Friday, May 28, 2010

Democracy Part XXI: Images of Rule and the Incarnation of the State in Democractic Societies in the Response to the BP Louisiana Oil Spill

Sometimes the smallest detail provides the greatest insight into the orientation of state officials and the mindset of an administration.  Taken from the home page of the official web site of the American President is the following text and accompanying image:

Taking questions from the press, the President makes clear that he is in charge of the response, that all hands are on deck, and that those responsible will be held accountable.

Oil Spill in the Gulf, The White House, May 27, 2010. 

This reveals a somewhat curious hierarchy of governance relationships: first press, then staff and last the entities against which the mechanics of state will be applied.   

First is the importance of image, of the need to provide evidence of the appearance of being in charge.  The President takes questions from the press--that activity is critical to the governance issue presented.  The President triumphs in this activity--not the resolution of the issues surrounding the oil spill but the domination of the questioning by the press.  As a consequence the President appears to acquire a legitimacy through the image of rule.  Substance is incarnated through gesture.   The ability to satisfy the inquires of the press substitutes or serves as a validation of the legitimacy of the actions to be undertaken in response.  Note also the subtly embedded in the terseness of the text--"the President makes clear that he is in charge of the response."  There is a double meaning here--he is meant to be in control of the response to the press and of the response to the crisis that prompted the engagement with the press.

Second, the need to provide the imagery of authority appropriately exercised is directed not to the people directly but to the press.  The context of the appearance of the exercise of authority is not  entwined with the mechanics of governance but rather with the approval of the press.  That approval--and the collusion/acquiescence of the press in subsequent governmental action, is derived from a successful passage of the test of the examination of the President--not by Congress but by the press.  

Third--the "all hands are on deck" provides the second critical prong of the incarnation of substance through imagery within the body of the President. Just as the imagery of positive interaction with the press is essential for validation, so is the construction of the imagery of the control by the president of his ministers and their underlings.  There is a control parallelism here--the President "is in charge""of responses to the press and is also in control of the apparatus of state.  That control of his government is conveyed deliberately in nautical-control rather than bureaucratic-comitological terms--"all hands are on deck." This is a common understanding in popular culture: "It's a command for everybody who can come and work to do so. . . . . It is also used in case of an emergency or any other time the captain needs all crew persons "front and center", where they can be counted and given commands."  The Phrase Finder (UK).  This construction is one consciously cultivated by the President's ministers for image control in the usual stagings for dramatic  Presidential appearances. "President Barack Obama, on a trip to Venice, Louisiana, the site of intense response efforts to the recent oil spill in the Gulf of Mexico, promised 'an all-hands on deck" response to a "massive and possibly unprecedented environmental disaster.'" President Barack Obama promises 'all hands on deck' approach to oil spill response, The Times-Picayune, May 2, 2010.

Fourth, the visual image itself is a source of unintended but revealing outlook.  It is entitled "hero_oil_presser2_PS-0795.jpg".  And so, the hero.  I have spoken before of the very deliberate effort to personalize the executive within the body of this president.  I have suggested the parallels in these efforts to the ancient notions of the incarnation of the nation (and the state apparatus) in the body of the man who holds the presidential crown.  It is clear that this thinking is not now far removed from those charged with the cultivation of the presidential persona.  Larry Catá Backer, Mr. Obama Speaks in Egypt: "Islam is a Part of America"--The Ummah Wahida, and the State in Two Distinct World Orders,  Law at the End of the Day, June 5, 2009.  There is a wonderful overtone that draws form a rich tradition of Christian imagery here as well--not drawn from the post Plague period when the human aspects of Christ (the Passion) became the center of Church imagery, but from the earlier period when the imagery of Majestas Domini (Christ in majesty, emphasizing the divine nature) was more central to Church visual representation.

Lastly, of course, is the element of judgment--"those responsible will be held accountable."  This conflates nicely the images of majestas and judgment--the legitimacy of authority and its exercise against those who have broken the covenant.  The effort suggests a personal judgment--not through the mechanics of a byzantine judicial system, but through application of the active principle embodied in the person of the President himself.  The image that accompanies the text is not mere static majesty but a youthful majesty in action.  The administration incarnate thus demonstrates its power, submitting to questions from the press and thereby demonstrating his control of the response (to the press and to the problem).  The incarnate administration also demonstrates its authority and control over its own house by declaring a mobilization of the apparatus of state to serve to implement the will of the administration embodied in the response.  And finally, that incarnated administration has judged and will employ his ministers to effectuate that judgment in accordance with the customs of the Americans.  For those who follow the relationship between law and power, between the rule of law and the Word personified, there appears to be much material for contemplation in this small, and necessary, gesture.

Thursday, May 27, 2010

The Strategic Use of the Public-Private Divide and Politics By Corporate Means: From the Front Lines of the War Between Iraq and Kuwait

I have been suggesting that the distinction between public and private spheres has lost its essential meaning as a separation of spheres of governance that function on essentially different planes.  Yet it seems that the legal distinctions continue to provide states--and economic enterprises--with a substantial space in which they might deploy these formal legal categories for strategic effect.  A recent case provides some illumination:

Iraq's government has dissolved state-owned Iraqi Airways over a decades-old financial dispute dating back to Saddam Hussein's invasion of his oil-rich neighbor Kuwait, the Transportation Ministry said Wednesday.
Kuwait has long demanded $1.2 billion in reparations from the airliner for alleged theft of 10 airplanes and millions of dollars worth of spare parts during the 1990 invasion. It had sought to freeze the company's assets worldwide.
A Transportation Ministry spokesman said the company will continue to operate until it is fully dismantled, but he did not give any time frame.
"Iraq's Cabinet decided to close Iraqi Airways and announced its bankruptcy because the company doesn't own any airplanes and because of the Kuwaiti government's cases raised against the company," spokesman Karim al-Tamimi told The Associated Press by telephone. "We hope in the future to replace it by two or three companies to resume its operations." . . .
Iraqi Airways did not own any of its own planes, but chartered them from other companies.
On Tuesday, the airline said it had canceled routes to Britain and Sweden after Kuwait tried last month to confiscate the airliner's first plane to fly to London in 20 years.
Lawyers working for Kuwait attempted to confiscate the airplane that made the flight, but were not able to when it turned out to be chartered from a Swedish company and not owned by Iraqi Airways.
Hamid Ahmed,  Iraq dissolves Iraqi Airways over Kuwait dispute, Bloomberg/Business Week, May 26, 2010.  There are a number of points worth considering here:

1.  The political issues underlying the dispute--the reparations claimed by Kuwait that have festered since the fist Gulf War were a political matter but resolved through resort to the traditional mechanics of private dispute resolution of commercial disputes.  In this case, the Kuwaiti and Iraqi governments continued their disputes over reparations through their controlled entities--their respective national airlines organized and operating in corporate form.  Indeed, the public was never far from the private form in which this dispute has been cast. 

2.  The resort to private sector commercial measures were most successful in the courts of a foreign jurisdiction.  "Kuwait Airlines won a British court order to freeze Iraq Airways' global assets on April 25, the same day the Iraqi Airlines flight landed in London for the first time in twenty years."  Iraq Dissolves Airline, Thwarting Kuwait, International Herald Tribune, May 27, 2010, at 21.  Strangely enough, this case appears in U.K. courts years after the United States directly intervened in the region militarily.  The odd missing element in this story is the United States--either as the occupying power immediately after the conquest of Iraq or thereafter during its administration when it might have been possible to obtain a consent to reach Iraqi assets.  The passive and silent role of the United States speaks volumes, though it is not clear that anyone is ready to hear what that silence suggests.

3.  The Iraqi venture into the airline business was strongly protected by the strategic use of legal devices that created a separation of ownership from control and effectively insulated the actual assets of the controlling entity--the government of Iraq--from the reach of legal process. This is not the separation of ownership from control that dominates the discourse of corporate lawyers and is the private sector analogue of the great debates about the nature of applied principles of mass democracy to economic entities.  Rather, this is a well understood method of avoiding risk to assets through arrangements that transfer control of assets but not their ownership. As a consequence--the operation of the Iraqi national airline will change form but will otherwise continue unimpeded by Kuwaiti action.  Indeed, even as the Iraqi government announced the dissolution of the airline, Amer Abdul-Jabbar, the Iraqi Transport Minister "said that three private airline companies were being established."   Iraq Dissolves Airline, Thwarting Kuwait, International Herald Tribune, May 27, 2010, at 21. 

4. The use of bankruptcy by a state owned enterprise provided a powerful strategic tool for states to avoid obligations while protecting their business ventures.  Bankruptcy leaves both the claimants, Kuwait and its Airline entity, along with the owners of the chartered aircraft, exposed.  "A lawyer for Kuwait Airways called the Iraqi government's strategy a 'cynical tactic' and said it would not end the dispute because Kuwait would still hold the government accountable for the debt."   Iraq Dissolves Airline, Thwarting Kuwait, International Herald Tribune, May 27, 2010, at 21.  However, the result is still the same, Kuawit will not be able to avoid political discussion.

