20, About G20, Achievements. More importantly, the G20 has begun to move toward the construction of an institutional framework through which this cooperation can be institutionalized for the production of harmonized regulatory frameworks to be adopted by the member states. Among the most important efforts at institutionalization of a global framework for economic regulation was the endorsement of the establishment of the Financial Stability Board. G20 Leaders at the Pittsburgh Summit endorsed the Charter formally establishing the Financial Stability Board. The Charter sets out the FSB’s objectives, mandate, membership and organizational processes. 

So how has the G20, through FSB, been forging a model for global governance?  My research assistant, Su Jin Hong, recently put together a report on the work of the FSB through its networks of regulatory groups.  What she describes is a complex network of regulatory frameworks, each in some way connected to the rest, around which the G20 appear to be creating a communal source of rules that will take effect only as and to the extent transposed into the domestic legal orders of each of the G20 states (and thereafter by the rest of the global community).   It suggests both the form of supra national governance (an autonomous and self referencing regulatory community) and the critical importance of communicative relationships (structural coupling) between the G20 governance community and the states through which that governance is to be effected.

The materials that follow have been pulled from the Progress Report on the Actions to Promote Financial Regulatory Reform Issued by the U.S. Chair of the Pittsburgh G20 Summit- Sep 25, 2009 Washington, London and Pittsburgh Summit Action - FSB related portions and the progress thereof.   Additional sources are listed below. 
1) We are committed to take action at the national and international level to raise standards together so that our national authorities implement global standards consistently in a way that ensures a level playing field and avoids fragmentation of markets, protectionism, and regulatory arbitrage. We call on the FSB to report on progress to the G20 Finance Ministers and Central Bank Governors in advance of the next Leaders summit.
¬    Progress: The IMF, FSB and other international organizations have provided G20 Finance Ministers and Central Bank Governors with a progress report describing the measures that have been taken and other progress made since the London Summit to implement the London Summit and relevant FSF recommendations. FSB has set up the internal structures needed to address its mandate. These new structures include a Steering Committee and three Standing Committees – for Assessment of Vulnerabilities; Supervisory and Regulatory Cooperation; and Standards Implementation. The FSB also established a Cross-border Crisis Management Working Group, and an Expert Group on non-cooperative jurisdictions. These groupings have all begun their work.
2) FSB members commit to pursue the maintenance of financial stability, enhance the openness and transparency of the financial sector, implement international financial standards and agree to undergo periodic peer reviews, using among other evidence IMF / World Bank FSAP (Financial Sector Assessment Program) reports. The FSB will elaborate and report on these commitments and the evaluation process.
¬    Progress: Peer reviews will take the form of both single-country and thematic reviews, where single-country reviews will examine the adherence to standards and other regulatory initiatives and progress in addressing shortcomings; thematic reviews will focus on the implementation of FSB policy recommendations or G20 action items or on the implementation of a specific standard across all FSB member countries. Work is progressing on the development of a mechanism for peer reviews, drawing on the experiences of other organizations and bodies, as well as the identification of priority themes and countries. The FSB expects to put in place a framework to strengthen adherence to international regulatory and prudential standards by the end of 2009. The FSB will report on the development of this framework at the November 2009 meeting of G20 Finance Ministers and Central Bank Governors. Actual member peer reviews will start by end-2009 with a thematic peer review on the implementation of FSB compensation principles.
3) The FSB should collaborate with the IMF to conduct early warning exercises (EWE) to identify and report to the IMFC and the G20 Finance Ministers and Central Bank Governors on the build up of macroeconomic and financial risks and the actions needed to address them. The FSB and IMF should launch the EWE together at the 2009 Spring Meetings.
¬    Progress: The initial, “dry run” Early Warning Exercise (EWE) was presented to the International Monetary and Financial Committee (IMFC) meeting in Washington on 25 April 2009. The next iteration of the EWE will be jointly presented to the IMFC meeting in October.

4) Implement immediately the FSF principles for cross-border crisis management and that home authorities of each major financial institution should ensure that the group of authorities with a common interest in that financial institution meets at least annually.
¬    Progress: Work is ongoing to implement the FSF Principles for Cross-border Cooperation on Crisis Management. Schedules for firm-specific cross-border contingency planning discussions have been set out and will take place in 2009 and first half of 2010. The FSB Cross-border Crisis Management Working Group is preparing a list of the main elements to be included in contingency planning discussions, including a template for “de-risking” plans to be prepared by the firms. De-risking plans will cover options the firms would need to consider to exit risky positions and scale back their activities, in an orderly fashion and without government intervention.

5) Establishment of the remaining supervisory colleges for significant cross-border firms by June 2009.
¬    Progress: Supervisory colleges have now been established for more than thirty large complex financial institutions identified by the FSF as needing college arrangements. The FSB Standing Committee on Supervisory and Regulatory Cooperation, working with standard setters to set out good practices among supervisory colleges, will report to the G-20 ahead of the Finance Ministers and Governors meeting (November 7-8, 2009).

6) Support continued efforts by the IMF, FSB, World Bank, and BCBS to develop an international framework for cross-border bank resolution arrangements. We should develop resolution tools and frameworks for the effective resolution of financial groups to help mitigate the disruption of financial institution failures and reduce moral hazard in the future.
¬    Progress: Progress is being made in the two major international initiatives now underway on bank resolution frameworks, namely the Cross-Border Bank Resolution Group (CBRG) of the Basel Committee on Banking Supervision (BCBS) and the initiative by the IMF and the World Bank on the legal, institutional and regulatory framework for national bank insolvency regimes. In September, the CBRG published for consultation a report, which includes recommendations for authorities on effective crisis management and resolution processes for large cross-border institutions. The IMF is producing papers on a Framework for the Cross-Border Resolution of Insolvent Financial Institutions. The first paper will examine key legal and policy issues, and will be completed by end-2009. Following Executive Board discussion, a second paper will set out recommendations for the resolution of these issues, which is scheduled for completion in the spring of 2010.

7) Advanced economies, the IMF, and other international organizations should provide capacity-building programs for emerging market economies and developing countries on the formulation and the implementation of new major regulations, consistent with international standards.
¬    Progress: The IFIs will play a key role in both the FSB’s assessment processes and the provision of advice to countries so that they may meet international standards in line with country-specific needs.
8) The FSB, BCBS and Committee on the Global Financial System (CGFS), working with accounting standard setters should take forward implementation of the recommendations published to mitigate procyclicality, by the end of 2009, including a requirement for banks to build buffers of resources in good times that they can draw down when conditions deteriorate.

¬    Progress: The Group of Central Bank Governors and Heads of Supervision, the oversight body of the BCBS, reached agreement in September to introduce a framework for countercyclical capital buffers above the minimum requirement. The framework will include capital conservation measures such as constraints on capital distributions. The Basel Committee will review an appropriate set of indicators, such as earnings and credit-based variables, as a way to condition the build up and release of capital buffers.

9) Financial institutions should provide enhanced risk disclosures in their reporting and disclose all losses on an ongoing basis, consistent with international best practice, as appropriate.
¬    Progress: National authorities have taken, and are continuing to take, steps to encourage firms to provide disclosures consistent with international best practice developed by the Senior Supervisors Group and the FSB, as appropriate. Firms have continued to enhance their risk disclosures in their published annual reports.

10) All firms whose failure could pose a risk to financial stability must be subject to consistent, consolidated supervision and regulation with high standards. Our prudential standards for systemically important institutions should be commensurate with the costs of their failure. The FSB should consider possible measures including more intensive supervision and specific additional capital, liquidity and other prudential requirements
¬    Progress: To implement these commitments, the FSB is developing in the 12 months to September 2010 proposals to reduce the systemic risks posed by large and complex financial institutions.

11) We call on the FSB to work with the BIS (Bank for International Settlements) and international standard setters to develop macro-prudential tools and provide a report by autumn 2009.
¬    Progress: Aside from the work to address procyclicality noted elsewhere, the FSB and its members are developing quantitative tools to monitor and assess the build-up of macro-prudential risks in the financial system. These tools aim to improve the identification and assessment of systemically important components of the financial sector and the assessment of how risks evolve over time.

12) Ensure that national regulators possess the powers for gathering relevant information on all material financial institutions, markets and instruments in order to assess the potential for failure or severe stress to contribute to systemic risk. This will be done in close coordination at international level in order to achieve as much consistency as possible across jurisdictions.
¬    Progress: The use of macro-prudential tools will require that authorities expand data collection on the financial system. The IMF and FSB have launched a joint initiative to identify and address data gaps and will submit a report outlining priorities and work plans to G20 Finance Ministers and Central Bank Governors in November.

13) The IMF and FSB will produce guidelines for national authorities to assess whether a financial institution, market or an instrument is systematically important by the next meeting of Finance Ministers and Central Bank Governors.
¬    Progress: The IMF, BIS and FSB have been working jointly to this end. The objective is to ensure that all systemically-important institutions, markets and instruments are subject to an appropriate degree of oversight and regulation. A report will be delivered to G20 Finance Ministers and Central Bank Governors in November 2009. It will outline conceptual and analytical approaches to the assessment of systemic importance, and discuss a possible form for high-level principles that support consistent implementation across countries.

14) We ask the FSB to develop mechanisms for cooperation and information sharing between relevant authorities in order to ensure effective oversight is maintained when a fund is located in a different jurisdiction from the manager. We will, cooperating through the FSB, develop measures that implement these principles by the end of 2009. We call on the FSB to report to the next meeting of Finance Ministers and Central Bank Governors.
¬    Progress: IOSCO, which is a member body of the FSB, published in June 2009 a set of high-level principles for hedge fund regulation. The six principles include requirements on mandatory registration, regulation and provision of information for systemic risk assessment purposes. They also state that regulators should cooperate and share information to facilitate efficient and effective oversight of globally active hedge fund managers/hedge funds. IOSCO will continue its work in this area. National and regional initiatives are also underway in key jurisdictions.

15) We have agreed that national supervisors should ensure significant progress in the implementation of FSF sound practice principles for compensation arrangements by financial institution by the 2009 remuneration round. We fully endorse the implementation standards of the Financial Stability Board aimed at aligning compensation with long-term value creation, not excessive risk-taking. We task the FSB to monitor the implementation of the FSB standards and propose additional measures as required by March 2010.
¬    Progress: Many national and regional initiatives are underway to implement the FSB Principles for Sound Compensation Practices. Because the FSB Principles were often the driver for change, these initiatives are broadly consistent in substance and have affected both regulatory frameworks and supervisory actions and practices. The BCBS, IAIS and IOSCO are working to support consistent implementation of the FSB Principles across jurisdictions. The BCBS incorporated the Principles in Pillar 2 of Basel II in July 2009, with an expectation that banks and supervisors begin implementing the new Pillar 2 guidance immediately. IOSCO is considering incorporating the FSB Principles into its Principles for Periodic Disclosure, published in July as a consultation paper planned to be finalized this fall. The IAIS has initiated work on the development of a standard and guidance paper on remuneration that will take into account the FSB Principles for cross-sectoral consistency purposes. The BCBS is now assessing how the FSB Principles are being implemented in practice and has created a task force that will promote a consistent and effective implementation of the FSB principles. In this context, a survey on the implementation of the FSB principles was conducted in July-August 2009 by the BCBS in coordination with the FSB, as a basis for more detailed work on actual bank and supervisory practices. The FSB has developed specific standards for implementing its Principles, which could be incorporated into supervisory measures, and will complete a review of actions by national authorities to implement the principles by end-March 2010.

