My Lecture Notes

These materials deal with legal and business ethics and are related to the reading in A Civil Action.

For Monday October 14, read this.

OBSERVER The Chronicle of Higher Education May 12, 2006
The Lessons of Legal Ethics by Leonard M. Niehoff
I teach ethics to law students. That always draws a laugh, or a sarcastic remark like, “Must be a short course.” My favorite response, though, came from a fellow who works at the local feed store and asked what I did for a living. When I told him, he shook his head and said, “Wow, and I thought dairy farmers had a tough job.”It is a tough job, indeed, for several reasons.
Most students have little or no interest in the course when they enroll in it, which they do only to meet the curricular requirement. Surveys tell me that students sign up for the course with indifference, or even hostility. I understand why.
Some students think we cannot find provably correct answers to ethical problems. Those students entered law school with an easygoing, skeptical relativism they acquired as undergraduates. Others think that we have already found the answers and that they’re obvious. Those students entered law school with a moral certitude they acquired from their family or faith. Both kinds of students have something in common: They enroll in my class thinking it a waste of time.
That attitude presents a collection of challenges. I have to engage uninterested students. I have to show some students that more can be said about ethics than they think. And I have to show others that less can be said.
The greatest challenge, however, comes in helping students understand that they may not even have framed the issues correctly. After all, thinking about ethics as a series of questions and answers may capture how those issues arise in academe, but it does not capture how they tend to arise in life, or, more pointedly, in the practice of law. In those complex contexts, ethical problems come to us as problems, not as hypothetical questions that invite abstract answers. That distinction is important because we do not seek to answer problems but to solve them, and solutions tend to be complex, organic, and communal in ways that answers often are not. Throughout the term I try to lure my students away from the question-and-answer model and invite them to consider other sorts of models.
Of course, my job is also a tough one because I am teaching law students. Their course work has already introduced them to an idea that influences a good deal of the theory around legal ethics: that lawyers hold a special place in our society. Most of them therefore come to the course recognizing, at least to some degree, that serving as someone’s lawyer may allow them — or even require them — to engage in conduct we would otherwise regard as morally obnoxious. They have some understanding, even if rough-hewn, that their professional obligations may compel them to depart from their personal morality, and that those obligations justify that departure.
At the beginning of the course, I often ask them to consider the following scenario. Your best friend comes to you and asks if you will keep a confidence. You agree, and he tells you he has a terrible confession. A few nights ago, while driving down a dark country road, he accidentally hit a young girl. He leapt from the car, checked her pulse, and discovered he had killed her. In a panic, he lifted her body into his arms, carried it to his car, and drove deep into the woods — where he buried the body. The incident tortures him, but he knows that disclosure to the authorities will ruin his life.
Some students immediately conclude that you have no obligation to keep this secret. They do so for different reasons. For example, some think your friend extracted the promise unfairly or believe that competing considerations outweigh whatever obligation of confidentiality may have arisen from your promise. But those students reach that decision without a struggle. Others resist at first, but as we add more facts — for instance, the child’s parents appearing on television every night pleading for information regarding the whereabouts of their beloved daughter — almost everyone comes to a point at which they decide that you can, or even must, reveal what you know.
Then we change the scenario: The conversation does not take place between best friends but between an attorney and a client who wants to understand the legal consequences of his actions. We go back through the decision making. A few students see no distinction; they think that in both cases you may breach the confidence. Most students, however, quickly conclude that the second scenario differs from the first in significant ways. In defense of their conclusion, they discuss “the greatest good for the greatest number,” try their hand at some sort of cost-benefit analysis, or even invoke ideas taken from game theory. When pressed, however, it turns out that all of their arguments finally depend on the special role of the attorney in our society. Again, most of them bring some version of that idea into the room with them and so resort to it immediately when the sledding gets bumpy.
For many years, I thought this was the most interesting aspect of legal ethics: Attorneys must sometimes do things that our moral sensibilities would ordinarily condemn, or refrain from doing things that our moral sensibilities would ordinarily direct. The students seem to find this issue fascinating as well. After all, it confirms an idea they’ve already encountered, underscores their special role in society, and gives them a dramatic glimpse of the brave new world they plan to enter.