5.  The Iraqi government can continue to run a public airline through private intermediaries by applying a strict regimen of regulation and a special taxing policy that would mimic the arrangements of corporate control and distribution of dividends.  Regulatory power substitutes for financial investment and a formally private enterprise is effectively transformed into an instrument of state power. Europeans have understood this in their own way as they constructed their legal regimes for state aids and free movements of capital within European Union Law.  See, e.g., Larry Catá, Backer The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares, Sovereign Wealth Funds, and the Public Law Element in Private Choice of Law. Tulane Law Review, Vol. 82, No. 1, 2008. But the parties in this dispute appear to have embraced the nearly opposite view, one that inclines to the notion that formalism in law serves as the predicate fig leaf to cover the realities of state control and operation, but with no financial exposure of state assets.

The moral of the story is ironic and perverse to some extent at least.  Two states, operating transportation sector operations in corporate form seek to resolve disputes related to the financial consequences of political action (war and occupation) through the use of private sector dispute resolution normative frameworks that favored, in this case, the defending jurisdiction because of its strategic use of operations structuring in the management of its business.   The dispute is being fought outside the jurisdictions of either state--and not subject to the jurisdiction of the courts of either of them.  But the dispute remains essentially juridified--a matter for judges applying the law of enterprises, subject to the  limitations of the sovereign character of the states that control the entities through which states invoke the process of private resolution for public (political) disputes. The element of farce permeates.  Yet, when broken down into its individual elements there appears nothing out of the ordinary.  But put together in this interesting way--the legal battles between Iraq and Kuwait point to an important blending of private methodologies and public policies, or better put, the political objectives of states.  In a perverse way, the old Marxist notion of the convergence of the political and economic, of the public and private, has been both inverted (the public is now the private and the economic is now the political) and globalized.  Markets are the new arena of political activity within a context in which territorial authority and judicial jurisdiction do not necessarily correspond.   See, e.g., Larry Catá Backer, The Other Face of Modern Warfare: The U.K. Battlefront in the Israel-Palestine War,  Law at the End of the Day, Dec. 15, 2009.

Saturday, May 15, 2010

Manuél Delmestro on Yuan Shikai's Failed Attempt to Restore Imperial Rule in China

For those who read Mandarin Chinese, Manuél Delmestro has just published an intriguing paper on Yuan Shikai's ultimately unsuccessful effort to restore imperial government in China in 1915. An English language abstract follows.

Manuel Delmestro
Fu Jen University; NTU

February 1, 2010

This article is not centred on the path that led to Yuan Shikai’s attempt to establish a new dynasty in the then four-year old Republic of China. Yuan engaged in a climb to power, first as the last strong man of the moribund Qing Government, then as the first real president of the Republic of China: he manoeuvred to get rid of annoying opponents, to mould and domesticate the Constitution and Laws, and to forge a net of entities aimed at reviving, nurturing and properly canalizing the monarchic sentiments in the recently Emperor-orphaned population.
Nor does this piece provide a minute account of the number of curiosities and old & ‘new’ traditions that mirrored Yuan and his supporters’ fondness for their glorious monarchical enterprise and its concretization in a set of details, procedures and even oddities.
This article rather focuses on three plain but somehow tricky questions: 1. Was Yuan Shikai a legitimate Emperor of China? 2. How long for exactly did Yuan, legitimately or not, hold the throne? 3. What kind of régime was - or/and was meant to be - Yuan’s?
I have tried to put some order in the decades-long academic debate over Yuan’s tenure as monarch, also arguing that a reformed (or at least modified) monarchy in late 1910s’ China (perhaps an “Empire of China with Western Characteristics” or a “Constitutional Monarchy with Chinese Characteristics”) could have been a desirable outcome. 

The article has made me think of the issue of order versus anarchy, of stability versus a long and bloody period of instability that is both basic to politics (and law) and important in two important situations today.  For the present government of China, the answer to the Yuan Shikai episode might be viewed as a necessary prelude to an even more necessary period of anarchy that served as the crucible from out of which the Chinese Communist Party was formed  and hardened for victory.  The stability of a weakened but stable imperial regime might have moved history in different directions.  And yet today, principles of Harmonious society (simplified Chinese: 和谐社会; traditional Chinese: 和諧社會;) and scientific development ((simplified Chinese: 科学发展观; traditional Chinese: 科學發展觀,) suggest a move toward stability and managerialism and away from the formative possibilities of periods of dynamic instability.  

Ironically, the move to managerialism and stability may also serve to protect the current government of Cuba from more aggressive moves to undermine that regime by the United States.  Though the rhetoric of both sides belies this idea--it appears clear enough that the United States would prefer to see  a managed evolution from its construction under Fidel and Raul Castro to a more obliging Marxist-Leninist state system--like that of Viet Nam.  Stability provides both the United States and Cuba with the ideological "other" against which each state can continue to measure itself.  It also serves as an excuse for the inabilities of either state to satisfy particular desires of their polities, and the cause for sacrifices extracted from each.   And lastly, from the perspective of the United States, it avoids the sort of destabilizing (on both sides) demographic disaster (but humanitarian blessing) that the United States  brought on itself during the ineffective presidency of Jimmy Carter now known as the Mariel boat lift. Anarchy might produce, through a crucible of violence, the sort of democratic regime the United States  likes to say it prizes, but the cost might be more than even the current administration is willing to pay.

Managerialism and stability play best  among social and political groups with a lot to lose.  It is meant to preserve the wealth, social, and power relations  among actors, and provide for movements only at great cost and over long periods--suggesting that the transaction costs of rapid and violent change are great. Law serves both as a  reference for conduct norms and as the systemization of barriers protecting the status quo.  Change is possible, but it can be affected only by those with the power and resources to outlast their opponents.  Conflict without violence, or at least within managed conflict geared for the preservation of wealth producing national resources.  See Larry Catá Backer, The Fuhrer Principle of International Law: Individual Responsibility and Collective Punishment. Penn State International Law Review, Vol. 21, No. 3, pp. 509-567, 2003.   Revolutionary dynamics, and its instability, is the lubricant for those dissatisfied with the status quo.   Today, the difference is not grounded in ideology--managerialism is a core principle of both the United States and the People's Republic of China, and even to a large extent, to post Revolutionary Cuba.  That makes the idea of Yuan Shikai appealing.  But sometimes managing a situation might do more harm than good.  And that may be one reality of Yuan Shikai as well.

Sunday, May 09, 2010

Gunther Teubner: On the ‘Constitutional Moments’ of Non-State Systems—Managing Systemic Compulsion to Self-Destruction in the Global Financial System

In a recently published article well worth reading, Gunther Teubner explores the possibility of systems, like individuals, can be organized as inherently addictive or at least prone to addictive behavior under certain conditions of stress. See, Gunther Teubner, A Constitutional Moment? The Logistics of ‘Hit the Bottom’, in After the Catastrophe: Economy, Law and Politics in Times of Crisis (Poul F. Kjaer and Gunther Teubner (eds.), forthcoming 2010). This short essay describes and engages Teubner’s elaboration of this thesis.

“Is there such a thing as collective addiction?” (Teubner, supra at 1) What drives institutionalized systems, rationally organized, to act against their own interests? (I., 2) . With these question, Teubner sets off on a journey from individual addiction to the possibility of both collective and systemic addiction. Teubner distinguishes his project from the usual efforts to understand what Western society likes to characterize as the addictive behavior of individuals, or the “social amplifiers of addictive behavior . . . peer pressure, imitation, social norms or mob mentality.” (Id., at 1). Applying the lens of systems theory, Teubner suggests the possibility of collective addiction, “addictive behavior quite independent[] of the dependence syndromes of individual human beings.” (Id.) He wonders, “If there is such a thing as a non-individual, and thus collective or communicative, compulsions to growth, then the greed of individual bankers is not the main problem. Instead we must look for the specific social addiction mechanisms that cause such impersonal addiction phenomena.” (Id., at 2).

Teubner’s reference to the “herd instinct of bankers” (Id.) and the like is both telling and interesting in this respect. Teubner draws on the language of the therapeutic to construct a view of systemic dialectic that is dynamic in the sense that it is incapable of end. But the of the herd is infused with other meaning. It is embedded within a “psychology” of morality, and especially of the contradictions of herd morality explored a century ago by Friedrich Nietzsche. “Whoever examines the conscience of the European today will have to pull the same imperative out of a thousand moral folds and hideouts—the imperative of herd timidity: ‘we want that some day there should be nothing any more to be afraid of!’ Some day—throughout Europe, the will and way to this day is now called “progress.’” Friedrich Nietzsche, Beyond Good and Evil: Prelude to a Philosophy of the Future ¶ 201 (Walter Kaufmann, ed. & trans., New York: Vintage Books, 1966). The herd is tied to the morality that gives it systemic form, and that itself is formed of essence and contradiction. Here is a notion of systemic addiction in its moral and inherently self contradictory (and thus dynamic) sense:
To blunder to such an extent, not as individuals, not as a people, but as humanity!—That one taught me t o despise the very first instincts of life; that one mendaciously invented a ‘soul’ a ‘spirit’ to ruin the body; . . . that, conversely, one regards the typical signs of decline and contradiction of the instincts, the ‘selfless,’ the loss of a center of gravity, ‘depersonalization’ and ‘neighbor love’ (addiction to the neighbor) as the higher value—what am I saying?—the absolute value.

Friedrich Nietzsche, Ecce Homo, IV (Why I am Destiny) ¶ 7 (Walter Kaufmann, ed. & trans., New York: Vintage Books, 1967). And thus a bridge between the therapeutic and the moral. “Definition of morality: Morality—the idiosyncrasy of decadents, with the ulterior motive of revenging oneself against life—successfully. I attach value to this definition.” (Id. ).