16) We are committed to strengthened adherence to international prudential regulatory and supervisory standards. The IMF and the FSB in cooperation with international standard-setters will provide an assessment of implementation by relevant jurisdictions, building on existing FSAPs.
¬    Progress: Progress is also being made towards promoting adherence to cooperation and information sharing standards in the financial regulatory and supervisory area. The FSB has established an Experts Group under the Standing Committee for Standards Implementation that will develop criteria for identifying jurisdictions of concern due to a combination of their weakness and systemic importance; develop an approach and a toolkit of progressive and proportionate measures to engage non-compliant jurisdictions; identify jurisdictions of concern based on the criteria approved by the Committee; develop an evaluation process to complement FSAP and ROSC assessments; assess compliance for jurisdictions of concern, using FSAP/ROSC information and mutual evaluations; and engage non-compliant jurisdictions as appropriate.

17) We call on the FSB to develop a toolbox of measures to promote adherence to prudential standards and cooperation with jurisdictions. We call on the FSB to report progress to address NCJs with regards to international cooperation and information exchange in November 2009 and to initiate a peer review process by February 2010.
¬    Progress: The FSB, in response to the G20 Finance Ministers and Central Bank Governors’ call for reporting on criteria and compliance against regulatory standards, is working to develop:
• a global compliance “snapshot” for the relevant standards building on FSAP assessments where available and any other information related to cooperation and information exchange, by the G20 Finance Ministers meeting in November 2009; • criteria for identifying jurisdictions of concern, by the G20 Finance Ministers meeting in November 2009; • procedures for a peer review process to build on and complement FSAP assessments, to be developed by February 2010 at the latest; and • a toolbox of measures (both positive and negative incentives) to promote adherence and cooperation among jurisdictions, by February 2010 at the latest.

18) We call on the FSB and FATF to report to next Finance Ministers and Central Bank Governors meeting on adoption and implementation by countries.
¬    Progress: The FSB and FATF have provided interim progress reports describing the measures that have been taken and other progress made since the London Summit to implement the London Summit and relevant FSF recommendations.

19) The IASB’s institutional framework should further enhance the involvement of various stakeholders.
¬    Progress: The IASB is working together with supervisors in key areas, including provisioning and valuation, and has had a number of meetings with the BCBS on these issues. In addition, supported by the FSB, the IASB held a meeting with senior officials and technical experts of prudential authorities, market regulators and their international organizations to discuss financial institution reporting issues on 27 August 2009. This meeting included senior representatives from a number of emerging market economies that are FSB members.

20) Regulators and accounting standard setters should enhance the required disclosure in relation to complex financial products by firms to market participants. (By end of 2009)
¬    Progress: National authorities have taken, and are continuing to take, steps to encourage firms to provide disclosures consistent with international best practice by the Senior Supervisors Group and the FSB, as appropriate. Firms have continued to enhance their risk disclosures in their published annual reports.

The 12 Key Standards for Sound Financial Systems
A key areafor governance is a set of coordinated regulations on the fundamentals of market operations.  As explained by the FSB on its website:  "The 12 standard areas highlighted here have been designated by the FSF as key for sound financial systems and deserving of priority implementation depending on country circumstances. While the key standards vary in terms of their degree of international endorsement, they are broadly accepted as representing minimum requirements for good practice. Some of the key standards are relevant for more than one policy area, e.g. sections of the Code of Good Practices on Transparency in Monetary and Financial Policies have relevance for aspects of payment and settlement as well as financial regulation and supervision."  FSB, 12 Key Standards For Sound Financial Systems.  
Area:  Macroeconomic Policy and Data Transparency
1. Monetary and financial policy transparency: Code of Good Practices on Transparency in Monetary and Financial Policies, Issuing body--IMF
2.  Fiscal policy transparency:  Code of Good Practices on Fiscal Transparency, Issuing body--IMF
3.  Data dissemination : Special Data Dissemination Standard (SDDS), and General Data Dissemination Systems (GDDS), Issuing Body-- IMF

Area: Institutional and Market Infrastructure
1.  Insolvency: Insolvency and Creditor Rights, Issuing body--World Bank
2.  Corporate governance: Principles of Governance; Issuing body--OECD
3.  Accounting: International Accounting Standards (IAS); Issuing Body--IASB
4.  Auditing: International Standards on Auditing (ISA); Issuing body--IFAC
5.  Payment and settlement: Core Principles for Systemically Important Payment Systems; Issuing body--CPSS;  and  
Recommendations for Securities Settlement Systems; Issuing bodies--CPSS, CPSS/IOSCO.
6.  Market integrity: The Forty Recommendations of the Financial Action Task Force, and 
9 Special Recommendations Against Terrorist Financing; Issuing body--FATF
Financial Regulation and Supervision
1.  Banking supervision: Core Principles for Effective Banking Supervision; Issuing body--BCBS
2.  Securities regulation: Objectives and Principles of Securities Regulation; Issuing Body--IOSCO
3.  Insurance:  Insurance Core Principles; Issuing body--IAIS
The FSB's work is thus intimately connected to the ongoing work of a number of key international organizations.  Each of them, in turn, provide a connection between standard setting, regulation, and states other than G20 members.  In this way standard setting provides an indirect way for state imput beyond the G20.  Perhaps it also encourages what political elites call "buy in."  My guess is that the "buy in" of states who are not directly involved in the construction of governance systems at this level is minimal.   Still, it suggests the "comitological" aspects of the global governance to which President Sarkozy alluded--one in which there is only an indirect connection between the sovereign will of states and the mechanisms thrugh which governance is effectuated. 
The Standard-Setting Bodies
Basel Committee on Banking Supervision (BCBS): The BCBS, established by the G10 Central Banks, provides a forum for regular co-operation among its member countries on banking supervisory matters. The BCBS formulates broad supervisory standards and guidelines and recommends statements of best practice in banking in the expectation that bank supervisory authorities will take steps to implement them. 
Committee on the Global Financial System (CGFS): The CGFS, established by the G10 Central Banks, undertakes systematic short-term monitoring of global financial system conditions, longer-term analysis of the functioning of financial markets, and the articulation of policy recommendations aimed at improving market functioning and promoting stability. As part of its work on longer-term structural issues relating to financial markets, the CGFS has developed a list of general principles and more specific policy recommendations for the creation of deep and liquid government securities markets.
Committee on Payment and Settlement Systems (CPSS): The CPSS, established by the G10 Central Banks, provides a forum for regular co-operation among its member central banks on issues related to payment and settlement systems. It monitors and analyses developments in domestic payment, settlement and clearing systems as well as in cross-border and multi-currency netting schemes. It also provides a means of co-ordinating the oversight functions to be assumed by the G10 Central Banks with respect to these netting schemes. The CPSS formulates broad supervisory standards and guidelines and recommends statements of best practice in banking in the expectation that bank supervisory authorities will take steps to implement them. In addition to addressing general concerns regarding the efficiency and stability of payment, clearing, settlement and related arrangements, the Committee pays attention to the relationships between payment and settlement arrangements, central bank payment and settlement services and the major financial markets which are relevant for the conduct of monetary policy.
Financial Action Task Force on Money Laundering (FATF): The FATF, established by the G7 Summit in Paris in 1989, has set out a programme of forty Recommendations to combat money laundering. The Recommendations were updated in 1996 and again in February 2002 in the wake of the 11 September 2001 terrorist attacks against the U.S., when 8 Special Recommendations were added to the original forty. Comprising 26 member countries, FATF monitors members' progress in implementing measures to counter money laundering through a two-fold process of annual self-assessment and a more detailed mutual evaluation, reviews money laundering trends, techniques, and counter-measures and their implications for the forty Recommendations, and promotes the adoption and implementation of the FATF Recommendations by non-member countries. 

International Association of Insurance Supervisors (IAIS): The IAIS, established in 1994, is a forum for co-operation among insurance regulators and supervisors from more than 100 jurisdictions. It is charged with developing internationally endorsed principles and standards that are fundamental to effective insurance regulation and supervision. After having developed the IAIS Core principles, Insurance Concordat and several other standards, much of the IAIS's recent work on standard setting has focused on developing standards in the areas of solvency, insurance concordat to cover cross-border service provision, asset risk management, group co-ordination of financial conglomerates, reinsurance, market conduct and electronic commerce. 

International Accounting Standards Board (IASB): The International Accounting Standards Board is an independent, privately-funded accounting standard setter based in London, UK. Board members come from nine countries and have a variety of functional backgrounds. The Board is committed to developing, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements. In addition, the Board cooperates with national accounting standard setters to achieve convergence in accounting standards around the world. The IASB is responsible for developing and approving International Accounting Standards (IAS). To-date, a total of 40 IAS have been promulgated by the IASB and its predecessor, the International Accounting Standards Committee (IASC). 

International Auditing and Assurance Standards Board (IAASB): The International Auditing and Assurance Standards Board (IAASB) is a committee of the International Federation of Accountants (IFAC) that works to improve the uniformity of auditing practices and related services throughout the world by issuing pronouncements on a variety of audit and assurance functions and by promoting their acceptance. IAASB pronouncements are developed following a due process that includes input from the general public, IFAC member bodies and their members, and a Consultative Advisory Group that represents regulators, preparers, and users of financial statements.                
International Monetary Fund (IMF): The IMF develops and monitors international standards in areas of direct operational relevance to its mandate to carry out surveillance over the international monetary system. In collaboration with other standard-setting bodies, it has developed international standards for data dissemination and transparency practices in fiscal, monetary and financial policies, and has contributed to the development of international standards for banking supervision. The IMF has prepared on an experimental basis several country reports on implementation of standards and codes of best practices.
International Organisation of Securities Commissions (IOSCO): IOSCO is an organisation for co-operation among national regulators of securities and futures markets. IOSCO develops and promotes standards of securities regulation in order to maintain efficient and sound markets. It draws on its international membership to establish standards for effective surveillance of international securities markets and provides mutual assistance to promote the integrity of markets by a rigorous application of the standards and effective enforcement against offences.
Organisation for Economic Cooperation and Development (OECD): The OECD aims to promote policies designed to achieve sustained economic growth and employment in its member countries. In the area of promoting efficient functioning of markets, the OECD encourages the convergence of policies, laws and regulations covering financial markets and enterprises.
CPSS-IOSCO Task Force on Securities Settlement Systems: Building on the previous work, the CPSS and the Technical Committee of IOSCO set up this task force to jointly issue recommendations for securities settlement systems.            
BCBS Transparency Group and IOSCO TC Working Party on the Regulation of Financial Intermediaries: The recommendations for public disclosure of trading and derivatives activities of banks and securities firms complement the two Committee's survey of trading and derivatives disclosures of banks and securities firms, which has been published annually since 1995. Both initiatives form part of a continued effort to encourage banks and securities firms to provide market participants with sufficient information to understand the risks inherent in their trading and derivatives activities.                                                                                   
And thus a face to the template offered by Mr. Zarkozy for the coming system of global governance.  There is something old fashioned about this governance model--it is still built on the will of the most powerful actors on the globe.  But the assertion of power is completely modern (and by modern I mean adopting the patterns of multi-lateral governance forged  after 1945) in its form.  It is soft and indirect.  One no longer tends to see power marching through the streets of an occupied place (though that happens now and again, though not so much for governance purposes as for the management of populations whose governments resist global governance norms).  One understands power in the form of principles, benchmarks, standards, objectives, and rules.  One feels the effects of these forms of governance through the regulatory power of surveillance.  The rules themselves are both bureaucratized and juridified.  They are formulated through mandarinates of experts and interpreted through global networks of judges.    Rules are not imposed.  They are transposed and adopted through a long and amorphous process of consultation, construction, adoption and management.   And they are complex--both each in their own field and together as a network of governance over economic and related activities of states and others.  In a world that is grounded politically on theories of mass democracy, the new governance suggested by Mr. Sarkozy, and constructed through FSB, is grounded in an aristocracy of experts.  That reality colors Mr. Sarkozy's Davos efforts at "populism" with both irony and perversity. 