We still explore those issues in class, but over time I’ve concluded that law students need to learn two other lessons from a legal-ethics course as well. I have come to think of them as the two most important messages the course conveys, and, at the risk of overstating matters, have come to believe that the moral fabric of our profession depends on students’ learning those lessons — and retaining them.
The first lesson is this: Many solutions to the problems of legal ethics turn not on the unique role of the attorney, but rather on the unique role of the attorney-client relationship. Students don’t take to this immediately. Toward the beginning of the course, I ask my students to identify the unique characteristic of the legal profession, and they overwhelmingly point to qualities they associate with lawyers: aggressive, critical thinkers, educated in the law, and so on. Only one or two will respond by pointing to the distinctive attorney-client relationship.
Once we’ve put that on the table, however, we discover that many of the rules of legal ethics were written to foster a particular kind of relationship between the attorney and the client. More important, we discover that the relationship those rules strive to create has a great deal in common with the relationships we try to build with our families and friends. In studying the characteristics of a sound attorney-client relationship — trust, loyalty, honesty, open communication, availability — we therefore end up learning a great deal about our life beyond the law. Of course, that has the added benefit of reminding the students that such a life exists, a fact newly minted lawyers often have trouble remembering.
The second lesson is this: Engaging in ethical decision making is much more difficult in practice than in the classroom. I illustrate that point with the example of mountain climbers, who decide while still at base camp the precise minute they will turn around from their attempt to reach the summit and head back down. Mountain climbers understand that they will not engage in their best decision making at high altitudes; the thin air, the apparent closeness of the summit, and the pressures of success will compromise their judgment. The best climbers have done all their good thinking at base camp, and they carry it right up the mountain with them.
The analogy to the practice of law is obvious. I teach some of the brightest young people in the country. They will become heads of law firms, business leaders, in-house counsel to major corporations and organizations, attorneys general, judges, legislators, prosecutors, and — perhaps most challenging of all — small-town, solo practitioners. They will find themselves at high altitudes. Summits, many of them false, will tempt them to keep climbing after the point of no return. My job is to help my students build their ethical base camps. And that is the principal reason my job is tough — wonderfully and gloriously so.
Leonard M. Niehoff is an adjunct professor of law at the University of Michigan Law School and an attorney at Butzel Long, in Ann Arbor. He is the author of “What We Believe: Geoffrey Stone’s ‘Perilous Times: Free Speech in Wartime’ and the Assault on Individual Conscience” (Rutgers Law Journal, 2005).
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And look at the relevant parts of this.

Massachusetts Code of Judicial Conduct

http://www.mass.gov/cjc/code.pdf
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And look at the relevant parts of this.

Massachusetts Rules of Professional Conduct (for lawyers)

http://www.mass.gov/obcbbo/rpcnet.htm

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And read this, for what are called in this article “three overlapping perspectives—economic, legal, and ethical,” two of which are the same as those discussed in class, and one of which is similar.

An Education in Ethics: Teaching business students life lessons in leadership, by John S Rosenberg Harvard Magazine Sept Oct 2006
LCA is a full-semester course required of all M.B.A. students. It thus complements first-semester courses in such expected skills as finance, marketing, and financial reporting and control, and second-term courses in strategy, negotiation, the international economy, and entrepreneurship. Mandating such a course, which few other American business schools do, reflects an ambitious view not only of what management leaders ought to know beyond the economics of their enterprises, but also of the most effective ways to teach this perspective to financially focused young people. At the most basic level, LCA aims to “give students a deep practical understanding of the responsibilities of business leadership,”. And because this is education for a profession, the course then challenges students to examine “How do you make good on those responsibilities in a world that is often unclear, constantly changing, and decidedly unforgiving?” In this large sense, LCA is an important statement about contemporary ethical education. Learning about norms of conduct has long been fundamental for students and practitioners in patient- and client-centered professions such as medicine and law. But in secular liberal-arts settings, the role of such education is far less defined: witness the College’s debate about revising undergraduate studies, which might include eliminating the current “moral reasoning” component. The business school’s challenge lies between these poles: broadening students’ perspectives as they prepare for a career where results are often measured by quarterly earnings, but where practice is guided by informal rules and the varying cultures of individual organizations.