One could use these hypotheses as the foundation for an exploration of the character of compulsion. But Teubner has something else, something more interesting, in mind. He means to use the insights of systemic addiction to posit the way social systems approach catastrophe and transform themselves at the moment of disaster, not through the intervention of political actors but autonomously and within the bounds of its own systemic logic. Here, perhaps, is an ironic application of the parable found in Luke 4:23 (Physician, heal thyself (Ἰατρέ, θεράπευσον σεαυτόν)), recast as--System, heal thyself. Teubner means to penetrate the interior hysteria of social systems, “that is, a folie circulaire between penitential convulsions and hysteria about redemption” (Friedrich Nietzsche, Ecce Homo, supra, IV (Why I am Destiny) ¶ 8), in system terms. The context is the financial crisis of 2007 in its systemic aspects. But the associations with morality lurks not far beneath.

Not that this cyclical set of dialectical “moments” occur in isolation. Rather, systemic addiction—as it reaches to and through the moment of confrontation with its own contradiction and reconstitutes itself to avoid obliteration—engages in these activities in constant communication with the economic and legal spheres. That inevitable systemic lurching toward catastrophe and its revaluing effects on the system itself, then are communicated with and through the law and economic systems through which it interacts with business and the law-state. Yet, here again, Nietzsche looms in the shadows. He reminds us that such communication can be inherently subordinating—another contradiction that itself is such to the cyclicity of dialectical system built on contradiction. In his exploration of the parameters of punishment in the original connection of moral concept of guilt (Schuld) in the material concept of debt (Schulden), Nietszche points to a variation of the notions of communication and hierarchy, as well as the contradiction and reconstitution of ideal and action.
Throughout the greater part of human history punishment was not imposed because one held the wrongdoer responsible for his deed, thus not on the presumption that only the guilty one should be punished: rather as parents still punish their children, from anger at some harm or injury, vented on the one who caused it—but this anger is held in check and modified by the idea that every injury has its equivalent and can actually be paid back, even if only through the pain of the culprit. And whence did this primeval, deeply rooted and perhaps by now ineradicable idea draw its power—this idea of an equivalence between injury and pain? I have already divulged it: in the contractual relationship between creditor and debtor, which is as old as the idea of ‘legal subjects’ and in turn points back to the fundamental forms of buying, selling, barter, trade, and traffic.
Friedrich Nietzsche, On the Genealogy of Morals Essay 2 Section 4(Walter Kaufmann, ed. & Trans., New York: Vintage Books, 1967)

This notion of ‘moments’, then, infuses the analysis. The addictive behavior of social systems embodies the contradiction built into the system itself. Catastrophe represents that ‘moment’ when the self-organizing constitution of the social system is confronted in an unavoidable way with its destruction through the application of the logic of its own constitution. That moment serves as a space within which, confronted by its own contradictions (in this case the irrationality of a social system built on rationality as a model of manageable social ordering), the systems values can be reconstituted (revalued), not from the application of external forces—law or economic regulation—but through the . And thus Teubner’s hypotheses:

(1) In order to understand the recent global financial crisis, we should not rely on factor analysis alone. Instead, we should look for the underlying self-destructive growth compulsions of information flows – in other words, for phenomena of collective addiction.

(2) ‘Hit the bottom’ refers to the constitutional moment when either a catastrophe begins, or societal forces for change are mobilised of such intensity that the ‘inner constitution’ of the economy transforms under their pressure.

(3) Plain money reform is one of several examples that illustrate a capillary constitutionalisation of the global economy, the effects of which could not be achieved through either national or transnational interventions of the world of states.

(4) The dichotomy constitutional/unconstitutional develops into a binary meta-code within the structural coupling between the economy and law, and is ordered above both the legal code and the economic code. 
 (Id., at 2).  But this is neither Hegelian dialectics nor Marxist dialectical materialism, though both also reflect the cyclidity of systemic transformations lubricated by the contradictions built into social systems.

Teubner starts with a search for the character of self destructiveness in social systems—the root of its internal contradiction and the lubricant for its revaluation in the face of catastrophe. (Teubner, supra, at 3-7). He criticizes the compartmentalized—and bureaucratic—approaches to “solution” to the financial crisis of 2007 as solutions grounded in false causes. “Typically, these proposals are based on factor analysis, in which individual causes are isolated, through the attribution of causality, and held responsible for the crisis. The aim of regulation, then, is to introduce counter-factors to the causal chain in order to prevent a repetition of the crisis.” (Id., at 3). He notes the principal problem of these institutional instincts: “fatta la legge trovato l’inganno. No sooner has a law been passed than the loophole appears” (Id.). I have suggested the same in the context of European efforts to assert regulatory power over irregular securities markets. See Larry Catá Backer, Monitor and Manage: MiFID and Power in the Regulation of EU Financial Markets. Yearbook of European Law, Vol. 26, 2007. One is reminded here of Nietszche’s insight of the error of imaginary causes. “First principle: any explanation is better than none. . . . the first representation that explains the unknown as famniliar feels so good that one ‘considers it true.’” Friedrich Nietzsche, Twilight of the Idols, The Four Great Errors, ¶5 (Walter Kaufmann ed. & trans., Princeton University Press, 1954).

Teubner suggests a deeper analysis, one “which regards the factors of factor analysis simply as interchangeable activating conditions, and which attempt to discover the underlying dynamic.” (Teubner, supras, at 3). He uses the example of the money mechanism to suggest the dynamic of rule and avoidance producing catastrophe that transforms the internal constitution of the global financial economy. Money creation has been liberated from control by states and their central banks. The result has been a massive creation of money by private banks and a massive growth of the financial sector. That growth, in turn can be sustained only by growth to the real economy. Butt eh growth is led by the imperatives of money supply rather than by the needs of the social sector increasing the exaggeration of both growth and contraction. (Id., at 4-5). “That said, it is not the compulsion to growth as such which occupies centre-stage, but rather the difference between necessary growth and self-destructive growth-excesses with undesirable consequences.” (Id., at 5).

Yet, this suggests the possibility of a managerialism that is at variance with the foundational dynamic of the dialectic that Teubner identifies. That mangerialism is considered in the consideration of self-destructive growth versus growth dynamics in communication. (Teubner, supra, at 5-7). The mangerialism, of course, is inherent in the terminology. Addictive behavior has a negative connotation, like the addictive imperatives of globalized capital considered earlier. These behaviors are destabilizing to individual and to system. They are also inherent in the body of the individual or system. The nature of addiction, after all, is its compulsiveness.
The definition of individual addiction – compulsive engagement in an activity despite lasting negative consequences – must be rethought for social systems in general, and for collective actors in particular. Which ‘addiction mechanisms’ are responsible for the fact that the autopoietic self-reproduction of a social system through the recursivity of system-specific operations reverts into a communicative compulsion to repetition and growth, bringing self-destructive consequences in its wake?
(Id., at 5). Yet this addiction, if Teubner is right, is also natural to the individual and system—without it, as Nietzsche reminds us, the dynamic element dissipates—no growth, no progress, no catastrophe bringing revaluation and transformation of the inner constitutions of systems.

Systemic addiction is understood within the context of social processes—as a phenomenology of communication. Teubner suggests communicative addiction as a compulsion to growth communicated through the mechanics of social interactikon grounded in the dynamics of the production of money. (Teubner, supra, at 6). This raises the fundamental question for autopoietics, “how are we to conceive of the relationship between social self-reproduction and the compulsion to growth?” (Id.)—what I call the instinct toward managerialism. I amless worried about the dependence of autopoiesis on the logic of growth. (Id.). A dynamic environment of self reproduction of social systems must include both the equilibrium and destabilizing elements. Systems that do not embrace the logic of their own inversion, as compulsion, become irrelevant. Teubner recognizes that there is “an inherent compulsion to ever higher production in function systems other than the economy – an inherent compulsion which, on the one hand, is a necessary condition of self-reproduction but, on the other, can be propelled by assignable growth-inducing mechanisms to the point of transition into destructive tendencies.” (Id., at 7). He notes that law systems are capable of creating conflict through its own regulation—that is that the law itself contains its own contradictions. Politics systems exhibit the same fundamental contradictory state, the movement toward the attainment of the fundamental objectives of such systems creates the conflicts that also distort the objectives and makes their attainment more difficult. But rather than embracing the dynamic, Teubner suggests the “need to differentiate between a compulsion to growth that is necessary for continuation, and increase-excesses, which threaten the normal state of things.” (Id.). It is to the effort to theorize that distinction and to manage threats to the normal state of things that he then turns.

To understand the distinction between normal growth, growth that does not threaten the stability of systems and their networks, from metastasizing growth that threatens stability, Teubner turns to catastrophe--destabilization powerful enough to threaten systems. For that purpose, the analogy to cancer provides a powerful metaphor. Here Teubner invokes the idea of constitutional moments. (Id., at 7-16).
The experience of near-catastrophe, as opposed to the experience of its contingency as such, may be regarded as the ‘constitutional moment’. . . . The constitutional moment is the direct experience of crisis; the experience of a liberated social energy, yielding destructive, even self-destructive, consequences that can only be overpowered by their reflection and by the decision to self-limitation. The passage of social systems through the ‘dark side’ of their promise of progress is ultimately no departure from the healthy normal course of things, no error to be avoided. Quite the opposite: the experience of the dark side is almost a necessary condition of the transformation of the inner constitution. It is ultimately, then, the pathologies that herald the constitutional moment: the moment in the catastrophe in which a decision is made between total destruction of the energy and its self-limitation.
(Id., at 8). Teubner thus appreciates both the creative possibility in the moment of transformation in the face of catastrophe, as well as the danger that the system will not be strong enough to meet catastrophe and survive in recognizable form.