The face of the new governance in all of these respects is quite visible in the managerialism inherent in the FSB framework of monitoring.   See, Joseph Heaven, Spain, Italy Said to Be First for FSB Peer Reviews (Update1), Bloomberg/Business Week, Jan. 20, 2010.   
Spain, Italy and Mexico will be the first countries to undergo the Financial Stability Board’s reviews of how effectively they implemented rules to prevent financial crises, three people familiar with the matter said. The so-called peer reviews will take place this year as part of the FSB’s effort to make sure member nations are complying with its rules. . . .  As markets recover from the worst financial crisis since the Great Depression, the FSB will use the reviews to measure how countries comply with standards created from 1996 to 2006 to protect financial stability. The reviews are separate from FSB assessments started last month on how countries are implementing bonus and compensation rules.
“The process is starting for real and countries who sense they might not match up know that it is coming and will catch up with them in due course,” said David W. Green, a former Bank of England official who now advises overseas regulators.
The FSB wants regulatory standards to be consistent across its 24 member countries and territories, to prevent companies moving to places with the most favorable law and harming those nations that stick to the rules. The Basel-based organization is coordinating financial regulators and supervisors response to the global economic crisis.
Id. Financial Sector Assessment Program appraisal is to occur every five years, and will be conducted under the authority of the International Monetary Fund--the international organization already well versed in the management of the economies of smaller states.  Id.  And, indeed, the FSAP has been a tool well developed for that purpose over the course of the last decade.
The FSAP, a joint IMF and World Bank effort introduced in May 1999, aims to increase the effectiveness of efforts to promote the soundness of financial sytems in member countries. Supported by experts from a range of national agencies and standard-setting bodies, work under the program seeks to identify the strengths and vulnerabilities of a country's financial system; to determine how key sources of risk are being managed; to ascertain the sector's developmental and technical assistance needs; and to help prioritize policy responses.
International Monetary Fund, The Financial Sector Assessment Program,  Now thoroughly tested, its approach will be globalized as applied to a broader range of actors.   Ironically, the forms of governance now part of the FSB's arsenal bear a resemblance to the modalities of governance within the supply chain of large multinationals.  See, Larry Catá Backer,   Economic Globalization and the Rise of Efficient Systems of Global Private Lawmaking: Wal-Mart as Global Legislator. University of Connecticut Law Review, Vol. 39, No. 4, 2007. In this area, at least,there is  sort of convergence of operational form.  On the issue of hierarchy of governance power, the answers have yet to be written.  

Saturday, January 30, 2010

Sovereign Wealth Funds and Internal Contests for Control of Sovereign Investing: Considering China and Brazil

Generally, the simplest answer or assumptions are bound to be correct. But sometimes efforts to simplify, and especially simplifying assumptions as a foundation to analysis, can lead away from useful analysis. These truisms are well known, yet for all the knowing the temptations of oversimplification are quite strong. This may be especially true when confronting new politico-legal phenomena like sovereign wealth funds. This short essay is meant to highlight a potentially harmful oversimplifying assumption in the construction, implementation and use of sovereign wealth funds—that they represent a considered and unified policy of a state. The operations of a sovereign wealth fund may appear to be part of a set of coordinated efforts by a state geared to the single minded projection of their wealth abroad in the context of external contests for control of economic power through private markets. However, it appears that sometimes sovereign wealth fund activity may also evidence the projection abroad of internal contests for control of significant sectors of the state governmental apparatus. To illustrate this, I will look briefly at the contexts in which sovereign wealth fund as are formed and operate in Brazil and China.

Conventionally, the focus on the character of the ownership of sovereign wealth funds is grounded in the assumption of an identity between the sovereign and the investment vehicle. Because the state is the owner, the fund is the state. “SWFs are, by definition, extensions of the state. They are therefore viewed as maximizing their country’s long-term strategic interests rather than as profit-maximizing actors.” (Daniel W. Dezner, Sovereign Wealth Funds and the (In)security of Global Finance, 62 J. Int’l Aff. 115, 117 (2008)). But that assumption, true enough, is grounded on a further assumption—that the state is a unitary actor in which all of its ministers and departments work together for a singular purpose. But of course, even a short reflection tends to suggest the error of this assumption. In China, for example, no functional distinction is made between its sovereign wealth fund, operated by the China Investment Corporation (CIC) and the State Administration of Foreign Exchange (“SAFE”), a purely sovereign entity charged with the conventional task of managing China’s reserves reporting to the State Council and charged with managing China’s foreign exchange. (State Administration of Foreign Exchange, Major Functions). Both now appear to invest directly in offshore equities. “As the CIC begins to expand its own outbound investments, SAFE is demonstrating its own intentions to occupy the same space. SAFE recently sank $2.5 billion in a $17 billion fund managed by TPG for private-equity investments. In addition, the foreign exchange manager has bought around $2 billion in shares of British Petroleum and around $2.5 billion in shares of France’s Total.” (Logan Wright, CIC and SAFE: Coordination or Bureaucratic Conflict?, China Stakes, June 24, 2008).

Yet what appears to be a coordinated effort to deploy China’s wealth outbound, actually masks a set of what may be extremely powerful institutional (and perhaps personal) antagonisms between two powerful sectors of the Chinese state apparatus. To some extent, CIC competes with the State Administration of Foreign Exchange (SAFE), the traditional agency charged with managing the nation’s foreign reserves, and the People’s Bank of China, which “formulates and implements monetary policy.” (People’s Bank of China, Major Responsibilities). There are some indications that the relationship between them is not necessarily cooperative, but instead reflects contests for power to control China’s significant national wealth. One account suggests an intention at the highest levels of government to create competition of sorts among state sector entities, and principally between the People’s Bank of China and the Ministry of Finance, to induce better performance based on an assessment that conservative policies to protect the Chinese currency no longer needed to limit the use of reserves. The result was a decision to create a sovereign wealth entity. “Eventually, the CIC was created under the control of the State Council, and out of the bureaucratic reach of either ministry, but was staffed primarily with personnel tied to the Ministry of Finance and the NDRC.” (Logan Wright, CIC and SAFE: Coordination or Bureaucratic Conflict?, China Stakes, June 24, 2009).

The result may substantially affect analysis of the investment activities of SWFs. Thus, for example, it may be as useful to analyze the pattern and scope of CIC investments for their effects on the distribution of policy and management power in contests between CIC and SAFE (or between the People’s Bank of China and the Chinese Finance Ministry) as it may be to focus on the way in which such investments speak to policy determinations by the highest levels of Chinese government. Of course, it is most likely that financial decisions at a micro level may reflect more the need to meet outward investment objectives. But in the aggregate, the flow and direction of investments may be as pointed to acquiring advantage over internal rivals as it is focused on acquiring dominance in foreign private markets in those sectors deemed important by the state. The regulatory consequences of this more subtle approach can be different from that of a more simple-minded conception of SWFs as merely a publicly owned private enterprise substantially disconnected from the state apparatus that owns and funds it, and whom it ultimately serves.

A similar complexity can be discerned in the development of the Brazilian Sovereign Wealth Fund.  The Sovereign Wealth Fund was created by Lei No. 11,887, of December 24, 2008 (in Portuguese). In an important article by Arthur Oscar Guimarães, Fundo Soberano, Revista de Conjuntura 23-27 (July 2009), a similar pattern of external unity masking significant internal contests can be discerned involving the central bank (Banco Central e Tesouro Nacional) and the ministry of finance (ministerio da fazenda). As in China, it appears that the Finance Ministry was able to assert authority over the opposition of the Central Bank in the construction and construction of the Brazilian version of this investment vehicle.
[N]o final de 2007 o debate sobre a constituição de um “fundo soberano” brasileiro se fazia presente na mídia. . . . Naquele momento a falta de consenso quanto ao papel destinado a um fundo desta natureza já se explicitiva no seio do governo e mesmo entre outros especialistas. Para alguns membros do governo o acúmulo de reservas internacionais tendência crescente seria usado (essa era a expectativa de então) na criação de um fundo soberano, que serviria para o governo investir recursos na eventualidade de uma crise financeira de grandes proporções. Entretanto, a falta de consenso alcançava até mesmo o objetivo do fundo. O presidente do Banco Central, Henmrique Meirelles, refutava a idéia de que o fundo poderia fazer um uso alternativo das reservas do país. Id., at 23-24. (At the end of 2007 the debate on the creation of a Brazilian "sovereign fund" was reported in the media. . . . At that time the lack of consensus about the role intended for such a fund had been already pointed out within the government as well as other specialists. For some members of the government the accumulation of upward trending international reserves would be used (this was the expectation at the time) to create a sovereign fund, which would provide the government with resources to invest in the event of a financial crisis of major proportions. However, the lack of consensus even included the goal of the fund. The chairman of the Central Bank, Henrique Meirelles, refuted the idea that the fund serve as an alternative use of nation’s reserves.)

Nonetheless, a SWF of asome kind was in the offing. The critical question was reduced to one of control—whether the fund would come under the control of the Central Bank or the Ministry of Finance. And that question subsumed within it the question of funding. In other words, if the Central Bank was opposed to the idea of the SWF and unwilling to allow funds under its control to be used for that purpose, could the Ministry of Finance go forward with the fund and without the Brazilian reserves controlled by the Central Bank?
Em maio de 2008, ganhava relevo a criacão de um fundo de poupança fiscal, denominação então utilizada pelo ministro da fazenda para o fundo soberano brasileiro, cujos recursos, aplicados em dólar, seriam usados para financiar, a taxas subsidiadas, empresas brasileiras com atuação no exterior. A proposta do ministro Guido Mantega estava praticamente formatado e aprovada faltando fechar uma questão importante: quem iria administrar esse fundo, se a Fazenda ou o Banco Central. A mídia noticiava que o BC permanecia não muito entusiasmado com a proposta, particularmente porque temia influências indevidas na formaçã da taxa de câmbio. Por isso, no caso de criação do fundo, defendia que a administração ficasse com a diretoria da autoridade monetária. Id., at 24. (In May 2008, the creation of a tax savings fund gained prominence, [the tax savings fund being] then the name used by the finance minister for the Brazilian sovereign wealth fund, whose resources were to be applied in dollars, to be used to finance, at subsidized rates, Brazilian companies with operations abroad. The proposal of the Finance Minister Guido Mantega was essentially structured and approved except with respect to an important issue: who would manage this fund, the Finance Ministry or the Central Bank. The media reported that the Central Bank was still not very enthusiastic about the proposal, particularly because of the fear of undue influence in setting the exchange rate. Therefore, in the case of creation of the fund, the Central Bank insisted that administration stay with the board of the monetary authority.).
The essence of the contest was thus both simple and complex—at one level the issue was about the use of Brazilian reserves. At another level, the issue was the power to control those reserves and the scope of permissible investment of those funds. This was not merely a matter of monetary policy, or of a refined analysis of the legitimacy of national authorities projecting financial power in private markets abroad. Rather, the more important issue was on the division of authority over those funds (and the direction of investment) between two coordinate sectors of the state government apparatus.