The course does so through two sequences of case studies drawn from practice The first set of cases addresses the corporation and its responsibilities: fiduciary concepts of loyalty, candor, and care; obligations to shareholders and creditors; the duties related to consumer product and service safety, authenticity, and integrity; the terms and conditions of employment; and public issues of privacy, the environment, health, and social expectations of business. The second set examines governance: from the law, regulation, and boards of directors to the internal design of compensation incentives, compliance systems, and organizational values and codes of conduct. The cases involve seasoned CEOs and people just starting their careers, domestic and foreign firms, industries ranging from medicine to meatpacking, and contexts as mature as the American market or as freewheeling (and frightening) as developing economies where bribery and favoritism are routine.
Throughout, students are challenged to analyze business problems from three overlapping perspectives—economic, legal, and ethical—and to recognize that enterprises can be sustained only when they are aligned with all three criteria. That triple-lens framework is perhaps LCA’s defining intellectual feature. It brings together elements that students might encounter separately in courses on finance, values, and law, but which are not otherwise combined in a dynamic way, readily applicable to the challenges business leaders regularly confront. LCA faculty members hope the framework informs the students’ subsequent decisionmaking in business; in evaluations, students have often cited the three lenses as an essential takeaway from the course.
One early class focused on Aaron Feuerstein, the businessman who became a national hero in late 1995: when a fire gutted his family’s Malden Mills textile plant in Lawrence, Massachusetts, Feuerstein announced on the spot that he would rebuild the complex, retain every employee, and continue their pay and benefits in the interim. The first students to comment acknowledged Feuerstein’s idealistic intentions and long adherence to his personal standards (he had not moved production offshore, for instance). But they immediately critiqued his deafness to contrary advice from his own company experts and his lack of strategic discipline. Feuerstein’s plan depended on rosy economic forecasts with little room for error—and ultimately bankrupted the reemerging company, jeopardizing the livelihoods of virtually all of the workers and their surrounding community. Other students argued that, given the traumatic fire, Feuerstein’s instinct to be reassuring and to stay the course was not only humane but indispensable. Putting his employees’ interests first—risking his own and his family’s wealth—was understandable. And they maintained that his vision could be adapted to work. But was it “ethical” in the familiar sense? Baker Foundation professor Thomas R. Piper asked the section to consider whether Feuerstein’s strengths—his admirable immediate reactions—were also larger weaknesses, given the shaky finances of his enterprise. If students emerged dissatisfied—torn between their emotional sympathies with the person and their analytical criticisms of his performance as CEO—Piper seemed to imply that made the class a good day’s work.
LCA is full of such vignettes. But even though most of the course is based on actual business cases—it is not a liberal-arts immersion in moral philosophy—the faculty has designed several classes around materials atypical of the HBS curriculum. In addition to Meinhard v. Salmon, students encounter Grutter v. Bollinger (one of the recent University of Michigan affirmative-action cases) as part of a package of readings on employment—including the unusual freedom given companies to shed workers under the American doctrine of “employment at will.” There are background readings on insider trading, the ethics of bluffing, divergent views of the corporate purpose (Milton Friedman versus Charles Handy), and on Albert O. Hirschman’s Exit, Voice, and Loyalty—a classic consideration of the individual’s options when an organization is out of alignment with one’s standards or values. The final reading is “Letter from Birmingham Jail,” Martin Luther King Jr.’s searing 1963 statement of moral responsibility in face of organizational resistance from fellow religious leaders.