The complication today, however, is the inability of the state—of law or political systems—to effectively intervene in the context of social systems and societal constitutions. Teubner suggests a hybrid constitutionalization, in which a balance is reached between internal processes and external interventions in the process of reconstitution in the face of catastrophe. That is, a wall of external communication may be necessary to produce the boundaries within which self reflectivity may serve to reconstitute systems in the midst of dynamic revaluation. Teubner suggests “not only state instruments of power, but also legal rules, and ‘civil society’ countervailing powers from other contexts, media, public discussion, spontaneous protest, intellectuals, social movements, NGOs or trade union power should apply such massive pressure on the function systems that internal self-limitations are configured and become truly effective.” (Id., at 10). Thus the task is to enlist the web of systems in their communicative interactions to foster interactions that provide a space within which any particular sub-system can construct its own stabilizing set of limits. The object is managerial and can be significant. “Political-legal regulation and external social influence are only likely to succeed if they are transformed into a self-domestication of the systemic growth dynamic. This requires massive external interventions from politics, law and civil society: specifically, interventions of the type suited to translation into self-steering.” Id., at 11.

The difficulty, though, when dealing with social systems—for example the global economy, is that the character of the normative structure is complex. With a nod to both Derrida (Jacques Derrida (1992) The other handing: Reflections on today's Europe, Bloomington: Indiana University Press) and Foucault (Michel Foucault (1976) "Räderwerke des Überwachens und Strafens: Ein Gespräch mit J.-J. Brochier", in: Michel Foucault (ed) Mikrophysik der Macht, Berlin: Merve, 31-47, 45) Teubner focuses on the capillary constitution—the microstructures of rules that constitute behavior values. This capillary constitution may not be managed directly—the tools of intervention are too crude for that purpose. But intervention may serve the same purpose as a grain a sand in an oyster—as an irritant that energizes the self-constituting mechanics of the sub system in accordance with its own logic. “The desired course for social sub-constitutions is, as has been said, limitations of the endogenous tendencies towards self-destruction and environmental damage. This is the core of the constitutional problematic, this difficult handling of the focal subsystem’s self-transformation and that of their environmental systems.” (Teubner, supra, at 11).

But this raises issues of method. For Teubner, this is the case of the Beelzebub casting out the devil. (Id., at 12). The pattern of political constitutionalism might provide a loose template for managing societal capillary constitutionalism, that is for stabilizing systems grounded in the constitution of micro power. And what better notion than Rechtsstaat notion for that purpose—process as the bones of system constitution!
What does this mean for the constitutions of other social sub-spheres, in particular, for the economic constitution? In order to inhibit pathological compulsions to grow, stimuli for change, which follow the historical model of the self-limitation of politics, need to generate permanent counter-structures that will take effect in the payment cycle down to its finest capillaries. Just as in political constitutions power is used to limit power, so the system-specific medium must turn against itself. Fight fire by fire; fight power by power; fight law by law; fight money by money. Such a medial self-limitation would be the real criterion differentiating the transformation of the ‘inner constitution’ of the economy from external political regulation.
(Id., at 12-13). We move from the judge to the ethical standard as the focal point of system stability and we move system stability to center stage. But social system stability is not sourced within the state, but in three “’reflection centers’ within society, and in particular within economic institutions, into the criterion of a democratic society. Candidates for a capillary constitutionalisation exist not only in the organised sector of the global economy, in corporations and banks, but also in its spontaneous spheres.” (Id., at 13).
As for authorities to judge whether the systems are in a healthy state, the theory of societal constitutionalism has identified “collegial institutions” in the various social sectors, which cultivate the relevant logic of actions, and has required them to be constitutionally institutionalised. Collegial institutions are reflection-centres for social self-identification, in the sense both of the rationality and normativity of the relevant social sector, and, simultaneously, of rendering it compatible with society. The collegial institutions function as a type of think-tank for the relevant constitution, which is to be understood, for its part, as the benchmark for system/environment relations.
Id., at 19. This notion of collegial institutions as collective stakeholders in societal constitutionalism, even in the economic sphere, has found expression within the governance efforts of public institutions in the wake of the 2007 financial crisis. The Financial Stability Board system represents a public sector version of this naturalization of institutionalized communication within the economic sphere. See, Larry Catá Backer, Polycentric Governance in the Transnational Sphere: Private Governance, Soft Law, and the Construction of Public-Private Regulatory Networks for States and Transnational Corporations (April, 03 2010). Indiana Journal of Global Legal Studies, Vol. 17, No. 2, 2011.

Key for Teubner are the politization of consumers (id., at 13-14), the ecologization of corporate governance (id., at 145), and plain money (id., at 14-16). The first evolves sub-system process to the construction and exercise of social preferences, the second broadens the impact of corporate constituencies within the governance structures and decision making of economic entities, and the third would add stability and order to the global financial constitution. The latter would require the reassertion of national power over the power to create money and money equivalents—the medium of economic exchange in its most liquid form.

And thus the heart of the argument for the defence of the stability of the capillary global societal economic constitution:
Plain money reform aims at the centre of the economic constitution because it configures – “constitutes” – the self-limitation mechanisms of the economy, the economic medium, money, and the transnational cash-flows themselves: it does not attempt indirectly to regulate the economy externally by means of political power, legal rules, moral imperative, discursive persuasion, or public opinion. . . . In what follows, it will be shown, whether and to what extent plain money reform involve constitutional functions, constitutional processes and constitutional structures, in a strict rather than metaphorical sense.
Id., at 16. The focus is on the societal economic constitution and the catastrophe that is represented by the financial crisis of 2007.

So, how does the control of the creation of money work the levers of this complex machinery of societal global economic constitutionalism in ways that distinguishes between stable (societal positive) and excessive (addictive and societal negative) activity and provides a foundation for dynamic movement that avoids system catastrophe? Teubner first suggests that the move to “plain money” would reconfigure “actors, organisational rules, competences, procedures and modes of functioning of the communication media of the economy. The decision in favour of plain money corrects the ‘invisible’ historical transformation of the global economic constitution, which has been caused by the development of non-cash money.” (Id., at 17). Power shifts back from private actors—the banks—to public actors—the state as the “real constitutional centre of money creation.” (Id.). Public control of money would then serve as an external break on the tendency to excess of commercial activity in the face of money.
Following the recent financial crisis, limitations of the excesses of economic commerce are high on the agenda. We could even talk of a secular displacement of constitutive constitutional functions in the direction of limitative constitutional functions. This is a necessary consequence of the global autonomous positioning of the function systems: “We cannot pre-suppose that society will be able to exist with the environment that it creates.”
(Teubner, supra, at 18, quoting in part, Niklas Luhmann (1995) Social Systems, Stanford: Stanford University Press, 169). Teubner notes that plain money rules also shifts power in other ways, principally by adding to the socio-constitutional legitimacy of central banks. “This may be regarded as a significant self-limitation of the growth compulsions of the economic payment cycle. Proponents of plain money reform proclaim it to be an effective withdrawal therapy against the excessive addictive behaviour of the credit sector.” (Id., at 19).

Teubner then suggests that plain money rules provide the sort of governance form that is natural to the social system it seeks to affect. But to achieve legitimacy as constitutional process, it must serve both to self constitute the social system and to serve as the basis for elaborating the system applied to itself—constitutions define the organization and order of the government of the state and serve as the framework within which the rules elaborating that organization are tested. Traditionally, one tests the constitutional sufficiency of statute by reference to a higher law of the constitution itself.
Politics becomes an autonomous power-sphere of society when it directs power processes via power processes, and produces a double closure of politics through the provision of electoral procedures, modes of organisation, competences, separation of powers and fundamental rights. And what about the economy? It becomes autonomous when, in the money cycle, payment operations are employed in order to control the money supply itself.
(Teubner, supra at 20). Thus, for the constitution of a social system (constituted as a state, as an economic system or other social system), “Constitutions do not emerge until phenomena of double reflexivity appear: reflexivity of the self-constituting social system and reflexivity of the supportive legal system. ” (Id., at 21). In this effort, law plays a secondary but critical role. Teubner suggests that “to identify constitutions as against other instances of structural coupling, we might wish to use the term ‘binding institution’ of law and social subsystem to refer to the former.” (Id.).

Rule order is critical for Teubner’s conception of the constitutional functions of plain money. Such rule order is framed by legal norms. “The critical point is not reached until secondary norms regulate how the identification, setting, amendment, and the distribution of competence to issue and to delegate primary norms should proceed.” (Id., at 22). Legal norms serve as both bridge and glue, joining autonomous systems. “A constitution is always the connection of two real ongoing processes. From the point of view of law, it is the production of legal norms, which is typically merged with the basic structures of the social systems. From the point of view of the social system, it is the generation of basic structures of the social order, which simultaneously inform the law and are regulated by it.” (Id.). But law serves a more important purpose—it become the source for closure, for the provision of a mechanics of stability that asocial system—for example the global economic system, is incapable of providing under the logic of its own normative ordering. Law in this sense is both an ordering mechanics and an intervention to avoid the catastrophe of the self-destructive addictive tendencies of any system. (Id., at 23).