As in China, the ultimate decision favored the Finance Ministry over the Central Bank apparatus. But in the case of Brazil, there was a twist.
A decisão então tomada seria a de criação de um fundo soberano de US $10 bilhões para atender à demanda de financiamento de BNDES [the Brazilian Development Bank, see] para 2008. Tratava-se, portanto, de um fundo que seria alimentado pela “aquisição de dólares que estão sobrando no Mercado. . . . O BNDES tinha a intenção de captar pelo menos R$ 25 Bilhões, metade dos recursos já disponíveis. Id., at 24. (The decision taken would be to create a sovereign fund with $ 10 billion to meet the demand for financing from BNDES [the Brazilian Development Bank] for 2008. It was, therefore, a fund that would be powered by the "acquisition of additional dollars from the market. . . . BNDES intended to raise at least $ 25 Billion, half of the resources already available.)
Whether or not the sovereign wealth fund succeeds, it has succeeded in producing a significant shift in monetary policy from the Central Bank to the Finance Ministry. 
Portanto, qualquer posicionamento definitivo sobre o erro ou acerto a respeito da criação do FSB, parece hoje precipitado, mas a título de conclusão ficamos com a afirmação do próprio Paulo Nogueira Batista: “Por que então a barulho na imprensa e a indignação da turma da bufunfa? Arrisco uma hipótese: a criação de um fundo soberano com parte das reservas, ou com reservas adicionais a serem adquiridas no mercado pelo Tesouro, resultaria em uma certa redistribuição de poder dentro do governo. Perderia o Banco Central, ganhariam o Tesouro e o BNDES.” Id., at 27 (Therefore, any definitive statements about the error or arrangement concerning the creation of the SWF, now seems premature, but in conclusion we get the affirmation of the very Paulo Nogueira Batista, "Why then the fuss in the press and the indignation of the monied classes? I venture a hypothesis: the creation of a sovereign wealth fund with part of the reserves, or with additional reserves to be acquired by the Finance Ministry in the market would result in the certain redistribution of power within the government. The central bank’s loss would be the gain of the Finance Ministry and BNDES).
In this Brazil and China appear to be going down similar paths. And in both cases, internal contests for control of the direction of the investment of national wealth appears to be a significant factor in the formation and deployment of sovereign wealth vehicles. But it does more than that—the movement of control of reserves, or other form as of national wealth, from the Central Banks to the Ministries of Finance signals a global move toward more aggressive interventions in both public finance and private markets. SWFs are here to stay because as a consequence of globalization, global private markets are a far more lucrative method for managing national wealth, and a more potent arena for effectuating national policy. Central Banks are, by the reality of the traditional limiting cultures of their operation, less capable of exploiting these new methods of government operation.  Central Banks  may be capable of engaging in the regulation of global markets, but appear less willing to participate in those markets. Such market participatory activities are more likely to be taken up by the more entrepreneurial Ministries of Finance.  This seems to be the case in Brazil.  On the other hand, in China, the move toward more aggresive intervention in private markets seems to have pushed the Central Banks and SAFE to change their more cautious approaches.  That has sparked a measure of competition both for shares of power within the government, and for investment opportunities outside China, 

Friday, January 29, 2010

Africa Center for Corporate Responsibility and Capacity Building in the Niger River Delta

One of the great failings of the global human rights and corporate social responsibility movements has been the difficulty of shifting the focus of the movement from Western civil society actors projecting their power into developing states to empowering local civil society actors to confront and manage locally relevant issues.  There is something a little odd about Western elements of civil society confronting western economic actors  in the west about their activities in developing states.  One of the most useful recent efforts to change this has been the work of many actors (from the West and elsewhere) to build indigenous capacity within developing states.   Among those are national programs for capacity building, like the American efforts through the United States Institute of Peace.  As that indigenous capacity grows, the tenor and scope of engagement between stakeholders around issues important in developing states is likely to change as well.  In that context,

An example of a successful indigenous civil society actor has been the Africa Center for Corporate Responsibility (ACCR) under the leadership of its executive director, Austin G.C. Onuoha.  It was established to serve as a think tank and resource center for the African continent on corporate social responsibility in extractive industries.  A recent report distributed by ACCR provides a window on a new, and indigenous, face of indigenous approaches to corporate social responsibility in developing states.  It is a lesson worth considering carefully, especially for its potential importance for regulatory efforts at the national and transnational level respecting corporations and human rights.   It is a lesson that will be as valuable for the western corporations that are now the object of the efforts of these civil society actors, as well as for other foreign actors now increasing their presence in developing states.  See Lindsey Hilsum, The Chinese are Coming, The New Statesmen, July 4, 2005; Stephanie Hanson, China, Africa and Oil, Council on Foreign Relations, June 6, 2008.

A recent project of the ACCR focused on community corporate relations in the Niger Delta.  See ACCR, Community Based Model Peace Plan for the Niger Delta (2009) (a project of ACCR with support from the United States Institute of Peace).  The Niger Delta has been the site of a complex stew of ethnic conflict, corruption, global economic activity, ecological effects, national and international law and behavior norms.  It has a long history of violence, but violence managed sufficiently well enough to permit large corporations to successful manage economic activity, especially in the extractive services sector.  See, e.g., Human Rights Watch, Background Briefing:  Rivers and Blood:  Guns, Oil and Power in Nigeria's Delta State (February 2005).  It is in the complex mix of violence and economic opportunity that ACCR became involved.  As ACCR explains it, the Niger Delta is important for its work for three reasons: (1) the region provides substantial amounts of wealth to a variety of actors, mostly outsiders (including Nigerians from other regions); (2) the people of the region bear the brunt of the ecological damage resulting from the operations of the extractive industries sector; and (3) the local people may not be well represented  because they represent a number of ehtnic and religious minority groups within the Nigerian Federation.  

It was with this in mind that ACCR participated in an Open Society Initiative of West Africa round table to address possible civil society action.    The OPen Society Initiative is grounded in  a set of core governance and aspirational principles
An open society is a society based on the recognition that nobody has a monopoly on the truth, that different people have different views and interests, and that there is a need for institutions to protect the rights of all people to allow them to live together in peace. An open society is characterized by the rule of law, the existence of a democratically elected government, a diverse and vigorous civil society, and respect for minorities and minority opinions.
Open Society Initiative , What is an 'Open Society?'. The participants determined that there was a need to define the Niger Delta and its political economy as a first step toward intervention.  ACCR, Community Based Model Peace Plan for the Niger Delta (2009) at ix.  Defining the Niger Delta as "any area, or community that is impacted by oil company operations," (Id.) the group turned to strategies and activities that might serve to address and mitigate adverse impact of all actors in tghe Niger Delta.  Id.  For this purpose, data was necessary.
In other words, participants agreed that to have any meaningful intervention in the Niger Delta, that it is important to conduct some form of baseline survey or study.  It is in line with the above and the need to give the people of the area more voice in determining what is important to them and how those should be addressed that this project was carried out. The strategy of the intervention is anchored around consultation, dialogue and community engagement. 
Id.  The important point here, of course, is the refocus of intervention, from the privileging of what civil society intervenors think is good for the local population to greater efforts to conform intervention to meet the needs of the local population as expressed by them. See id., at 1.

But decades of social engineering from outside the affected communities and exploitation have made the local population wary.  And so the "data collectors were greeted with cynicism, denial, grandstanding and outright hostility." ix. As important, the target users of the data produced their own culturally oriented difficulties.  In order to affect the intervention community--from governments, corporations and foreign civil society elements, it was necessary to conform he data to their own cultural expectations and the habits of their work. "This accounts for the extensive use of bullet points and summaries.  This is because this document is largely targeted at policy makers and those who seem not to have the time to read very long texts."  Id.

And thus was crafted a Community Based Model Peace Plan.  That plan was grounded in the initiation of cooperation through fact gathering (rather than fact "finding"), the identification of important local actors, and the parameters of any framework for satisfying the needs of all stakeholders. Id., at 1.  The focus of the activities of ACCR was centered on the data gathering and consequential relationship building in the target area.  Id., at 1-2.  The process was neither simple nor quick.  From literature review, through survey design, data collection training, the collection of data, its collation analysis and meetings leading to the production of a final report took the better part of a year.  Id., at 2-3.

The focus of data collection activity was "on Bayelsa, Delta, Rivers and Imo States.  The main reasons for this was because these four states combined produce close to 80% of the nations total petroleum output.  Moreover these four states have also been the theater for some of the worst form of violence in the entire Niger Delta."  Id., at 3. 

What did AACR find?  First that government neglect, unemployment, lack of infrastructure and ignorance were identified as the most important causes of the conflict in the Niger River Delta.  Id., at 4.  Second, that employment, infrastructural development, youth/female empowerment, education, and poverty/livelihood systems were identified as the issues most important to Niger Delta peoples.  Id.  Additionally, and not surprisingly, government, oil companies, oil producing community leaders, the Church and reputable NGOs were identified as key groups that must be involved in negotiating an end to conflict in the Niger Delta.  Id.  Interestingly, the local population insisted that governmental involvement be limited to observation rather than participation.   The government was generally viewed as one of the causes of the problems in the Niger Delta.  Id., at 5.  Also  understood as a controbutor to instability was corruption.  Id.   Somewhat inconsistently, the local populations also insisted that government, the oil producing communities and the oil companies must execute any agreement to end violence.  Id., at 5. The focus on reputation legitimacy  of NGOs suggests a distrust of "strangers bearing gifts" that go sour.  And it appears that the involvement fo the Church might serve as a means of ensuring a powerful ally to assure good faith.
The local populations were less specific on acceptable approaches to the focus of any peace agreements int he region.  The survey suggested a preference for "whatever the parties at the negotiating table agree" and "oil revenue must go directly to the communities" as their preferred alternatives.  Id., at 5.    Yet, consistent with the importance attached to the legitimacy of participating NGOs and the role of the Church, the survey revealed a preference for structuring any agreement to include monitoring by NGOs, the establishment of separate budgetary authority for its enforcement and community involvement.  Id., at 5.  There was also strong support for Church and reputable NGO facilitation of any agreements among the parties.  Id.

ACCRA's analysis fleshes out these insights from the data.   They suggest that the anger directed against the government doesn't so much suggest alienation as anger at a lack of engagement by any governmental authority.    "The implication of this is that government must also play a prominent role in bringing the crisis to an end."  Id., at 6.  But government's role in this process must be muted and respectful.  Respect first appears to require acknowledgment that the affected local communities must also participate in the process of resolving conflict.  Id.  But this has important implications.  The usual course in the face of such demands is to construct some sort of theatre of participation with no real effect.  What thew data suggested was a broader participation based on a recognition that the distinct communities in the affected region each require participation in equal measure.  "No two Niger Delta communities are the same and the impact of each oil company facility is different and unique."  Id.  Aggregation of local participation as much eviscerates it as it appears to embrace it.  Trust issues, of course, were important.  There were few outside representatives that local communities trusted.  Id., at 6-7.  Trust issues were interrwined with issues of development and the provision of government services.  Both of those, in turn, were related to issues of ethnic and religious subordination within Nigeria.
Most, if not all the demands put forward by the people of the Niger Delta as possible provisions of a peace agreement are what governments shpuld ordinarily deliver whether the area produces oil or not.  Therefore the non provision of these basic amenities to the people of the Niger Delta smacks of injustice.  Injustice which according to them, arise from their being minorities, injustice from the imposition of leaders, and injustice form corrupt leaders and impunity by oil companies.   
Id., at 8.  Thus, an emphasis on marginalization.  "In other words, marginalization is at different levels.  First marginalization at the federal lñevel, then at the state level, and local government level and finally at the community level.  They insist that this must be addressed in any peace settlement."  Id., at 10.