One of LCA’s most vivid learning moments comes from the most unusual teaching material used in the course. After probing discussions of Enron and WorldCom—whose directors appeared to the students as particularly passive and feckless—the class read a “Note on Human Behavior: Character and Situation,” written by Chapman professor of business administration Nitin Nohria, of HBS’s organizational-behavior unit. But that analysis of “unreflective obedience” and “emotional contagion” hardly prepared anyone for the experience of watching a film on the famous experiment by psychologist Stanley Milgram, Ph.D. ’60, in which two-thirds of subjects instructed by a white-coated authority figure agreed to administer seemingly painful, even dangerous, electric shocks to another person under the guise of scientific research. The nervous laughter in Lynn Paine’s section during the film, and the subdued discussion after, suggested that a door had opened on disturbing truths. One student wondered how people had slipped into roles that made it easy to “just follow orders,” and found the deference to authority “scary.” Another worried about how readily people crossed the threshold of conceding their judgment to others. Several commented on how authority figures could elicit trust from others and then use it to their own ends. A torrent of real-world examples spilled out, from a student who saw quality-control standards short-circuited to meet monthly shipping goals, to another whose cash-strapped company repeatedly strung out its suppliers (“It got easier,” he said).
Paine guided the conversation toward ways students could manage through such situations. The discussion focused on preparing themselves in advance, so that, knowing their own principles, they could work in, and ultimately lead, organizations without compromising their basic values. (A subsequent case, on how James E. Burke, M.B.A. ’49, LL.D. ’93, navigated Johnson & Johnson through the two crises of Tylenol tampering and poisonings, linked his reactions and decisions to his own immersion in the company’s credo, which specifies norms of behavior.) In closing, Paine commented on the pervasive but naive belief that “It’s all about character”—that good people do good things. Complementing Allen Grossman’s comments on LCA overall, she suggested that the Milgram experiment shows that character is malleable: behavior is affected by the culture and context an organization creates. By implication, that culture and context, like a company’s profitability or growth, are the responsibilities of its leaders.
During a teacher-preparation meeting before the first class sessions, George expressed concern about the students whom their peers call “gunners”—a subset of the roughly 20 percent each year who are focused on financial analysis as a fast track to highly paid work in hedge funds or private-equity firms, and who may regard LCA more as an obligation en route to the M.B.A. than as an opportunity to learn about management (and themselves) generally. In a separate conversation, he criticized the “shareholder-value mantra,” driven by Wall Street expectations, that narrows many more students’ view of the role of businesses and the work of executives. LCA, he said, “opens them up to a much broader way of thinking.”
That broader perspective was very much the subject on February 16, as George’s section grappled with the issues confronting Royal Dutch/Shell’s Nigerian oil operations in 1995. Facing civil protests by the Ogoni people, whose Niger delta farmlands and fisheries are at the center of oil production and bear the brunt of frequent oil spills, the government of military dictator Sani Abacha arrested the activist leaders and rushed toward finding them guilty of capital crimes. Worldwide protests aimed at the government and at Shell, who were partners in the oil business, demanded justice for Ken Saro-Wiwa, the most visible of the Ogoni activists, and commitments from Shell to improve its environmental performance and to invest in local economic development. Corporate policy directed the company to “avoid involvement in politics.”
The students divided sharply on almost every aspect of the situation. A private company shouldn’t be involved in politics, one said, although Shell could invest more in community development. Another argued that the company was inevitably involved, and had no choice but to work with other oil producers to curb pollution, address local socioeconomic problems, and even engage third parties to change the government. But how could one reform a corrupt dictatorship? a third asked. And if Shell met these demands, would it not edge toward becoming a shadow government? Shell’s economic leverage was limited, another said: if it left, Nigeria would simply pick another partner eager for access to crude. One student recommended that Shell stay on the job even if the national government conducted a pogrom against the Ogoni, unless its own employees were thereby put at risk.
In the “B” case then distributed to class, the students learned that after the guilty verdicts on October 31, 1995, the company issued a statement acknowledging “demands that Shell should intervene, and use its perceived ‘influence’ to have the judgment overturned. This would be dangerous and wrong” because a “commercial organisation like Shell cannot and must never interfere with the legal processes of any sovereign state.” Ten days later, Saro-Wiwa was put to death on the gallows.