That is the key to societal constitutionalism’s addiction problem. Law as methodone—“ The economy. . . requires massive interventions from law in order to achieve self-constitutionalisation; though not to the comprehensive extent characteristic of politics.” (Id., at 23). He uses the banking sector as example:
In the banking sector, the ability to pay and the inability to pay are generated simultaneously. The banking system relies on the paradox of self-reference, on the unity of the ability and inability to pay. “The banks have the core privilege of being able to sell their own debts for profit.” This paradox is disarmed where payment operations become reflexive; that is, where operations of money supply are used on operations of money supply. But this reflexivity of economic operations is unstable. It has been stabilised through an internal hierarchisation of the banking sector, supported by a ‘hard’ regulation by means of binding law. In this way, the law, with its procedural and organisational norms that regulate central banks in their relation to the commercial banks, contribute to the process of coping with the paradoxes of the economic cycle.
(Id., at 24, quoting, in part, Niklas Luhmann (1990) Die Wissenschaft der Gesellschaft, Frankfurt: Suhrkamp, 145).

There is a formalist cast to this constitution of societal systems undergirded by law. “Through the restriction of money creating competences, law apprehends the limitative function of an economic constitution and at the same time stabilises the self-reflexive relations of the payment operations, which, without being legally anchored in this way, would again disperse.” (Id., at 24). And not just governance, but connected by a more formal rule structure typical of the Rechtsstaat. I wonder, though, whether law, as Teubner understands it, is broad enough to include those techniques of behaviour controlling power that serve Foucault’s notions of governmentality. (See, Michel Foucault, Governmentality, in The Foucault Effect: Studies in Governmentality 87 (Graham Burchell, Colin Gordon & Peter Miller eds., 1991). For a valuable analysis, see Michael Reed, From the ‘Cage’ to the ‘Gaze’? The Dynamics of Organizational Control in Late Modernity, in Regulation and Organizations: International Perspectives 17 (Glenn Morgan & Lars Engwall eds., 1999); Wendy Larner & William Walters, Introduction Global Governmentality: Governing International Spaces in Global Governmentality: Governing International Spaces 1, 1 (Wendy Larner & William Walters eds., 2004)).
Consider the complex of power issues involved in the construction of transnational transparency regimes of financial markets. Entities like the International Monetary Fund and World Bank “have found themselves drawn into battles with a range of transnational, multinational, domestic, and international authorities over the production of financial information and the diffusion of financial information.”In this aspect, surveillance is felt as gouvernmentalité, a linking of governance with the techniques of its power.
Larry Catá Backer, Global Panopticism: States, Corporations and the Governance Effects of Monitoring Regimes. Indiana Journal of Global Legal Studies, Vol. 15, 2007 (quoting in part, Margaret Hansen, The Global Promotion of Transparency in Emerging Markets, 9 Global Governance 63, 64 (2003) (“These political battles cast a critical light on seemingly apolitical assumptions that motivate much of the theoretical rationale for international governance strategies inspired by the goal of a transparent global financial system.”)).

But the notion of governmentality might require avoidance for another reason—it detracts from the larger project of securing recognition of the possibility of constitutionalism beyond the state. Teubner recognizes the skepticism within the academic herd (I use the term here in its Nietzschean sense, though note an irony in applying Teubner’s notion of self destructive compulsion to the herd habit). But he seeks to assuage them through mimicry—and thus the transposition of law and social system as basis of autonomous constitution (and emergence of autonomous constitutional code). (Teubner, supra at 25). But it is not clear to me that the dynamics of the law-state ought to transpose to the social state. Here, Teubner’s own resort to Foucault might provide a useful insight—the construction of a constitutional code, understood in a systems way, grounded in structural coupling of social system and governance code—not law (understood in its traditional form, but governance understood in the way in which it has been applied in fact by governance units—from states to economic entities. Understood in that way, the constitution of a global economy, founded on the communication among law-governance-politics systems and the establishment of governance rule hierarchy ((constitutional code above governance code form which it is derived and through which its elaboration is limited) becomes clearer and more powerful. The communicative (structural coupling) aspect then comes to the foreground, tying Teubner’s notion of communication between systems as irritant (and thus as a spur to internal change) and as an external limit on internal operation. (Teubner, supra, at 26-27).
These two types of programmes irritate one another to the point where they cause a specific co-evolutionary path of legal and economic structures within the economic constitution. . . . Fundamental principles of the economic system are reconstructed as legal constitutional principles (according to the particular historical situation: property, contract, competition, social market economy or ecological sustainability). Law “translates” the fundamental principles of the economy into legal principles, and concretises them as legal rules of constitutional law. . . . In the opposite direction, something comparable occurs: the meta-code allows the re-entry of law into the economic system (again historically variable: mandatory rules of contract law, social obligations of property, the limits of competition, rule of law principles in economic decisions or fundamental rights within corporations). Thereby, constitutional law binds economic operations.
(Id., 26, 27). And thus back to plain money: the legal irritant of the plain money rule would induce a revaluation of the constitution of economic system. “Under a plain money regime, money creation by the private banks would be economically unconstitutional and not simply illegal.” (Id., at 27). And thus, addictive behavior—the excess at the heart of the contradiction inherent in the operation of any social or economic system, can be managed, and thus managed, contained.

We now understand the role of law sub-systems within the process of constitutional management within Teubner’s construct. But what political sub-systems; what of the role of the state? The last part of the essay suggests a double conception of the political as a basis for understanding the role of politics, and the distinct role of the state, in the reconstruction and management of the economic constitution.
First, by ‘the political’ is meant institutionalised politics: the political system of the world of states. In relation to this notion, the social sub-constitutions ‘go the distance’; they require extensive autonomy against the political constitution. . . . Second, the concept can also indicate the political in society outside institutionalised politics. . . . In this respect, the particular social constitutions are highly political, but beyond the state.
(Id., at 28). That is, the issue of control ought to return to the people, but not to the people constituted by and exercising power through the state. Teubner suggests the nature of this limitation, one that upends the contemporary ideology of the law-state as the totalizing repository of power over all other sub systems—social, economic, cultural, ethnic, religious and political. “In the functionally differentiated society, the political constitution cannot fulfil the role of defining the fundamental principles of other sub-systems without causing a problematic de-differentiation – as occurred in practice in the totalitarian regimes of the twentieth century.” (Id., at 29). In place of hierarchy, Teubner offers communication as action-inducing irritant, and autonomy. “We must give up the notion that, in the state, politics represents society and that other social spheres – people or sub-spheres – participate therein. No social sub-system, not even politics, can represent the whole society.” (Id.).

Political legitimacy is neither sufficient nor appropriate to the constitution of systems that exist beyond the control of the political state but that are tied within closely bound networks with them. Teubner suggests a troika of law-politics-economics as the basis for three way division of the social constitution. (Id., at 30-31). The political law-state serves now as irritant and boubndary framer (a function that the economic order serves with respect to the political law-state in turn).
The phrase, ‘in the shadow of politics’ has an additional meaning. Societal constitutionalism always depends on law; Law, for its part, depends on the physical monopoly that politics has over power. Economic and social sanctions alone are not sufficient to stabilise the constitutional norms. Plain money reform, too, requires politically backed legal sanctions. . . . Such political support, however, does not transform the economic constitution into a state constitution. It is only the instruments of state power which law mediates, depoliticises, and places at the disposal of the economic constitution.
(Id., at 32). I might add religion to the mix. (See, Larry Catá Backer, Values Economics and Theology: The Contribution of Catholic Social Thought and its Implications for Legal Regulatory Systems (December 4, 2008). Coalition for Peace & Ethics Working Paper No. 2008-1/1.

But the economic system cannot play its role properly unless it too acquires it own autonomous politics. Here again mimicry—A social system, like a law or political system requires its demos. And the actions of that demos constitutes legitimating acts and the preservation of autonomy within a system that preserves accountability. Again, structural mechanics meant to manage the contradictions of systems that are inherently self destructive, as system, by the provision of webs and networks of restraints. (Id., at 32). But like political systems, that requires an outside force—the psychologist with the power to restrain, and a set of therapeutic devices that the patient may use to self correct the contradictions of self-destructive compulsion. For the financial system that role would be served by an instrument of the law-state—the central banks. ““Guardians of the constitution” – that is the appropriate metaphor. And just as constitutional assemblies and constitutional courts are the guardians of the political constitution, so the central banks and the constitutional courts are the guardians of the economic constitution. And their constitutional politics requires a high degree of autonomy.” (Id., at 33). But effectiveness is possible only to the extent that these central banks attain a degree of autonomy from any one sector of the law-politics-economics troika. “Here, the meaning of an autonomous financial constitution is revealed, which must control its own logic and cannot, despite its highly political character, be delivered by institutionalised politics. The analogy with constitutional courts is again appropriate. This is a principle not of the political, but of the societal separation of powers.” (Id.).