One might expect that this would open the door to greater involvement by economic enterprises in issues ordinarily understood as governance related.  But the opposite seems to be true.  "This leads to another major finding of the research.  Many respondents do not see much role for the oil companies both in the peace process and in community development."  Id.  The idea is that corporations must remain subordinate to governmental control, and thus, issues over which enterprises have direct control are understood as derivative of governmental authority.  This, of course, presents opportunities for enterprises, who relying on this perception, may blame the state for excesses.  "It is the view of most respondents that it is the government that caused the violence and that they should be the one repairing the damage."  Id., at 9.  

Lack of trust also appears to influence the shape of approaches to monitoring regimes.  "Because of the serial failure  o governments to deliver on their promises, people see any peace plan as being susceptible to government lethargy and neglect."  Id., at 11.  As a consequence, the preference is for transnational or extra-national monitoring mechanisms.  Interestingly, local communities focus on public rather than private organizations as best constituted to discipline state compliance with any agreement.  Private entities--either in the form of companies or civil society are less vested with legitimacy in this respect than public bodies.  A reason for that may be the conflation of legitimacy with a taxing power.  The entity that can tax sits atop the popular conception of  authority.   The ACCR quoted a traditional ruler from Imo State in a telling way: "The Federal Government has no business with oil.   They collect only taxes.  We as oil producing companies deal with oil companies. Oil companies deal with Oil Land Lords.  What we need is real fiscal federalism. "  Id., at 12. Perhaps this reflects a a transfer of the legitimacy of tribute to the taxing power.  Perhaps it suggest cultural approach to the legitimating aspects of the taxing power for public authority.  What clearly emerges, though, is the importance of symbolism in the construciton of legitimating power relationships, the endurance of notions of public authority as confiscatory, and thus constructed as suggesting a hierarchy of legitimate authority that places the power to tax well above other indicia of power.

What result?
Going through the data one message comes out clearly--and that is that communities want a framework of integrity for the development of their area.  The constitutional provisions, revenue allocation laws, and the establishment of several development bodies have not been able to address the development need of Niger Delta communities.  They therefore want a mechanism  call it peace agreement if you will, that will be specific, measurable, enforceable and time bound.
Id., at 15.  Yet the role for the enterprises at the center of the disputes appear subsumed under more fundamental tensions within the Nigerian body politic. 

"Somehow the people expressed implicit faith in democracy and democratic institutions."  Id.  But there is no corresponding faith in the economic enterprises that stand in the middle between the state and local communities.  Indeed, the multinational enterprises at the center of the disputes here seem to disappear in what becomes a battle between local and national constituencies for a division of the of income derived from the taxation of those enterprises.  Yet it would seem that there is a role for the multinational enterprise in this context.  It is in this context that a corporation's responsibility to respect human rights can help flesh out the role of the enterprise.  Local communities appear to mean to deal with the Federal Government through the economic enterprises who have negotiated for rights to exploit the nation's natural resources.  Enterprises mean to trade their arrangements with the Federal (and to some extent local) governments for immunity from having to deal with local communities.  But the tax and payment arrangements between these enterprises and the Federal government, with or without the local communities' willingness to exercise power to capture a greater portion of those tax revenues should not define the enterprises' independent obligations to local communities.  Those obligations  exist by virtue of the enterprises' activities in a place rather than as a consequence of the legal relations between the enterprise and the state.  The payment of funds (as taxes or otherwise) to a host state by the enterprise does not diminish the enterprise's obligations.  Nor are the enterprise's obligations sourced solely in the peculiar law of the host state.  Rather the corporation's obligations arise directly from its relationship to those it affects in the course of its operations within a locality.  In this sense, the obligations of the oil sector businesses in the Niger Delta flow  directly to the members of the local community.  They are defined by the host of well respected international norms , amny of which bind states as well.   In the context of ACCR's work, this suggests a greater role for the Niger Delta oil sector enterprises, one that recognizes their double obligations--up to the federal government as the host state and down to the local communtiies as the stakeholders who most directly feel the effects of corporate activity.

Sunday, January 24, 2010

What is a Corporation? : The Regulatory Effects of Different Conceptions of Corporate Personality in American Constitutional Law in Citizens United v. FEC

This essay reviews an aspect of the recently decided case, Citizens United v. Federal Election Commission, No. 08-205 (argued March 24, 2009; reargued September 9, 2009, Decided Jan. 21, 2010). The opinions in the case may be downloaded at

On January 21, 2010, a Supreme Court closely and bitterly divided on fundamental issues of constitutional political theory decided Citizens United v. Federal Elections Commission. Over several hundred pages of majority, concurring and dissenting opinions, the case itself raised and sought to resolve a number of complex and important issues of constitutional law. These include the constitutional contours of stare decisis, the scope of the First Amendment, the extent of a government’s powers to regulate the processes of its elections, the proper scope and use of original sources in constitutional interpretation, and the prudential rules guiding the proper circumstances when issues raised in a case may be “constitutionalized,” that is when a court may reach constitutional issue embedded in a case where resolution may be possible on non constitutional grounds. These issues impact the understanding of the American constitutional order and the political theories on which that order is grounded. For that reason alone, the case is an important marker in the evolution of the construction of the political forms of the American Republic. It is unlikely that the settlement of these issues as represented by the opinions of the justices in the majority will remain intact for long. These are extremely dynamic areas of law and there is no emerging consensus with respect to any of these issues.

But to a considerable extent, Citizens United is also a case touching on basic issues of corporate law. Central to the decision was a fundamental disagreement among the members of the Court as to political consequences of activity undertaken in corporate form. This rift reflects a deeper set of disagreements relating to the appropriate conceptualization of the corporation in political society and the regulatory consequences of that conceptualization. Central to the determinations of both majority and dissenting opinions are fundamentally distinct views of the nature of the corporation, and consequently, of the relationship between the state and the corporation. On the one hand, corporations can be understood as property in the hands of their shareholders, and as such, little more than aggregations of shareholder preferences. On the other hand, corporations can be conceived as an institution, autonomous of its shareholders, with its own obligations and objectives, and as such, as independent and distinct from any individual shareholder. But corporations can also be understood as nothing more than a legal construct, an amalgam of privileges conceded by the state through which it is chartered and from which it owes its existence, and as such cannot be the direct bearer of rights or protection, only the bearer of rights derived from those of its holders. And yet, corporations can be understood as bundles of privileges, giving rise to obligations to act like and undertake the duties of a public entity with respect to its actions. Lastly, corporations can be understood as the meeting point of clusters of contractual relations among a series of actors, whose rights and obligations to the entity are a function of those relations, only some of which is subject to regulation by the state.

These fundamental differences in conception were neither accidental nor evidence of confusion. They are ancient and well considered positions on the nature of the corporation that are, to some extent are both irreconcilable and give rise to substantially different constitutional and regulatory consequences. The differences, in modern form, were first well-exposed in First National Bank of Boston v. Bellotti, 435 U.S. 765 (1978), and contested in Austin v. Michigan Chamber of Commerce, 494 U. S. 652 (1990). Citizens United has effectively recast them anew. The effect of Citizens United is thus not merely confined to issues touching on the constitutional protections of speech rights, and the form of legitimate of constitutional jurisprudence. Rather, it will have potentially significant effects on approaches to the regulation of corporations far beyond the constitutional framework in which the case was decided.


The case arose from a challenge to certain provisions of federal law prohibiting entities from making expenditures for speech that advocated the election of defeat of political candidates. Specifically 2 U.S.C. Section 441b (as amended by the Bipartisan Campaign Reform Act of 2002 Section 203) prohibited corporations and unions from using their general treasury funds to make independent expenditures for speech defined as “electioneering communications” or for speech expressly advocating the election or defeat of a candidate for public office. “Electioneering communications” were defined as “any broadcast, cable, or satellite communication” that “refers to a clearly identified candidate for Federal office” and is made within 30 days of a primary election, §434(f)(3)(A), and that is “publicly distributed,” 11 CFR §100.29(a)(2). However, corporations and unions may establish political action committees (PACs) for the purpose of engaging in such otherwise prohibited speech activity, as long as they complied with the substantial operational, monitoring and disclosure rules relating to PACs. However, the prohibitions apply to for profit and not for profit corporations in equal measure. These regulations had been unsuccessfully challenged in some respects in McConnell v. Federal Election Commission, 540 U.S. 93 (2003), and earlier with respect to corporate expenditures, in Austin, supra, and non-profit corporations, Federal Election Comm’n v. Massachusetts Citizens for Life, Inc., 479 U. S. 238 (1986) (MCFL) (where the Court found unconstitutional only that portion of Section 441b that applied to nonprofit corporations that were formed for the sole purpose of promoting political ideas, did not engage in business activities, and did not accept contributions from for-profit corporations or labor unions. Id., at 263–264).

With respect to disclaimer and disclosure, federal law also imposed requirements. “Under BCRA §201, any person who spends more than $10,000 on electioneering communications within a calendar year must file a disclosure statement with the FEC. 2 U. S. C. §434(f)(1). That statement must identify the person making the expenditure, the amount of the expenditure, the election to which the communication was directed, and the names of certain contributors. §434(f)(2).” Citizens United, supra, slip op., at 51. BRCA Section 311 required that televised electioneering communications contain a disclaimer identifying the person or entity responsible for the communication. Id., at 50-51.

The plaintiff, Citizens United is a non profit corporation supporting conservative causes and candidates. According to SourceWatch (, Citizens United

was created in November 1988 by conservative activist Floyd G. Brown,[1] It is "a nonprofit corporation organized under the laws of Virginia and tax-exempt under section 501(c)(4) of the Internal Revenue Code."[2] Citizens United is affiliated with The Presidential Coalition, a 501(c)(4), and the 2007 Conservative Victory Committee, a Section 527 political action committee. Previously, it was affiliated with the National Security Political Action Committee (National Security PAC), Presidential Victory Committee and Americans for Bush. Citizens United is led by David Bossie, who has served as president since 2000. Its offices are on Pennsylvania Avenue in the Capitol hill area of Washington, D.C.

SourceWatch, Citizens United, available at It has a budget of $12 million, received mostly as donations form individuals. (Citizens United, supra, slip op. at 2). It accepts a small amount of funds from for profit corporations. Ironically, before filing its case, it had participated in an effort to use the provisions it challenged in this case to stop distribution of Michael Moore’s Fahrenheit 9/11 in a complaint ot the Federal Election Commission. (Susan Jones, "Michael Moore Film Violates Campaign Finance Law, Group Alleges," (formerly Conservative News Service; now Cybercast News Service), June 23, 2004).

