- Professor, School of Law, Widener University. Postal address: Post Office Box 7474, Wilmington, Delaware 19803-0474 USA; e-mail address: firstname.lastname@example.org. I want to thank four members of the staff of the Widener University Legal Information Center who provided invaluable assistance in the preparation of this article: Enza Klotzbucher, Janet Lindenmuth, Mary Jane Mallonee, and Kelly Pierce.
The article proposes a concept-social productivity-that focuses on the social outputs of organized groups and underscores their importance. Four outputs are discussed: (1) standards for behavior, (2) reputation, (3) symbols, and (4) trust and perceptions of fairness. Because the social outputs of a group affect both commitment to the group by its participants and conduct toward the group by others, the outputs of a group can benefit or harm the group. When society is being damaged by the outputs of an organized group, government will adopt formal standards of behavior (i.e., law) to influence the outputs in a way that increases the cohesiveness and stability of the social system. To illustrate the concept of social productivity, this article reviews federal law concerned with conflicts of interest affecting investment companies and investment advisers.
In the economic sector, productivity is-and is widely acknowledged to be-a critical variable determining the pecuniary success or failure of profit-seeking entities that furnish goods and services. Productivity, however, affects not just the profitability of particular business enterprises, but the material wealth of society as a whole. All else being equal, the financial prosperity of a society is a function of: (1) the ability of the goods that are manufactured and the services that are furnished in an economy to satisfy what consumers perceive to be their needs; and (2) the influence that the prices of those goods and services exert on the purchasing power of the basic consuming units in a society (individuals,Page 794 households, and families) and, in turn, on their standard of living. Productivity, by affecting the monetary cost of goods and services, is a key variable in the economy.1
While an economic concept of productivity is undeniably important in explaining the material wealth of groups, personal observation suggests that understanding organized groups-including business firms-requires a sociological concept of productivity. The need for such a concept is illustrated by a number of significant instances during the last several decades in which Americans in decision-making positions failed to appreciate and concern themselves with the critical, albeit often subtle, social consequences of policies and actions. According to available evidence, these consequences weakened the social system by creating inter alia alienation from and mistrust of the system.2The instances were harmful to the fabric of society not because the activities involved were found to be unlawful but because they eroded implicit expectations that decision-makers would act in a fair manner and in the group's long-term interests. If "[djiscovery consists in seeing what everyone else has seen and thinking what no one else has thought,"3decision-makers in recent decades have too often failed to discover, and respect, fundamental principles of group dynamics.
The instances that injured the social system, in short, breached unwritten rules that defined social equity for Americans. Through civil actions and/or criminal prosecutions in courts, confidence in society may be restored for violations of rules of law, but government does not supply justice for violations of rules that are implicit in social life. Since society's cohesion is reduced when justice is not obtainable for breaches of implicit rules that are basic to interpersonal relationships, government converts some of these rules into law through legislative, administrative agency, or judicial action. Thus, when relationships between individuals became difficult or impossible because of uncertainty whether a particular form of conduct (e.g., fraud or violence) would occur, common law developed to penalize such conduct and allow each participant in a relationship to expect that all participants will act in a manner consis-Page 795 tent with the requirements of the relationship: "[T]he early common law posited 'rights and duties upon the relationship of parties within the socio-economic system rather than upon factors, such as consensual agreement, dependent on the will of individual litigants' and such relationship concepts served as the major framework of the legal structure."4Thus, the protection and promotion of interpersonal relationships were important goals of law in its initial stage, suggesting that these goals are part of the foundation of law. As such, they help to explain both the emergence and the continued existence of law in society. It follows, then, that law must support social life and that when existing law fails to do so, the rules (and occasionally the concepts) of law change in order to furnish this support. Changes in law, although not immediate, occur because the evolution of law cannot be divorced from, but must reflect, the evolution of society.
With the preceding points in mind, let me review the more notable of the instances in which concern was lacking for the social consequences of group policies and actions. For each instance, I present data from responses to questions included in national sample surveys of the adult population in the United States. The responses are measures of the reactions of the public to the instances and are indicators of changes in commitment to the social order.
One of the instances of socially damaging action, and chronologically the earliest, was the United States' military engagement in Vietnam during the 1960s and early 1970s.5The engagement came to be widely questioned, but the executive branch of the federal government continued the engagement and even sought (unsuccessfully) to prevent newspapers from publishing a document that it expected would further public doubts regarding its Vietnam policy.6Moreover, as the historical record now suggests, the President of the United States obtained congressional authorization for large-scale military involvement in Vietnam by falsifying evidence, and contrary to his public statements, he recognized that military intervention by the United States would not suc-Page 796 ceed.7Among the negative social consequences of the use of American military force in Vietnam is that, in sample surveys of the adult population conducted during the 1979-1980 period, three out of five respondents expressed the belief that the United States' Vietnam policy made "suckers" of Americans who served in the military to implement the policy.8Moreover, for the last quarter of a century, no fewer than three out of five survey respondents thought that the United States military involvement in Vietnam "was more than a mistake, it was fundamentally wrong and immoral."9Such reactions undoubtedly increased mistrust of government and thereby eroded societal commitment. Indicative of the magnitude of the error of the Vietnam policy is that Congress in 1973 enacted legislation to limit the ability of the President to commit United States military forces.10
A second instance of group policies and actions harmful to the fabric of society involves financial practices at salient tax-exempt organizations. These financial practices do not entail illegal activity; indeed, the requirements of law appear to have been fully satisfied.11In particular, a notable number of national charitable organizations that have qualified under section 501(c)(3) of the Internal Revenue Code (IRC)12lawfully pay their key officers and employees very substantial compensation even though a provision of the IRC is designed to prevent unreasonable compensation.13Table 1 lists selected charitable organizationsPage 797 and shows, in the third column, the compensation ranges of the three officers or employees at each organization who received the largest compensation amounts.14The figures for compensation in the third column include both salaries and contributions by the organization to benefit plans and deferred compensation plans; however, the figures for compensation omit amounts received from expense accounts, other allowances, and bonuses. The table, arranged alphabetically by organization name, covers prominent national charitable organizations that seemed especially generous in compensating their top managers.15The columns in the table respectively list: the name of the organization; the city in which the headquarters of the organization is located (since cities vary in their cost of living); the highest and lowest compensation of (the range of compensation paid to) the three officers or employees who received the largest compensation amounts; and the last month of the fiscal year in which the compensation was paid. The fiscal year shown is the most recent for which information could be obtained. By way of example, among the three best-compensated officers or employees of the American Cancer Society, the largest amount paid was $528,284 and the smallest amount paid was $431,659 during the fiscal year ending in August 2002.Page 798
Table 1. Highest and Lowest Compensation Amounts of the Three Persons Paid the Largest Compensation by Selected Charitable Organizations