And thus Teubner draws this complex web together. All systems are subject to catastrophe as a function of the inherent contradictions of its own internal logic. Those contradictions are manifested (using the language of the therapeutic) in compulsive and self-destructive behavior which, given the internal logic of any system can lead to catastrophe—the imperiling of system order itself. The self-destructive contradictions of all sub-systems (but in this case the economic social system) derived from the compulsions of its own internal logic can be managed. That management is inherent in the operation of the complex web of the troika law-politics-economics sub-systems within which collective organs operate. Yet, no networked system can successfully project its power completely or thoroughly to reconstitute another. It may provide boundaries against the external effects of internal compulsion and it may, acting within the constraints of its own logic, irritate internal reaction in other systems. But these irritants can be consciously applied, and targeted. And thus, the suggestion of a simple irritant—the severe limitation on the power over money is suggested as a means of working the machinery of networked sub-systems communicating (irritating) each other and thus forcing internal confrontations with the illogic of internal constitutions before catastrophe manifests to threaten all sub-systems within the greater global social organ. Teubner ends with a reminder of the possibilities of consequences to flirting with catastrophe—the lessons of the Great Depression of 1929 and its reinvigoration of the state and its ultimately failed attempts to usurp the autonomy of the economic sphere by a variety of means. (Id., at 34).

Still, I am reminded of the great contests between the Mensheviks and Bolsheviks in pre-Revolutionary Russia. Teubner has elaborated the possibility of order in the systems cosmos. He identifies the levers through which the system itself can face its self-destructive contradictions, its compulsive addictions, and avoid excess—while at the same time producing conditions that permit foundational revaluation in the face of the possibility of catastrophe. I wonder, though, whether fundamental systems order necessarily includes a large dose of chaos. It is not clear to me that the fundamental contradictions of systems—their relentless drive toward the limits of their logic—their compulsion to drive toward their limit, and by such compulsion to destroy their essence as they strive to attain it—is not both basic and inescapable. That, is I wonder whether catastrophe is avoidable in the face of the inherent contradictions of systems, and the fundamental drive of systems to follow their internal logic (purity) to its limit (compulsion, addiction, crisis).
People, groups, all conscious organisms simultaneously seek the protection of oblivion, an acceptance of repose in some perfect and eternal state, equilibrium, on the one hand, and also struggle to overcome the desire for oblivion, that is struggle against faith. Such struggle leads to emancipation for those who can successfully struggle. That success is valid for those who struggle, but cannot be gifted to others. Each in turn must struggle – individual, group, organism – against the reality bequeathed to it. And thus the process of self-overcoming and recurrence are linked through death and transformation. “Existence seeks an organizing principle.” Yet organizing principles are personal to the organism that struggles or accepts. Only the struggle remains the same – over and over. Friedrich Nietzsche, The Will to Power at § 1066. Only the eternal can overcome eternally; in all other cases, overcoming recurs eternally. J (1886) at § 200. These open systems of multiple cycles constitute the matrix within which the hermeneutical projects of Gadamer and his followers, can occur, foundations can be established, maintained, problematized, destroyed, and replaced.
Larry Catá Backer, Cycles of Legal Foundations: Law After Deconstruction, Law at the End of the Day, Aug. 14, 2006. This suggests an ancient insight into the cyclicity inherent in systems. (ibn Khaldun, 'Abd-ar Rachman. 1377. The Muqaddimah: An Introduction to History, trans. Franz Rosenthal, ed., N.J. Dawood. Princeton: Princeton University Press, 1967.) It is not the nearness of catastrophe but catastrophe itself that provides the space within which a system either reengages in self revaluation or is overtaken and reconstituted from outside. That is another possible lesson from the Great Depression of 1929. Teubner draws near that precipice and pulls back. But in that turn, he has illuminated an elegant and plausible basis for management, far more coherently drawn than the limited scope approaches that have been the bread and butter of financial sector analysis since the recognition of the slide toward financial sector catastrophe in 2007.

Friday, May 07, 2010

Gesture and Sovereign Wealth Funds: A View From Sydney

Friedrich Nietzsche's old insight about gesture--about the human predilection for gesture over substance -- appears more apt than ever in the context of establishing a multilateral governance framework for sovereign wealth funds.   The importance of gesture is likely to be at the core of the International Forum of Sovereign Wealth Funds being held in Australia this week.
The International Forum of Sovereign Wealth Funds (IFSWF) will convene its second meeting in Sydney, Australia on May 6-8, 2010, hosted by the Future Fund of Australia.
The meeting of senior representatives of Sovereign Wealth Funds (SWFs) from more than 20 countries across the world, together with representatives from government agencies and multi-lateral organizations, will review and discuss recent developments in the global economy and challenges in the investment environment going forward.
The IFSWF will issue a short communiqué and hold a press conference at the conclusion of the Sydney meeting.
International Forum of Sovereign Wealth Funds to Meet in Sydney, Australia on May 6-8, 2010

Ashby Monk in his excellent blog site, Oxford SWF Project, recently brought this idea home in his perceptive analysis of the build up to the final communique from this group. 
As an ‘unnamed SWF source’ explains in the FT today:
“That was the issue that gave rise to the whole thing…We responded by adopting the Santiago Principles and now we want to see what the rest of the world is doing about [providing] open, non-discriminatory investment markets.”
What? Hold your horses just a second, unnamed FT source. You are confusing the adoption of the Santiago Principles at the level of the IWG and the Forum with the implementation of the Principles at the level of the SWFs. The two are quite different.
While I think we’d all agree that developing and “adopting” the Principles was a remarkable feat of diplomacy and negotiation at the international level, their long-term success will depend on SWFs’ compliance with them. In other words, I don’t think you can claim to have “adopted” the Santiago Principles just because the IWG agreed on a framework. The funds themselves have to use this framework.
Ashby Monk, Santiago Implementation Falls Short, Oxford SWF Project, May 6, 2010. Monk draws attention to the analysis in an important new work, Sven Behrendt, Sovereign Wealth Funds and the Santiago Principles:Where Do They Stand?, Carnegie Endowment for International Peace, Carnegie Middle East Center No. 22 (May 2010), which offers some important insight into the level of compliance with the Principles.  Monk concludes that
there remains quite a bit of work to be done to move from “adoption” at the level of the IWG / Forum to “compliance” at the level of the SWFs. In fact, Sven finds that there are literally zero (!) SWFs that are 100% “Santiago Compliant” – i.e. not a single SWF has managed to implement all the principles and practices that they themselves crafted and agreed to adopt. While some funds are quite close (such as the New Zealand Superannuation Fund), most fall under the 60% compliance range. Remarkably, some signatories (e.g. Iran) are literally 0% compliant.
Ashby Monk, Santiago Implementation Falls Short, Oxford SWF Project, supra.  

Yet the governance implications for home as well as host states are complex.  Part of the problem is one of linkage.  Bernhardt reminds us that one can consider the Santiago Principles "as an experiment in global governance arrangements could be designed in an increasingly fragmented economic and political global space."  Bernhardt, supra, at 16.   There is an assumption within this analysis that this experiment can succeed only if it is translated into the traditional language of law and, as law, incorporated into the domestic legal orders of legitimately constituted states--both home and host states.  But the context in which the Santiago Principles themselves were developed--under the umbrella of a supra national organization for the purpose of designing confidence building principles of a self regulatory nature--suggests perhaps that the arena within which regulatory efforts should be directed are not localized within states.  It also suggests that the traditional methods of governance--statute, and international convention, but be inadequate.  SWFs represent projections of public power in private markets.

The Santiago Principles were meant to reassure host states that these projections of public power in private markets were not threatening.  Yet their adoption,without more, amounts to  mere gesture.  Their implementation would involve something considerably more substantive--Ashby Monk's principal point.  Like SWF states, host states have also adopted graet principles for the preservation of open private markets.  Indeed, most have done that and more.  It becomes perversely ironic, in that context, to consider the SWF home state complaints about gesture.

Monday, May 03, 2010

Democracy Part XX: Mass Democracy and Shareholder Democracy--The Aristocratic Impulse in Corporate Governance

Joseph A. Grundfest recently published an excellent article which provides excellent insights into the ideological wars currently subsumed under notions of "shareholder rights" and "corporate governance." Joseph Grundfest, The SEC's Proposed Proxy Access Rules:  Politics, Economics and the Law, Business Lawyer 65(2) (Feb, 2010).The abstract provides:
 The Securities and Exchange Commission has proposed proxy rules mandating shareholder access under conditions that can be modified by a shareholder majority to make proxy access easier, but not more difficult. From a legal perspective, this Mandatory Minimum Access Regime is so riddled with internal contradictions that it is unlikely to withstand review under the arbitrary and capricious standard of the Administrative Procedures Act A fully-enabling opt-in proxy access rule is, in contrast, entirely consistent with the administrative record developed to date by the agency and is easily implemented without delay.

From a political perspective, and consistent with the agency capture literature, the Proposed Rules are easily explained as an effort to generate megaphone externalities and electoral leverage to benefit constituencies allied with currently dominant political forces, even against the will of the shareholder majority. Viewed from this perspective, the Proposed Rules have nothing to do with shareholder wealth maximization or optimal governance, and reflect a traditional contest for economic rent common to political brawls in Washington D.C.