In January 2008, Citizens United released a film entitled Hillary: The Movie. We refer to the film as Hillary. It is a 90-minute documentary about then-Senator Hillary Clinton, who was a candidate in the Democratic Party’s 2008 Presidential primary elections. Hillary mentions Senator Clinton by name and depicts interviews with political commentators and other persons, most of them quite critical of Senator Clinton.

Citizens United, supra, slip op. at 2. Citizens United released this cinematic effort in theaters and on DVD. Eventually it sought to arrange additional distribution through a video-on-demand service. Id. Citizens United intended to make this service, and a series of advertisements publicizing the film, available within 30 days of the 2008 primary elections. Id., at 4. Fearing that these efforts would run afoul of Section 441b, Citizens United sought declaratory and injunctive relief against the Federal Selection Commission. Id. Specifically, it sought to have both Section 441b and the disclosure provisions in Sections 201 and 311 of the BCRA declared unconstitutional as applied to Hillary. Id. “The District Court denied Citizens United’s motion for a preliminary injunction, 530 F. Supp. 2d 274 (DC 2008) (per curiam), and then granted the FEC’s motion for summary judgment.” Id. The Court noted probable jurisdiction 555 U.S. – (2008) and then compelled reargument to consider whether the Court should overrule “either or both Austin and the part of McConnell which addresses the facial validity of 2 U. S. C. §441b.” Id., at 5.

The Supreme Court determined that it could not avoid the constitutional issue. Id., at 5-20. It overruled Austin with respect to both its limitations on non profit and for profit corporate political expenditures, and that part of McConnell that extended Section 441b’s restrictions on independent corporate expenditures as inconsistent with the protections of the First Amendment. Id., at 20-51. Lastly, it upheld the disclaimer and disclosure requirements of BRCA Sections 201 and 311. Id., at 50-57. The majority opinion was authored by Justice Kennedy in which all justices but Justice Thomas joined as to the issue of the constitutionality of the disclaimer and disclosure provisions. Justices Alito, Scalia and Thomas, and the Chief Justice joined that portion of the opinion dealing with the constitutionality of Section 441b. Justice Stevens, joined by Justices Ginsburg, Breyer and Sotomayor, filed an opinion concurring in part and dissenting from that portion dealing with the constitutionality of Section 441b and overruling Austin. The discussion that follows looks at the opinion solely from a very limited perspective. It considers the way in which different conceptions of the corporation contributed to the arguments deployed by majority and dissenting opinions.

Privileging the Corporation as Autonomous Entity:

The majority opinion suggests the consequential power of a conception of corporation as autonomous entity in the context of constitutional rights adjudication. Justice Kennedy is able to frame his argument—focused on the prohibition of speech limitations applied to corporations—only by developing a set of premises that together constitute a corporation as an entity capable of independent action. If corporations are not autonomous, then the rights they claim, and especially the constitutional protections extended to them, would have to derive from those for whom corporations act. If, on the other hand, corporations are understood as entities separate from others, then it may be extended protection ion its own right. This distinction is crucial for the elaboration of the majority’s argument. It suggests that Section 441b constitutes an outright ban on speech, backed by criminal sanctions. Citizens United, supra, slip op., at 20. It is a ban that is a function of the identity of the speaker (a corporation) though not a function of the nature of the origin of the speech (in collective speech). Thus PACs are permitted speech rights where corporations are denied them. Id., at 21. On the other hand, PACs were understood as being burdensome because of the nature of the rules for their operation. Id., at 21-22.

Of course, this would make no difference if corporations were assumed to be no more than the sum of statutory privilege or the creature of the state. In either case, all corporate attributes would be understood as privileges rather than rights. Moreover if corporations were understood as property, then the fact that they could not “speak” for themselves would be of little moment—their real voices could be heard when shareholders chose each to speak as they liked. Corporate speech, in this sense, would merely duplicate shareholder speech, and thus would not have an independent value. “We find no basis for the proposition that, in the context of political speech, the Government may impose restrictions on certain disfavored speakers. Both history and logic lead us to this conclusion.” Id., at 25. The issue, then, reduces itself to a simple one: do corporations (or other aggregations) constitute rights bearing “speakers” for purposes of constitutional analysis. The Court determined that they were. To get there they necessarily embraced a particular understanding of the nature of the corporation.

Let us work through Justice Kennedy’s analysis for the majority. He starts with the general proposition that the “Court has recognized that First Amendment protection extends to corporations.” Id., at 25. He cites among a slew of cases, Bellotti, supra. This is noteworthy, if only because Bellotti was among the first cases where the majority opinion explicitly relied on an institutionalist conception of the corporation—as an independent and autonomous entity distinct from its stakeholders and capable of independent expression—in reaching their holding that a state could not ban corporate expenditures relating to referenda put to voters. Justice Kennedy builds on this by suggesting that this proposition has been extended to political speech in general. Id., at 26.

Corporations and other associations, like individuals, contribute to the ‘discussion, debate, and the dissemination of information and ideas’ that the First Amendment seeks to foster” (quoting Bellotti, 435 U. S., at 783)). The Court has thus rejected the argument that political speech of corporations or other associations should be treated differently under the First Amendment simply because such associations are not “natural persons.”

Citizens United, supra, at 26. Against this judicial movement toward protection of corporate political speech, Justice Kennedy identified a legislative movement toward restriction of corporate speech in political campaigns. Id., at 26-27. These courts increasingly found distasteful to its own views of the scope of political speech holders. Id., at 27-31. It is in this context that Austin is considered, and characterized as an aberrational judicial moment. Id., at 31-32. Its aberration was precisely in its privileging of a view of the corporation that suggested both its power to corrupt through aggregations of power and its in authenticity as a legitimate autonomous speaker. Id., at 32.

In its defense of the corporate-speech restrictions in §441b, the Government notes the antidistortion rationale on which Austin and its progeny rest in part, yet it all but abandons reliance upon it. It argues instead that two other compelling interests support Austin’s holding that corporate expenditure restrictions are constitutional: an anticorruption interest, see 494 U. S., at 678 (STEVENS, J., concurring), and a shareholder-protection interest, see id., at 674–675 (Brennan, J., concurring). We consider the three points in turn.

Citizens United, supra, at 32. Each is rejected in turn. And in the course of those rejections, Justice Kennedy constructs a notion of the corporation as an entity substantially different from that on which both the statute, and Justice Stevens dissent, is based.

Justice Kennedy grounds his rejection of the antidistortion rationale on an acceptance of a parity among individual and corporate speakers. Each is treated as independent, autonomous and a co-equal contributor to political discussion. But that parity requires acceptance of another premise—that corporations contribute in their own right rather than serve as amplification of the views of individuals who have a stake in the enterprise. He notes: “If the First Amendment has any force, it prohibits Congress from fining or jailing citizens, or associations of citizens, for simply engaging in political speech. If the antidistortion rationale were to be accepted, however, it would permit Government to ban political speech simply because the speaker is an association that has taken on the corporate form.” Id., at 33. Because there is a parity between individual and corporate speech, there is no basis for distinguishing between speech on issues (permitted in Bellotti) and speech advocating the election of a candidate (prohibited in Austin). Id., at 33-34.

For this purpose, Justce Kennedy specifically rejected the idea of corporations as a nexus of privilege or as a construct of the state—and therefore subject to whatever limitations the state might choose to attach to that existence.

Either as support for its antidistortion rationale or as a further argument, the Austin majority undertook to distinguish wealthy individuals from corporations on the ground that “[s]tate law grants corporations special ad vantages—such as limited liability, perpetual life, and favorable treatment of the accumulation and distribution of assets.” 494 U. S., at 658–659. This does not suffice, however, to allow laws prohibiting speech. “It is rudimentary that the State cannot exact as the price of those special advantages the forfeiture of First Amendment rights.” Id., at 680 (SCALIA, J., dissenting).

Citizens United, supra, at 34-35. Noted but not discussed here is the way that Justice Kennedy, without much pause to consider the effects of the Press Clause, then leaps from this idea to the conclusion that a consequence of treating the corporation as a creature of the state would imperil the ability of media companies to operate in corporate form. Id., at 34-38. Thus, critical to Justice Kennedy’s conceptualization of the extent of speech rights is his acceptance of the premise that associations of individuals speak with a voice distinct from the individuals that comprise the organization. This institutionalist assumption posits the corporation as a entity that is less property in the hands of its owners and more an entity distinct from those with interests in its income or assets, and who retain certain indirect rights of control. Austin is thus constitutionally suspect because “permits the Government to ban the political speech of millions of associations of citizens. . . . By suppressing the speech of manifold corporations, both for-profit and non profit, the Government prevents their voices and viewpoints from reaching the public and advising voters on which persons or entities are hostile to their interests.” Id., at 38-39.

Somewhat bizarrely, Justice Kennedy then equates corporations with the political factions at the heart of Madison’s discussion of factional governance in the construction of the Republic. “Factions will necessarily form in our Republic, but the remedy of “destroying the liberty” of some factions is “worse than the disease.” The Federalist No. 10, p. 130 (B. Wright ed. 1961) (J. Madison). Factions should be checked by permitting them all to speak, see ibid., and by entrusting the people to judge what is true and what is false.” Id., at 39.

Yet for those who have been arguing that there is little difference between political parties—as special purpose political corporations in the business of securing political power for their followers—and corporations in the business of making money or fomenting some sort of social, cultural or other objectives, this argument suggests that corporations thus reimagined might well be burdened with political obligations. Yet this is something that has been rejected by the very people who have embraced the notion of corporate institutionalism for the purpose of freeing these entities from the limitations of participation in the political process. At some point the contradictions inherent in that position—that corporations are purely private enterprises that cannot have political obligations without interfering with the democratic organization of the state while simultaneously holding that corporations have a protected constitutional right to participate in the political process—will have to be confronted. To some extent that process is already occurring at the international level. See, e.g., Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises. Business and human rights: Towards operationalizing the “protect, respect and remedy” framework, at ¶ 15, U.N. Doc. A/HRC/11/13 (April 22, 2009). The position of Justice Kennedy here will make those efforts much more difficult to resist.

A similar approach was taken to reject the government’s corruption argument. First Justice Kennedy distinguished Bellotti on this score as both dicta and as based on a student law review note that ought not to have been given much weight. What, after all, could a law student know! Id., at 41-42. Absent a showing of actual corruption, the argument from corruption was assumed merely speculative. Id., 44-45. Additionally cases of the appearance of judicial corruption as a basis for recusal in the face of corporate donations to political campaigns was distinguished as not involving speech rights. Id., at 43.

Lastly, and perhaps most importantly from the perspective of the corporate law perspective of the case, Justice Kennedy rejected the argument that the provisions were valid as a basis for the protection of shareholders form their managers. Rejected, in this way, was the idea that corporations are passive shells that reflect the views of their managers, and that any use of corporate funds for purposes other than to make money might well misuse corporate funds to the detriment of shareholders. This conception, grounded in the idea of corporation as property in the hands of shareholders, was rejected in favor of the view of corporation as autonomous institution with the principal obligation to preserve itself rather than the interests of its shareholders.

There is, furthermore, little evidence of abuse that cannot be corrected by shareholders “through the procedures of corporate democracy.” Bellotti, 435 U. S., at 794; see id., at 794, n. 34. Those reasons are sufficient to reject this shareholder protection interest; and, moreover, the statute is both underinclusive and overinclusive. As to the first, if Congress had been seeking to protect dissenting shareholders, it would not have banned corporate speech in only certain media within 30 or 60 days before an election. A dissenting shareholder’s interests would be implicated by speech in any media at any time. As to the second, the statute is overinclusive because it covers all corporations, including nonprofit corporations and for-profit corporations with only single shareholders. As to other corporations, the remedy is not to restrict speech but to consider and explore other regulatory mechanisms. The regulatory mechanism here, based on speech, contravenes the First Amendment.