Were Shell’s hands clean or bloody? George asked. Again, the students disagreed. There are political killings the world over, one maintained: would the United States suspend trade with China? Another said her firm decided not to invest in West African oil because of the political situation—but doubted companies would forgo drilling in Texas because of the state’s practice of capital punishment. A third said oil comes from “lots of lousy governments,” citing conditions in Saudi Arabia. Others pointed to Shell’s close relationship with the Nigerian state; given the moral taint and the severe terms of its contract with the government, they thought Shell should get out of the country. Doing nothing was not an answer, one said; should a company wink at the Holocaust?
Having listened to all opinions, George then shed the role of case-method instructor and offered a personal perspective (a step some students later said they welcomed). One week after the executions, he said, Shell approved a multibillion-dollar liquified natural gas project in Nigeria. That was not the inevitable result of some corporate capital-budgeting process, he said, but a discretionary statement of Shell’s commitment to its Nigeria operations and its government partners. Turning to information in the case materials, he pointed out that Royal Dutch/Shell’s complicated structure—with two boards, a CEO with limited authority, and dozens of foreign operating subsidiaries—was tailor-made for minimizing central responsibility and oversight. Estimates of oil reserves, prepared by the subsidiaries, may have been influenced by local management’s relationship with the government, and environmental standards were a matter of local discretion. The whole system left responsibility to Shell’s Nigeria manager, sheltering senior officers from the dirty details of keeping the oil flowing.
But the CEO was inevitably accountable, no matter how he tried to avoid involvement. Were he running Shell, George said, he would have reconsidered its position in Nigeria. And that might well have been the right decision: even as the LCA students discussed the case, protests resumed (kidnappings and sabotage of production facilities roiled an already fragile world oil market), suggesting the long-term nature and depth of Shell’s problems.
The contemporary relevance of cases involving business leaders and corporate accountability—the renewed violence in the Niger delta; the Texas trial of Enron CEOs Kenneth L. Lay and Jeffrey K. Skilling, M.B.A. ’79, which overlapped the two classes devoted to that corporate collapse—might make the course seem a quick response to current events. In fact, it has evolved from nearly two decades of research, experiments with pedagogy, faculty recruiting, and assessments of how best to prepare students for a changing business world.
During the 1980s, Thomas Piper recently recalled, the junk-bond-propelled boom in corporate takeovers and the abuses of inside information by investment bankers and traders, including at least one HBS alumnus, prompted overdue reflection on business education. Although individual faculty members at HBS and elsewhere had worked on issues of managers’ conduct and business ethics, the field was in the wilderness intellectually. Just when “the corporation’s role is increasingly recognized to be more complex than that of a profit-maximizing agent for its shareholders,” Piper wrote in an essay in Can Ethics Be Taught? (1993), “consideration of professional ideals has given way in the M.B.A. curriculum to emphasis on quantification, formal models, and formulas, all of which minimize the application of judgment and the debate about values.” Because the latter subjects figured little in the curriculum, students assumed they didn’t matter.
Simultaneously, researcher Sharon Daloz Parks examined the worldview of young adults beginning professional education and careers. Her work, reported in Can Ethics Be Taught?, described a population carried along in a “flow of success,” who had “less occasion for critical reflection on self and world” than peers who had encountered adversity or “cross-cultural cognitive dissonance.” As a result, M.B.A. candidates at the elite schools she studied were “more vulnerable than might be presumed to the unexamined assumptions of conventional thought and circumstance”—a real worry if they were to become effective business leaders. She described “the mind-set articulated by one student who advised his classmates that they should do business during the week and ‘wait to save the whales on the weekend,’” somehow separating commerce from the ethics-laden choices businesses make every day.
Compared to their peers in the 1980s, Piper said, he has sensed a “remarkable” change in what students today seek from this part of their education. Where once they focused on the consequences of wrongdoing, they are now more likely to ask, “How does business contribute to the well-being of society, and what are the conditions of doing so?” According to Badaracco, the intersection of such questions with a practical framework for analyzing options and evolving markets means that contemporary students “don’t view this as something purely academic.” If nothing else, he said, in the wake of Enron, they are at pains to “avoid these kinds of calamities.”
Given LCA’s objectives, it seems impossible to imagine a more perfect counter example than Enron.