From an economic perspective, if the Commission nonetheless determines to implement an opt-out approach to proxy access, it will then confront the difficult problem of defining the optimal proxy access default rule that should be subject to a symmetric opt-out by shareholder majority (not the asymmetric opt out imposed by the Mandatory Minimum Access Regime, for which there is no support in the academic literature). The administrative record currently contains no information that would allow the Commission objectively to assess the preferences of the shareholder majority regarding proxy access at any publicly traded corporation. To address this gap in the record, the Commission should, if it determines to follow an opt-out strategy, conduct a properly designed stratified random sample of the shareholder base, and rely on the results of that survey to set appropriate default proxy access rules. The Commission’s powers of introspection are insufficient to divine the value-maximizing will of the different shareholder majorities at each corporation subject to the agency’s authority.
Id., Abstract.  My colleague, Marco Ventoruzzo tends to agree that a less enabling regulation of proxy access, facilitating proxy access by qualified minorities, would be desirable, but views with more skepticism proposals that would leave these matters entirely to contractual freedom and the governing documents of a listed corporation.  In an excellent paper, he has argued that a mandatory form of proportional representation of shareholders on the board might be welcome.  Ventoruzzo, Marco, Empowering Shareholders in Directors' Elections: A Revolution in the Making (February 24, 2010). Penn State Legal Studies Research Paper No. 4-2010; Bocconi Legal Studies Research Paper No. 01-10; ECGI - Law Working Paper No. 147/2010. 

While the article focuses on what appears to be a technical issue, the ideological points it raises on changes to the sort of ideology embraced by academic elites and government functionaries are worth considering.

I have been following these recent efforts to import public law notions of mass democracy (and its ideological baggage) into corporate governance over the last decade.  I remain suspicious.  First, most of these proposals (from executive compensation caps to the management of proxy access rules) have the feel of gesture rather than substance--the point, of course, of the more precisely oriented  Grundfest article. Second, it is not clear whose interests are served by the rules--certainly not the day traders and the small holders.  More likely the interests of larger holders are advanced, holders whose own interests may not be identical to those of small holders.  For a valuable consideration of this argument, see Lee Harris, Missing in Activism, An Empirical Analysis of Retail Investors in Corporate Elections, forthcoming in the Columbia Business Law Review, No. 1 (2010) ("When it comes to the interests of retail investors — i.e., individuals with small stakes in a particular firm — the evidence suggests that contested corporate elections are virtually off-limits as conduit for activism. Retail investors almost never launch a campaign and their interests are not represented well by those who do." Id., abstract ).  

If this is a possibility, then it might follow that stable minority holders and large institutional investors profit--from governments, and interest oriented private investment funds.  The Norwegian Sovereign wealth Fund and CALPERS are among two of the most powerful activist shareholders, I imagine a coordinated investment activist program from the Chinese is not far behind. See, e.g., Backer, Larry Catá, Sovereign Wealth Funds as Regulatory Chameleons: The Norwegian Sovereign Wealth Funds and Public Global Governance Through Private Global Investment (May 4, 2009). Georgetown Journal of International Law, Vol. 41, No. 2, 2009. We move, then, only to a system in which control aristocracies use the state to manage their division of power to reach "the masses".   Those aristocracies will reflect global rather than national economic elites--public and private.  That makes the purely national discussion of shareholder democracy somewhat parochial--the shareholder demos and the national demos are no longer either identical nor arranged in a perfect hierarchy in which the a state regulator sits at the apex.

Still, the point advanced by Grundfest and Ventoruzzo (among others) is powerful--even a broadened control aristocracy is "better" when measured against ideals of corporate democracy that in turn is modeled on political democracy currently in fashion.   Justice Scalia made a  point worth reconsidering in  dissent in Austin v. Michigan Chamber of Commerce, 494 U.S. 652 (1990)--shareholders have two choices in the face of disagreement with management--persuade or sell. The state has taken it on itself to determine which of the two objectives it will favor through the aggregate of its regulatory efforts.  Even the most technical of measures can shift the balance in either direction.  It appeared, for a while at least, that the choice had been made to favor a shift of power to the small investor by favoring markets over  management.   That choice was implemented through the web of rules that were meant to move towards more "perfect" markets and easier exit (understanding that "perfection" is both problematic, unattainable, and creates its own abuse issues).  To the extent that the state favored liquidity and real pricing in markets, it tended to favor the small investor whose economic interests were maximized by the increase over time of her aggregate investment portfolio.   If the idea was to sustain broad markets and perfect the small shareholders' exit rights (that is to move toward "perfect" pricing), then it seems odd to try to tinker with this system in order to reach a different--and importantly perhaps inconsistent--objective--greater participation by powerful blocks of shareholders.  As between directors and large owners, there is an elements of democracy in these movements; as between small and large shareholders, the reverse may be true.The movement now, it seems, is to use the state to favor the larger investor through these  management oriented regulatory programs and "democracy" movements.

Saturday, May 01, 2010

A Consideration of John Ruggie's 2010 Report to 14th session of UN Human Rights Council: "Business and Human Rights: Further steps toward the operationalization of the 'protect, respect and remedy' framework"

John Ruggie recently submitted his report to 14th session of UN Human Rights Council: "Business and Human Rights: Further steps toward the operationalization of the 'protect, respect and remedy' framework"  (The 2010 Report).  The Report serves as a crucial last step in the long process that began in 2006 when Mr. Ruggie started to distinguish what would become the Protect-Respect-Remedy project from the failed efforts to develop a set of Norms on the responsibilities of transnational corporations and other business enterprises with regard to human rights and will end next year with the publication of a set of guiding principles for the operation of the Protect-Respect-Remedy framework.  This short essay considers the 2010 and its place in the process from theory to operating system.

The 2010 Report[1] serves to refine the conceptualization of the Protect-Respect-Remedy framework and to provide the foundation for the development of a set of governance principles that will serve as the basis for operationalizing the framework. Reflecting the format of the original mandate, the SRSG first focused on principled pragmatism as the core working method utilized to move closer to operationalizing the Three Pillar framework.[2] The remainder of the Report distilled the essence of each of the pillars and the linkages between them. This was meant to provide the last official version of the conceptual framework from which the final product of the mandate will be drawn—the guiding principles.

The first part of the Report reminds its readers of the fundamental importance of the notion of “principled pragmatism” to the conceptualization of the mandate,[3] first announced in the 2006 Report.[4] The 2010 Report reminds its readers that principled pragmatism was at the heart of the conclusion of the 2008 Report of the impossibility of finding a unified approach to the issue of business and human rights in the context in which states and corporations occupied different regulatory spaces.[5] “As has been true throughout the mandate, the operationalization phase combines research, consultations and practical experimentation.”[6]

The 2010 Report then turns to the State duty to protect. It “describes a portfolio of possible measures by States to promote corporate respect for human rights and prevent corporate-related human rights abuse.”[7] These are grouped into “five priority areas through which States should strive to achieve greater policy coherence and effectiveness as part of their duty to protect: (a) safeguarding their own ability to meet their human rights obligations; (b) considering human rights when they do business with business; (c) fostering corporate cultures respectful of rights at home and abroad; (d) devising innovative policies to guide companies operating in conflict-affected areas; and (e) examining the cross-cutting issue of extraterritorial jurisdiction.”[8]

The corporate responsibility to respect is offered as both contrast and supplement to the state duty to protect human rights.[9] Companies have a fundamental responsibility to comply with the laws of all host states.[10] This obligation exists even in the absence of a government (in which case the company is expected to fill the void).[11] It poses special problems where national law conflicts with international standards, a problem the solution to which remains elusive. [12] But actions that affect human rights may also collaterally affect the ability of a company top comply with law, producing community resistance that may delay otherwise lawfully operating companies.[13] Lastly, blind compliance with local law might expose companies to complicity in state violations of international human rights norms.[14]

The limitations on a company’s obligations to comply with local law in all circumstances suggests the key characteristic of the corporate responsibility to respect human rights: its autonomy from both domestic law systems and from the state. The SRSG continues to emphasize that “responsibility exists independently of States’ human rights duties. It applies to all companies in all situations. ”[15] This responsibility exists with respect to all actors with whom the corporation interacts.[16] It is framed by the International Bill of Rights combined with the ILO core Conventions,[17] but not limited to the principles contained therein.[18] Yet the SRSG resists expanding the scope of the responsibility to respect human rights to something more positive. Reflecting concerns about the democratic legitimacy of corporate control of political policy within states, the SRSG suggests that such a role would substitute the corporation for the government of a state.[19]

What the SRSG does posit as a positive obligation in the context of the responsibility to respect is the obligation to undertake and disclose the products of internal and external due diligence.[20] “Human rights due diligence can be a game-changer for companies: from “naming and shaming” to “knowing and showing.” Naming and shaming is a response by external stakeholders to the failure of companies to respect human rights. Knowing and showing is the internalization of that respect by companies themselves through human rights due diligence.”[21] The SRSG elaborates the way in which such due diligence is to be undertaken. He suggests four basic components of due diligence,[22] and indicates that such systems can increase the likelihood of better management of human rights violations, and serve as a basis for the provision of remedies.[23] He also notes that such systems are ineffective unless implemented.[24] And he seeks to reassure companies that due diligence will reduce rather thasn increase exposure to liability.[25]

Lastly, the SRSG focuses on the Remedy pillar, arguably the most conceptually difficult of the three. The difficulty arises form the relationship between remedy and the distinct source of obligation for human rights that attach to states and to corporations. That suggests a substantive component tied to the character of the state duty to protect and the corporate responsibility to respect. At the same time, remedies are procedurally laden. Remedies can be understood as the process for vindication of rights and the management of claims. They serve as an important prong of accountability in the relationship between state and stakeholders, and corporation and stakeholders.