Id., at 46.

Left unexplored is a consequence of the decision—the ability of foreign individuals and states to participate in the American democratic process by acquiring “citizenship” and speech rights through ownership of American corporations. Justice Kennedy is at the end of his conceptual rope on this point. He merely points to 2 U.S.C: Section 441e (forbidding political contributions by foreign nationals) Id., at 47, and suggesting that this fear is not cured by retaining Section 441b. Id. Yet this is hardly satisfying as a matter of corporate law. And the ideals of the nature of the corporation as autonomous entity actually suggest that it will be exceeding hard to prevent foreign participation in the political process son the basis of the corporate conception at the heart of the decision. Corporations are deemed to be citizens of the state of their incorporation. The citizenship of their shareholders is not deemed to affect that citizenship, or the rights of the entity to assert those citizenship rights. There are exceptions, with respect to ownership of sensitive industries. But even there, it is usually the case that the implementation of approaches safeguards is usually enough to satisfy most limitations. See Eben Kaplan, Foreign Ownership of U.S. Infrastructure, Council on Foreign Relations, Feb. 13, 2007, available Yet, though corporations are deemed to speak independently of their owners, their views would necessarily be shaped by the preferences of those owners, especially if they own a sizeable stake in the enterprise. This issue will become much more pressing when, for example, it is determined that an American corporation, with substantial expenditures in a political campaign, is a wholly owned subsidiary of a Chinese or Norwegian sovereign wealth fund, which has announced its intention to be an active shareholder (something applauded as a matter of American corporate policy) to induce the corporation to further its own political and policy objectives.

So conceived, no limitation on corporate direct expenditure in political campaigns is possible. “Austin is overruled, so it provides no basis for allowing the Government to limit corporate independent expenditures. As the Government appears to concede, overruling Austin “effectively invalidate[s] not only BCRA Section 203, but also 2 U. S. C. 441b’s prohibition on the use of corporate treasury funds for express advocacy.” Brief for Appellee 33, n. 12. Section 441b’s restrictions on corporate independent expenditures are therefore invalid and cannot be applied to Hillary.” Id., at 50.

Privileging the Shareholder:

Justice Stevens dissent offers a conceptual basis of corporate organization substantially different from that on which Justice Kennedy’s majority opinion was grounded. The dissent suggests the consequential power of a conception of corporation as property in the hands of its shareholders in the context of constitutional rights adjudication. Understood on the basis of this foundation, the focus of Justice Stevens’ dissent becomes both clear and inevitable. Justice Stevens understands the case as one of reasonable management of corporate speech in the context of the election of natural persons to office. Citizens United, supra, Stevens, J., concurring in part and dissenting in part, slip op. at 1.

The basic premise underlying the Court’s ruling is its iteration, and constant reiteration, of the proposition that the First Amendment bars regulatory distinctions based on a speaker’s identity, including its “identity” as a corporation. While that glittering generality has rhetorical appeal, it is not a correct statement of the law. Nor does it tell us when a corporation may engage in electioneering that some of its shareholders oppose. It does not even resolve the specific question whether Citizens United may be required to finance some of its messages with the money in its PAC. The conceit that corporations must be treated identically to natural persons in the political sphere is not only inaccurate but also inadequate to justify the Court’s disposition of this case.

Citizens United, supra, Stevens, J., concurring in part and dissenting in part, slip op. at 1-2. While Justice Kennedy privileges the corporation as entity, Justice Stevens privileges the shareholder. For him the corporation is less entity than the nexus of shareholder interests, regularized and managed through law.

In the context of election to public office, the distinction between corporate and human speakers is significant. Although they make enormous contributions to our society, corporations are not actually members of it. They cannot vote or run for office. Because they may be managed and controlled by nonresidents, their interests may conflict in fundamental respects with the interests of eligible voters. The financial resources, legal structure, and instrumental orientation of corporations raise legitimate concerns about their role in the electoral process. Our lawmakers have a compelling constitutional basis, if not also a democratic duty, to take measures designed to guard against the potentially deleterious effects of corporate spending in local and national races.

Citizens United, supra, Stevens, J., concurring in part and dissenting in part, slip op. at 2. The conceptual foundations of corporations art the heart of this dissent could not be more distinct from that of the majority opinion.

A large portion of the fist part of the dissent was devoted to two significant issues of constitutional jurisprudence. The first touched on the prudential obligation to avoid reaching a constitutional issue if a case could be decided on non constitutional grounds. Citizens United, supra, Stevens, J., concurring in part and dissenting in part, slip op. at 4-17 “The Court’s ruling threatens to undermine the integrity of elected institutions across the Nation. The path it has taken to reach its outcome will, I fear, do damage to this institution.” Id., at 4. The second touched on the role of stare decisis in constitutional cases. Id., at 17-23. Neither will be discussed further here.

More relevant for the corporate law implications of the opinion are Justice Stevens efforts to attack three of the bases of the majority’s argument. “First, the Court claims that Austin and McConnell have “banned” corporate speech. Second, it claims that the First Amendment precludes regulatory distinctions based on speaker identity, including the speaker’s identity as a corporation. Third, it claims that Austin and McConnell were radical outliers in our First Amendment tradition and our campaign finance jurisprudence. Each of these claims is wrong.” Id., at 23. But that effort is grounded on a vastly different understanding of the corporate form.

Justice Stevens first suggests that the idea that Austin and McConnell ban corporate speech is wrong because corporate shareholders and executives remain free to aggregate their resources to assert speech rights.

For starters, both statutes provide exemptions for PACs, separate segregated funds established by a corporation for political purposes. See 2 U. S. C. §441b(b)(2)(C); Mich. Comp. Laws Ann. §169.255 (West 2005). “The ability to form and administer separate segregated funds,” we observed in McConnell, “has provided corporations and unions with a constitutionally sufficient opportunity to engage in express advocacy. That has been this Court’s unanimous view.” 540 U. S., at 203. Under BCRA, any corporation’s “stockholders and their families and its executive or administrative personnel and their families” can pool their resources to finance electioneering communications. 2 U. S. C. §441b(b)(4)(A)(i).
Id., at 24.

Central to this argument is the idea that there is an identity of interest between corporations and their principal stakeholders, or better put, that corporations do not speak for themselves, they serve to amplify the speech of the individuals who control them. That conflation, that idea that corporations, as property in the hands of shareholders is incapable of autonomous activity is further refined by Justice Stevens in this context.

Like all other natural persons, every shareholder of every corporation remains entirely free under Austin and McConnell to do however much electioneering she pleases outside of the corporate form. The owners of a “mom & pop” store can simply place ads in their own names, rather than the store’s. If ideologically aligned individuals wish to make unlimited expenditures through the corporate form, they may utilize an MCFL organization that has policies in place to avoid becoming a conduit for business or union interests. Id., at 25.

As a consequence, the statutes at issue amount to little more than reasonable time, place and manner restrictions.

So let us be clear: Neither Austin nor McConnell held or implied that corporations may be silenced; the FEC is not a “censor”; and in the years since these cases were decided, corporations have continued to play a major role in the national dialogue. Laws such as §203 target a class of communications that is especially likely to corrupt the political process, that is at least one degree removed from the views of individual citizens, and that may not even reflect the views of those who pay for it. Such laws burden political speech, and that is always a serious matter, demanding careful scrutiny. But the majority’s incessant talk of a “ban” aims at a straw man. Id., at 28.
Justice Stevens offers a similar argument against the “second pillar of the Court’s opinion is its assertion that “the Government cannot restrict political speech based on the speaker’s . . . identity.” Ante, at 30.” Id., at 28. The crux of that effort is the suggestion that Justice Kennedy misread Bellotti. “Like its paeans to unfettered discourse, the Court’s denunciation of identity-based distinctions may have rhetorical appeal but it obscures reality.” Id. First, Justice Stevens reminds us that the Supreme Court has approved identity based restrictions on speech rights in a number of contexts. Id., at 28-30. “When such restrictions are justified by a legitimate governmental interest, they do not necessarily raise constitutional problems.” Id., at 29. This applies even in the election context. Id., at 31-32. Here, the idea that corporations are not distinguishable from the individuals that control them drives the difference in conceptual approach.

The same logic applies to this case with additional force because it is the identity of corporations, rather than individuals, that the Legislature has taken into account. As we have unanimously observed, legislatures are entitled to decide “that the special characteristics of the corporate structure require particularly careful regulation” in an electoral context. NRWC, 459 U. S., at 209–210.50 Not only has the distinctive potential of corporations to corrupt the electoral process long been recognized, but within the area of campaign finance, corporate spending is also “furthest from the core of political expression, since corporations’ First Amendment speech and association interests are derived largely from those of their members and of the public in receiving information,” Beaumont, 539 U. S., at 161, n. 8 (citation omitted). Campaign finance distinctions based on corporate identity tend to be less worrisome, in other words, because the “speakers” are not natural persons, much less members of our political community, and the governmental interests are of the highest order. Furthermore, when corporations, as a class, are distinguished from noncorporations, as a class, there is a lesser risk that regulatory distinctions will reflect invidious discrimination or political favoritism. Id., at 32-33.

Notice the importance of the embrace of a particular understanding of corporate nature to the force of this argument. Rejected here is the idea of corporate existence as an autonomous institution embraced by Justice Kennedy. Corporations are derivative entities. They speak only as the individuals who control them desire. As such, there is no such thing as corporate speech per se. There is only speech by individuals through the corporations they control. “Under the majority’s view, I suppose it may be a First Amendment problem that corporations are not permitted to vote, given that voting is, among other things, a form of speech.” Id., at 33-34.

Justice Stevens devotes a substantial portion of his dissent to the idea that Austin and McConnell are not outliers. Central to this argument is a discussion of the original understanding of the role of corporations in American political life. Id., at 34-42. There is substantial irony here and a bit of role reversal. It is Justice Stevens, rather than Justice Scalia, who is the champion of arguments from original understanding in this context. And no wonder. Notions of private modern corporations as autonomous institutions are hardly more than a century old. To mold the two-century old First Amendment to changing notions of corporations barely a century old would appear to be a matter of legislative rather than judicial prerogative under the argument usually made by Justice Scalia. But here, it is Justice Stevens rather than Justice Scalia who advances this conservative argument, and who thus, exposes the radical nature of the interpretation of the majority (and with it the importance of the new conception of the corporation for constitutional and statutory law). Justice Scalia is put in the uncomfortable position of arguing in the style of those he has spent a lifetime criticizing. See, Citizens United, supra, Scalia, J., concurring, at 1-9.

