Assessing the Assessment: B Lab’s Effort to Measure Companies’ Benevolence

For benefit corporations to persuade their various audiences that they are as beneficial for society as they claim, they need reliable assessments of their social performance. Even if assessments were not required by most states’ benefit corporation statutes, it is difficult to imagine the benefit corporation form could gain credibility without them. Creating measurement tools for these assessments poses the twin challenges of balancing simplicity against validity and weighing vision against inclusiveness. This article examines how B Lab’s popular assessment tool engages these challenges

Miscalculating Welfare

In their quest to maximize efficiency, law and economics scholars often produce novel, creative, and counterintuitive legal rules. Indeed, legal economists have argued for baby selling, against anti-discrimination laws in the workplace, and for insider trading. In this essay, we discuss some concerns about this form of legal scholarship that privileges the creative and counterintuitive over the fair, mundane, and intuitive. Drawing on a range of empirical evidence, this essay argues that the failure to include, and to give sufficient weight to, fairness preferences undermines legal economists\u27 policy recommendations. Specifically, after setting forth three examples of this phenomenon, in the second part of our essay, we turn to the empirical evidence that legal economists should take fairness concerns seriously. This evidence ranges from the recent happiness research that calls into question the correlation between wealth and happiness, to studies of the capuchin monkey who rejects unequal pay, to cross-cultural results of the ultimatum game. We argue that given the growing body of research revealing that individuals value fairness over their own rational self-interests, it is incumbent on legal economists to take preferences for fairness into account. From here, we discuss several perils of ignoring fairness. We illustrate that unfair rules may upset reasonable expectations or instigate resistance. Either of these effects would undermine whether the specific legal rule was itself wealth or welfare maximizing. We then turn to two ways in which an unfair legal rule might adversely impact the legal system as a whole. Drawing on the work of Tom Tyler and others, we argue that unfair rules may create general disrespect for the legal system thus undermining the force of law. We also argue that unfair legal rules may undermine more general social norms, thus upending the rule-utilitarian benefits of rules over standards. Finally, we speculate a bit about the perverse incentives of current legal scholarship. The three proposals at the beginning were published by a University press, a peer-review journal, and a top student-edited journal. Innovative and creative solutions to legal problems may get widespread publicity and may be highly valued over and above realistic solutions to legal problems. In the final section, we sketch out what we believe are the pitfalls and the benefits of our rewarding this sort of scholarship

The Group Dynamics Theory of Executive Compensation

The corporate governance debate has focused recently on executive compensation. While defenders of the status quo assert that CEO compensation – and corporate governance generally -- is efficient, critics contend that boards have been captured by powerful CEOs who demand excessive pay unconditioned on their performance. Both sides argue that the evidence garnered from CEO compensation justifies their positions on legal reform of corporate governance as a whole. Defenders of the status quo argue that the system works well as is, as demonstrated by the enormous success of U.S. corporations. Critics concerned about managerial power propose reforms that will increase board’s responsiveness to shareholders, enhancing the board’s willingness to act as a check against untrammeled CEO power. In this Article, I take as given that many forms of CEO compensation are less effective than they might be and explore an alternative explanation. Advancing a new, Group Dynamics Theory, I argue that the problems with CEO compensation in public corporations may be caused by the decision-making flaws rooted in group dynamics, particularly groupthink and social cascades. Psychology, rather than economics, may be chiefly to blame. I also propose a very different type of solution, one that targets and improves boards’ decision-making processes

Confident Uncertainty, Excessive Compensation & the Obama Plan

Public outrage at the enormous bonuses TARP recipients paid to senior executives recently prompted the Obama administration to impose sweeping new curbs on executive compensation. Shortly thereafter, Senator Dodd added restrictions on executive bonuses to the stimulus bill President Obama subsequently signed. These are understandable political reactions, but will they achieve the twin goals of reducing executive compensation in recipients of federal assistance while spurring better corporate performance? To examine this question, I analyze excessive compensation as the product of confident uncertainty, the tendency of even the most sophisticated actors to place unwarranted confidence in their ability to predict the future. In particular, research from psychology and behavioral law and economics argues that employers demonstrate misplaced faith in their ability to distinguish among closely comparable candidates and therefore vastly overpay for talent which is not predictably superior. I apply confident uncertainty to explain why corporations may pay their senior executives too much. These insights on the root causes of excessive compensation grant valuable insight into the likely impact of both the Obama Plan and the Dodd provisions. I argue the Obama Plan\u27s cap on pay is likely to prove effective in countering cognitive uncertainty, but it should be tailored to a corporation\u27s particular circumstance and apply to performance pay as well. I also contend the nonbinding say on pay provisions in both the Obama Plan and Dodd provisions are unlikely to curb excessive pay. Finally, I conclude that the Dodd provisions\u27 cap on performance pay are a step in the right direction, but contain loopholes likely to seriously dilute any predicted benefit