For the 2010 Report, the SRSG chose process and organization. In connection with process, he focuses “on three types of grievance mechanisms that can provide avenues for remedy: company-level mechanisms and both non-judicial and judicial State-based mechanisms.”[26] For organization the SRSG “examined how these can be complemented by initiatives undertaken by industry bodies, multi-stakeholder groups, international organizations and regional human rights systems. ”[27]

Company level remedies are grounded in internal grievance mechanisms. These would be available both for internal problems and also as a method for outside stakeholders to interact with the company. For the company these procedures are meant to serve as early warning systems, that is as a method for managing and minimizing the adverse impacts of potential human rights violations.[28] To ensure process legitimacy, the SRSG imports traditional Rechtsstaat notions in the construction and operation of such systems: “legitimacy, accessibility, predictability, equitability, rights-compatibility and transparency. A seventh principle specifically for company-level mechanisms is that they should operate through dialogue and engagement rather than the company itself acting as adjudicator.”[29]

States are also encouraged to create non-formal systems of dispute resolution.[30] The SRSG points to models that might be incorporated into state practice—from the national contact point system under the OECD Guidelines for Multinational Enterprises,[31] to the deployment of national human rights institutions.[32] “Whatever roads they choose, States should view the provision of remedy comprehensively so that judicial and non-judicial approaches begin to cohere as a system of remedial options for victims of corporate-related abuse. ”[33] However, at least as far as states are concerned, the core remedial institutions are judicial. In this sense, the remedial pillar and the state duty to protect converge.[34]

The SRSG then considers the appropriate scope of judicial remedies. These touch on a number of substantive issues. Ironically, having embraced the paramount role of the state system, and territorially bounded law-systems in the construction of the First Pillar, the SRSG is confronted with the consequences of that necessary choice in the elaboration of the Remedial Pillar. These include difficulties relating to the consequences of respecting the distinct legal personalities of corporations,[35] the extraterritorial reach of the judicial power, [36] and the problem of prosecutorial resources when poorer states confront investigations on a global scale.[37] Additionally, practical considerations may effectively deny individuals (and states) adequate remedies through the invocation of formal judicial process. “Turning to practical obstacles, three are particularly problematic: costs; bringing representative and aggregated claims; and disincentives to providing legal and related assistance to victims. Their coexistence can make it almost impossible for victims to access effective judicial remedy.”[38] Yet this is a problem that confronts all litigants in even the richest states. The issue of access to justice is as much a problem in the United States for the poor as it is for victims of human rights abuses in developing states.

Lastly, the SRSG emphasizes complementarity in the remedial context. State based formal and informal systems ought to be integrated in some way. [39] Likewise expanded and integrated private grievance mechanisms “can enable companies to increase the reach and reduce the costs of grievance mechanisms. ”[40] The SRSG notes the importance of collaboration across pillars—between states and companies, and the need to be sensitive to class, culture and context issues in designing remedial structures. The object is to maximize the availability of remedy. And that objective is likely to serve as the basis for judging the effectiveness of remedial mechanisms implemented rather than some compliance with formal system construction.[41] For the moment all remedial systems remain underdeveloped.[42]

The SRSG then points to the future. He will provide a set of guiding principles in the 2011 Report.[43] “The final report also will present options and recommendations to the Council regarding possible successor initiatives to the mandate. ”[44] The 2010 Report ends with a warning—all the conceptualization in the world is no substitute for the institutionalization and bureaucratization of the standards developed. In the absence of some sort of institutional structure, the work of the mandate will effectively die on the vine with the publication of the 2011 Guiding Principles.[45] The next move will be both contentious and important in the development of global governance standards for business and human rights.

[1] Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie, Business and Human Rights: Further steps toward the operationalization of the “protect, respect and remedy” framework, A/HRC/14/27, Human Rights Council, 14th session, Agenda item 3, Promotion and protection of all human rights, civil, political, economic, social and cultural rights, including the right to development, available (hereafter the 2010 Report).

[2] 2010 Report ¶¶ 4-15.

[3] 2010 Report ¶¶ 4-15.

[4] See 2006 Report at ¶ 81.

[5] “But, he added, those things must cohere and generate an interactive dynamic of cumulative progress – which the framework is designed to help achieve.” 2010 Report, supra, at ¶ 5.

[6] Id., at ¶ 7.

[7] Id., at ¶ 17.

[8] Id., at ¶ 19.

[9] The SRSG explained in language somewhat more subtlety drawn than in the 2008 Report:

The term “responsibility” to respect, rather than “duty”, is meant to indicate that respecting rights is not an obligation that current international human rights law generally imposes directly on companies, although elements may be reflected in domestic laws. At the international level, the corporate responsibility to respect is a standard of expected conduct acknowledged in virtually every voluntary and soft-law instrument related to corporate responsibility,31 and now affirmed by the Council itself.

2010 Report, supra, at ¶ 55.

[10] Id., at ¶ 66.

[11] Id., at ¶ 67.

[12] Id., at ¶ 68.

[13] Id., at ¶¶ 69-73 (“human rights are adversely impacted, serious corporate value erosion occurs and disclosure requirements and directors’ duties may be breached. Clearly, better internal control systems and oversight are necessary. ” Id., at ¶ 73).

[14] “For example, the more than fifty cases brought since 1997 against United States-based and other companies under the Alien Tort Statute have included allegations of complicity in genocide, slavery, extrajudicial killings, torture, crimes against humanity, war crimes and other egregious human rights violations. ” Id., at ¶ 75.

[15] Id., at ¶ 57.

[16] Id., at ¶ 58.

[17] Id., at ¶ 60. The International Bill of Rights consists of the Universal Declaration of Human Rights and the main instruments through which it has been codified: the International Covenant on Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights.

[18] “Depending on circumstances, companies may need to consider additional standards: for instance, they should also take into account international humanitarian law in conflict-affected areas (which pose particular challenges)36; and standards specific to “at-risk” or vulnerable groups (for example, indigenous peoples or children) in projects affecting them.” Id., at ¶ 61.

[19] Id., at ¶ 62-65. He notes that

the proposition that corporate human rights responsibilities as a general rule should be determined by companies’ capacity, whether absolute or relative to States, is troubling. On that premise, a large and profitable company operating in a small and poor country could soon find itself called upon to perform ever-expanding social and even governance functions – lacking democratic legitimacy, diminishing the State’s incentive to build sustainable capacity and undermining the company’s own economic role and possibly its commercial viability. Indeed, the proposition invites undesirable strategic gaming in any kind of country context.

Id., at 64.

[20] Id., at ¶¶ 79-86. On the importance of monitoring in this context, see, Larry Catá Backer, From Moral Obligation to International Law: Disclosure Systems, Markets and the Regulation of Multinational Corporations, 39 Georgetown Journal of International Law 591 (2008).

[21] 2010 Report, supra, at ¶ 80. On the governance effects of surveillance and disclosure systems, see Larry Catá Backer, Surveillance and Control: Internal, External and Governmental Monitoring of Corporate Insiders After Sarbanes-Oxley, 2004 Michigan State Law Review 327 (2004).

[22] These include: “a statement of policy articulating the company’s commitment to respect human rights; periodic assessment of actual and potential human rights impacts of company activities and relationships; integrating these commitments and assessments into internal control and oversight systems; and tracking and reporting performance.” 2010 Report, supra, at ¶ 83.

[23] Id.

[24] “Accordingly, the Special Representative is also developing guidance points for their implementation.” Id., at ¶ 84.

[25] Id., at ¶¶ 85-86.

[26] Id., at ¶ 89.

[27] Id.

[28] Id., at ¶ 92.

[29] Id., at ¶ 94. The actual construction of such grievance mechanisms is left to the company. Id. at 95.

[30] “The importance of non-judicial, State-based mechanisms, alongside judicial mechanisms, is often overlooked, as regards both their complaints-handling role and other key functions they can perform, including promoting human rights, offering guidance, building capacity and providing support to companies and stakeholders. ” Id., at ¶ 96.

[31] Id., at ¶ 98-100. The SRSG however notes the weaknesses of this system.

[32] Id., at ¶ 97.

[33] Id., at ¶ 102.

[34] “States that deliberately erect barriers to prevent cases from being brought against business or that obstruct or intimidate the peaceful and legitimate activities of human rights defenders may breach their duty to protect.” Id., at ¶ 103. Convergence with the corporate responsibility to respect occurs where corporations impede access to courts. Id.

[35] The SRSG notes both the problem of dealing with corporate groups (id., at ¶ 105) and parent subsidiary structures. Id., at ¶106.

[36] Id., at ¶ 107

[37] Id., at ¶ 108.

[38] Id., at ¶ 109.

[39] “State-based judicial and non-judicial mechanisms should form the foundation of a wider system of remedy for corporate-related human rights abuse. ” Id., at ¶ 114.

[40] Id., at ¶ 115

[41] Id., at ¶ 114-115.

[42] Id., at ¶ 117.

[43] Id., at ¶ 124.

[44] Id., at ¶ 125. “The Special Representative will engage extensively with Member States and others in developing these ideas. Nevertheless, to sustain the momentum the mandate has achieved, he is flagging one recommendation now. ” Id.

[45] Id., at ¶ 126. “Resource constraints limit how much he and his small team have been able to do. However, even those limited efforts will come to a halt once his mandate ends unless an advisory and capacity-building function is anchored firmly within the United Nations.” Id.