Beyond irony, though, Justice Stevens suggests that the conception of corporations that was widely held at the time of the adoption of the First Amendment would be inimical to the embrace of the sophisticated institutionlaist conception of the autonomous private corporation at the foundation of Justice Kennedy’s opinion. See, Citizens United, supra, Stevens, J., concurring in part and dissenting in part, at 36-39. Indeed, Justice Stevens suggests that the corporation was understood as a creature of the state, imbued with public purpose, and subject to regulation and limitation by the public body that created and sustained it. “The Framers thus took it as a given that corporations could be comprehensively regulated in the service of the public welfare. Unlike our colleagues, they had little trouble distinguishing corporations from human beings, and when they constitutionalized the right to free speech in the First Amendment, it was the free speech of individual Americans that they had in mind.” Id., at 37. Justice Stevens then suggested the way in which both courts and legislatures acquiesced in this understanding for much of the history of the Republic. Id., at 42-56. “In sum, over the course of the past century Congress has demonstrated a recurrent need to regulate corporate participation in candidate elections to “ ‘[p]reserv[e] the integrity of the electoral process, preven[t] corruption, . . . sustai[n] the active, alert responsibility of the individual citizen,’ ” protect the expressive interests of shareholders, and “‘[p]reserv[e] . . . the individual citizen’s confidence in government.’ ” McConnell, 540 U. S., at 206–207, n. 88 (quoting Bellotti, 435 U. S., at 788–789; first alteration in original). . . . The only thing new about Austin was the dissent, with its stunning failure to appreciate the legitimacy of interests recognized in the name of democratic integrity since the days of the Progressives.” Id., at 55-56 (with a swipe at Justice Scalia).

Having thus contextualized the constitutional framework in light of a distinctive rationalization of the nature of the corporation, Justice Stevens then turns to the defense of the statute on anticorruption, antidistortion, and shareholder protection rationales. Id., at 56-89. Like his prior arguments, these are substantially informed by a conception of the corporation as a nexus of contract, a shareholder flow through and a confluence of statutory privilege that militates against treating the entity as an independent organization with autonomous consciousness and speech.

Thus, in constructing his anti corruption argument, Justice Stevens draws on his understanding of the distinctiveness of the corporate nature.

Business corporations must engage the political process in instrumental terms if they are to maximize shareholder value. The unparalleled resources, professional lobbyists, and singleminded focus they bring to this effort, I believed, make quid pro quo corruption and its appearance inherently more likely when they (or their conduits or trade groups) spend unrestricted sums on elections. Id., at 64.

Consider the importance of the conception of corporation as property as the foundation for Justice Stevens’ antidistortion argument.

Unlike natural persons, corporations have “limited liability” for their owners and managers, “perpetual life,” separation of ownership and control, “and favorable treatment of the accumulation and distribution of assets . . . that enhance their ability to attract capital and to deploy their resources in ways that maximize the return on their shareholders’ investments.” 494 U. S., at 658–659. Unlike voters in U. S. elections, corporations may be foreign controlled. Unlike other interest groups, business corporations have been “effectively delegated responsibility for ensuring society’s economic welfare”;71 they inescapably structure the life of every citizen. “ ‘[T]he resources in the treasury of a business corporation,’ ” furthermore, “ ‘are not an indication of popular support for the corporation’s political ideas.’ ” Id., at 659 (quoting MCFL, 479 U. S., at 258). “ ‘They reflect instead the economically motivated decisions of investors and customers. Id., at 75.

Or consider the understanding of corporations supporting the argument from shareholder protection:

Indeed, we have unanimously recognized the governmental interest in “protect[ing] the individuals who have paid money into a corporation or union for purposes other than the support of candidates from having that money used to support political candidates to whom they may be opposed.” NRWC, 459 U. S., at 207–208. The Court dismisses this interest on the ground that abuses of shareholder money can be corrected “through the procedures of corporate democracy,” ante, at 46 (internal quotation marks omitted), and, it seems, through Internet-based disclosures, ante, at 55. I fail to understand how this addresses the concerns of dissenting union members, who will also be affected by today’s ruling, and I fail to understand why the Court is so confident in these mechanisms. By “corporate democracy,” presumably the Court means the rights of shareholders to vote and to bring derivative suits for breach of fiduciary duty. In practice, however, many corporate lawyers will tell you that “these rights are so limited as to be almost nonexistent,” given the internal authority wielded by boards and managers and the expansive protections afforded by the business judgment rule. Id., at 87-88.

Taken together, Justice Stevens constructs a solid framework supporting diminshed constitutional protection for corporations and enhanced regulatory power by states. But this framework is grounded on notions on corporate nature that privilege the property aspects of corporate nature. It embraces shareholder prominence and the idea that corporations do not speak, rather they magnify the voices of those who control them. As such, they can more readily serve as vehicles to corrupt the political process by disguising the sources of political speech, and amplifying the voices of some individuals over others. It is a framework that suggests that corporations are less bearers of rights than are the individuals who hold interests in those entities. Lastly, it suggests that enhanced regulation is critical to protect shareholders against managers and directors, against whom most shareholders have little real power to control. This is a view of corporations substantially different from that of Justice Kennedy. And it is this difference of view, rather than jurisprudential differences about the nature of the First Amendment, that informs the differences in approach.

The COnstitutional Consequences for Monitoring and Transparency:

Ironically, within all this division, one strong consensus position emerged—all justices other than Justice Thomas agreed on the strong state interest in monitoring and transparency. While this has immediate and specific relevance to the implementation of election procedures, it also has potentially profound importance for corporate law, both within the domestic legal orders of states and in the construction of transnational systems of corporate governance.

In rejecting the challenge to the disclaimer (transparency) and monitoring rules, Justice Kennedy spoke broadly about the value of disclosure as it relates to corporate operation:

Shareholder objections raised through the procedures of corporate democracy, see Bellotti, supra, at 794, and n. 34, can be more effective today because modern technology makes disclosures rapid and informative. A campaign finance system that pairs corporate independent expenditures with effective disclosure has not existed before today. It must be noted, furthermore, that many of Congress’ findings in passing BCRA were premised on a system without adequate disclosure. See McConnell, 540 U. S., at 128 (“[T]he public may not have been fully informed about the sponsorship of so-called issue ads”); id., at 196–197 (quoting McConnell I, 251 F. Supp. 2d, at 237). With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are “ ‘in the pocket’ of so-called moneyed interests.” 540 U. S., at 259 (opinion of SCALIA, J.); see MCFL, supra, at 261. The First Amendment protects political speech; and disclosure permits citizens and shareholders to react to the speech of corporate entities in a proper way. This transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages.

Citizens United, supra, slip op. at 55. These values appear to represent both a judicial and legislative consensus at the state and federal levels. It suggests that irrespective of the understanding of the nature of the corporation, disclosure, transparency and monitoring are now deemed an essential element in the regulation of the relationships between the corporation, its stakeholders, the state, and other parties.  Monitoring and transparency are central to the functioning of entities.  It deepens its autonomy from its stakeholders, and furthers the elaboration of the institutional character of the organization.   It suggests a direct relationship between theories of accountability for governmental entities and corporate entities.  That direct relationship may carry over to other areas of governance--from the imposition of public duties, to the nature of the duties of directors to the enterprise rather than to shareholders as one of many stakeholders in the enterprise.

Regulatory Consequences:

What emerges from the summary discussion of the two principal opinions in Citizens United that dealt with the corporate law related issues of the case is the significance of the regulatory consequences of embracing a particular set of assumptions about the nature of corporate personality.  Equally important is the insight that, even after more than a century of an "enabling" approach to corporate formation, there is no consensus on whether  corporate personality or its regulatory consequences.  In truth, such consensus, to the extent it seeks to emphasize one framework to the exclusion of the others, is impossible.  Corporations are simultaneously property in th hands of their shareholders and autonomous institutions in their  constitution and operation.  Still more, corporations exist both as the reification of a nexus or network of contract among the individuals (and other entities) with a stake in its operations, and as a nexus or web of privileges conferred on it (as an entity) by the state through which it is organized and as a result of which it (again as entity) owes certain duties).

Yet polycontextuality, even in the organization of corporate governance, does not necessarily imply anarchy.  Rather, it suggests a complexity in the relationships between the state--as the ultimate national body corporate--and other aggregations of power, which the state may recognize or prosecute.  See, Larry Catá Backer, The Drama of Corporate Law: Narrator between Citizen, State and Corporation (Winter 2009). Michigan State Law Review, Winter 2009 (suggesting the way that standard ideologies of corporation character provide a basis for legtimating their domestication within legal regimes in ways that exclude the possibility of corporate character not dependent on the state, archetypes for which are the Yakuza and Mafia). That complexity also suggests that consistency in the construction of relationships between corporations and the state, or better put between legal regimes and corporate organizations may be impossible.  Rather it may be more useful to understand corporate character as a function of the relationship within which it is relevant.  Thus, for example, as between shareholders and corporations, corporations might be best understood as property with respect to shareholdings, but as entity with respect to the control rights of shareholders.  But that flexibility, or multi-contextuality, provides little comfort within the one size fits all framework of conventional lawmaking.    Other have suggested that that a hierarchy of character may be necessary, but that the corporate character privileged in any state will be a function of the economic culture of that state.  See, Katsushito Iwai, The Nature of the Business Corporation: Its Legal Structure and Economic Functions. Japanese Economic Review, Vol. 53, pp. 243-273, 2002.

Citizens United illustrates the inability of law to embrace flexibility in the context of corporate personality.  It also shows the continued power of the lack of consensus about a guiding ideology of corporate personality and its regulatory consequences.  Entity ideology tends to disfavor shareholder rights as owners, and reduce them to the position of "citizens" of a corporate "state" in which their rights are derivative, and the greatest protection afforded them is in their rights to participate in governance, coupled perhaps, with substantial protection for their rights to "cash out" in markets for their interests.  Within this framework, corporate speech is as important as the speech rights of natural persons.  The more autonomous the interests of corporations are perceived to be, the greater the tendency to permit protection of those interests by the entity.  Entity ideology fosters notions of shareholder democracy, of corporate social responsibility, of the public character of the institution, and of its obligations to stakeholders amd others.  Shareholder ideology, on the other hand, tends to disfavor the autonomy of corporations as actors independent of shareholders and other stakeholders.  They are understood more as pass through aggregations that are valuable because of the bundles of privileges that collective action in that form provides.  The protection of shareholder's property interests in the entity, rather than the protection of the integrity of the entity itself, is privileged.  In this context, shareholders, directors and officers speak--for themselves and through the entity--but it is inconceivable to consider that the corporation speaks autonomously for itself.  Shareholder ideology fosters notions of profit maximization, of the importance of markets, and of exit rights.  

Thus understood, Citizens United is as much about corporate governance as it may be about the constitutional limitations of government efforts to regulate corporate speech.   The Supreme Court majority's embrace of an entity ideology ought to provide  substantial support for regulatory efforts that seek to deepen the autonomy of the corporate enterprise and weaken governance rules that strengthen shareholder's property rights.  Citizens United provides a foundation from which to advance everything from rules that advance shareholder democracy and participatory rights, to the imposition of public obligations on corporate entities.  It suggests a policy basis for the separation of corporate governance from the personal and individual interests of shareholders in the protection of their property. As a consequence, it may be possible to conceive of fiduciary duty as extending to other corporate stakeholders. If corporations are not synonymous with their shareholders, then domestic corporations, owned by foreign individuals or governments, may be treated as domestic persons to the same extent of natural persons resident in or citizens of the jurisdiction.  Perhaps more interesting, Citizens United also suggests a basis, tinged with constitutional implications, for the extension to corporations of direct obligations under international as well as national law.   Corporations, understood as entities with a public purpose, may be burdened with public obligations not only under national law, but under international norms as well.  Inadvertently perhaps, for it is doubtful that the justices thought in these terms, but no matter, inevitably, the consequence of the embrace of an entity ideology provides a basis for a transnational framework for corporate governance.