Allen Grossman had no difficulty engaging students in the case when he began class on March 7: Andrew S. Fastow, the company’s former chief financial officer, was just about to testify for the prosecution in the trial of Kenneth Lay and Jeffrey Skilling. Grossman did review the atmosphere in 2001, when Enron’s stock was trading at Internet-bubble valuations and Harvard M.B.A.s, lured by the company’s glowing reputation, rapid promotions, and rich bonuses, turned down Goldman Sachs and McKinsey to work there. A video of Skilling talking to a packed house at HBS’s Burden Auditorium revealed his serene confidence in Enron’s new paradigm—slicing apart integrated businesses and handling their production, logistics, and marketing through “virtual integration” and electronic trading—as it had so successfully done for the stodgy natural-gas business.
Before long, the students were slicing apart the assumptions behind Skilling’s vision, using skills they had acquired in their finance, accounting, and strategy courses. As it diversified, Enron entered markets it knew nothing about. When it expanded abroad—supplying electricity in India, for instance—its “asset-light,” trading-oriented strategy suddenly required billions of dollars of capital investment that it could not finance. Its novel accounting showed burgeoning revenues—in some cases, for energy trading in states where the market had not yet been deregulated to permit such activity—but those results ran far ahead of the cash and real earnings the business produced. Internal incentives yielded huge rewards for closing deals that then were prematurely recorded as revenue; and to keep the revenue flowing, traders helped grade the performance of the risk managers who nominally sat in judgment of their proposed transactions.
In the second Enron class, William George guided the students in linking these practices to the company’s internal governance and to its unusual immunity from effective external oversight. The Skilling of 2002, shown testifying before Congress, and by then shorn of his confidence, was by his account uninformed about any of the pertinent details of the “complex” partnerships that shored up Enron’s balance sheet—a victim who had relied on the representations of accountants and other experts.
With that, the real questions of interest in LCA were ripe for discussion. As George framed the issue, was Enron management clueless, corrupt, or incompetent? Why was it that among internal risk managers, auditors, lawyers, their external counterparts, the board of directors and its audit committee, commercial and investment bankers, stock analysts, and even credit-rating firms, no one stepped up to deflate Enron’s homegrown bubble? The students probed the passive behavior of board members—distracted by financial details, highly compensated for their service, unwilling to seem ignorant or ill-informed by asking questions. They considered the pressures on accountants and legal counsel, all receiving multimillion-dollar fees from Enron, and management’s ability to dazzle or bulldoze the press and securities analysts. Anticipating the classes to come on human behavior and deference to others, they painted a picture of the perfect bubble, where every player, one student said, became “caught up in it.”
As the formal discussion ended, George made time for students to engage that morning’s guest: Lloyd C. Blankfein ’75, J.D. ’78, then president (now chairman and CEO) of Goldman Sachs. A student asked how a company could create an environment where auditors give trustworthy—even when discomfiting—advice. Without hesitating, Blankfein replied, “Culture matters a lot. Culture is fate in this business.” His answer may have surprised the “gunners,” but it was a clear affirmation of LCA’s recurrent themes about human behavior, organizational incentives, and the management challenge of reconciling the two. “Culture matters, and culture isn’t random,” Blankfein emphasized. What of new, post-Enron laws and reporting standards? a student wondered. Blankfein was emphatic: “You can’t legislate culture.”
Having come this far in their understanding of individual motivation, group dynamics, and the perverse incentives that can arise in businesses, would these students make the same mistakes of leadership and corporate accountability? George, in a later conversation, was hopeful. The greatest danger facing HBS graduates, he said, was their assumption that they were the smartest people in any room, that there was a right answer to a given business problem, and that they knew it. LCA, he thought, could help “disabuse” them of these conceits.
Piper, the senior member of this generation of HBS faculty members who have struggled to bring such concerns into the classroom, professed encouragement about the gains made in “helping young people examine what’s often unexamined about their worldview and sense of purpose” as aspiring executives. But as a student of human nature, he sees the work as unending. “Frailty,” he said, “is part of the human condition.”
John S. Rosenberg is editor of this magazine.
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