Inverting Common Corporate Governance Myths

• Author: Michael J. O'Sullivan
• Position: Practices corporate law at Munger, Tolles & Olson LLP in Los Angeles, California and is an Adjunct Professor of Law at Loyola Law School
• Pages: 703-720

INVERTING COMMON CORPORATE GOVERNANCE

MYTHS

MICHAEL J. O’SULL IVAN1

I. INTRODUCTION

Before I discuss some common corporate governance myths, I would

first like to set the context. The United States is in the midst of an epic

financial cris is. That is no myth. Hom e prices have fallen drastically,1 the

level of new ho me sales is th e lowest it has been in a g eneration, both

imports and exports are cliff-diving,2 and, most troubling of all,

unemployment is at levels not seen since the Great Depression. 3 Surely

something must be done, but what? When a complex system such as an

economy fails , finding causes is easy—they are everywhere you look—but

understanding them is difficult . This i s due in part to four common

cognitive dist ortions we are all pro ne to make in tim es of crisis.

First, peop le tend to act first and think later.4 After all, th is is a crisis,

so there is no time for contemplation . Someth ing must be done now, even

if we have not fig ured out what to do yet.

Copyright © 2010, Mich ael J. O’Sullivan

1 Mr. O’Sullivan prac tices corporate law at Munger, Tolles & Olson LLP in Los

Angeles, California and i s an Adjunct Professor of Law at Loyola Law Scho ol.

This article is an edited version of a presentation Mr. O ’Sullivan delivered on October

16, 2009 at Capital University Law School’s Sixth Annual B usiness and Tax Institute. Mr.

O’Sullivan wou ld like to th ank Jason Block, Tim Pudlowski, and the entire C apital

University Law Review Staff whose invaluable assistance wa s instrumental in tu rning a

presentation into this articl e.

1 See David Leonhardt, Do I Hear a Housing Rebound? Not Y et, N.Y. TIMES, Apr. 22,

2009, at B1.

2 Patrice Hil l, Economy ‘Fell off a Cliff’ at the End of ’08, This Quarter Could Be

Worse, WASH. TIMES, Jan. 31, 200 9, at A1.

3 Janell Ross & Heidi Hall, Many Men S truggle with New Fa mily Role, THE

TENNESSEAN, Aug. 2, 2009, at B1.

4 See, e.g., Jawaharl al Neh ru Quot es, http ://www.brainyquote.com/quotes/quotes/

j/jawaharlal133828.html (last visited Mar. 18, 201 0) (“A leader or a man of action in a

crisis almost always acts subconsciously and then thinks of the reasons for his action.”);

Steve Po llick, Look to Ottawa Hills to Deal with Deer Glut, Sept. 13, 2009, h ttp://www.

toledoblade.com/apps/pb cs.dll/article?AID=/20090913/COLUMNIST 22/909139996

(“That’s the way politics work[] in thi s fair land—long-term , critical thinking and

(continued)

704 CAPITAL UNIV ERSITY LAW REVIEW [38:703

Second, in times of crisis we refl exively find ready exp lanations i n our

pre-existing biases .5 If you are a lifelong dyed-in-the-wool Democrat,

chances are your initial explanat ion for the crisis was that it was caused by

Republican deregulation. Likewise, if you are a lifelong dyed-in-the-wool

Republican, chances are your initial explanation for the crisis was th at it

was caused by Democratic regulation. Th ese biased exp lanations feel right

to us, and without time for true contemplati on they are often all we have to

rely on when decis ions need to be made.

Third, we tend to personalize the abstract and complex.6 Our modern

economy is so vast it elud es comprehension. 7 When a crisis hits, we

reflexively try to reduce it down to the simplest white/black hats level.

Just put Ken Lay and Je ff Skilling8 in handcuffs, and we thin k our

problems will be so lved. If only it were that easy.

Fourth, we have an innate need to simplify, even when our problems

are complex.9 This is related to t he prior poi nt, but it is a bit different.

Here, I am conc erned that giv en a choice betwe en a simple ex planation and

a complex explanation, our minds are wired to favor the simple

explanation. Often t his is a us eful cogniti ve filter, but sometimes it gets us

in trouble. At times, we need to resist our urge to simplify and instead

“complexify.” We need to turn inherent ly appealing simp le solutions on

subsequent straig htforward action are ignored till too late, and we are stuck w ith knee-jerk

reactions to crises.”).

5 See Gregory Mitchell, Ca se Studies, Counterfactuals, and Causal E xplanations, 152

U. PA. L. REV. 1517, 1563–64 (200 4). See Top 10 Crooked CEOs: Kenneth Lay & Jeffrey

Skilling, TIME, June 9, 2009, h ttp://www.time.com/time/specials/packages/ article/0,28804,

1903155_1903156_ 1903186,00.html, for additional discussion of the En ron scandal.

6 See, e.g., Mich ael McCann et. al., Java Jive: Genealogy of a Judicial Icon, 56 U.

MIAMI L. REV. 113, 115–16 (2001) (mentioning social science analyses, which “empha size

how the m edia dramatize, persona lize, fragmentize, and normalize narratives of events and

relationships, thus reconstru cting complex social relations and policy is sues in simplistic,

systematically skewed ways”); Neal R. Feigenson, Accidents as Melodrama, 43 N.Y.L.

SCH. L . REV. 7 41, 741 (1999) (noting how ju rors using common sense often perso nalize,

simplify, and moralize comp lex questions).

7 See John A. Paulos, Complexity and Intell igent Design: How ‘Spontaneous Order’

Applies to Econ omics and Evolution, ABC NEWS, Sept. 4, 2005, http://abcnews.go.com/

Technology/WhosCounting /story?id=1077586.

8 See Top 10 Crooked CEOs, supra note 5.

9 See JOHN H. HOLLAND, HIDDEN ORDER: HOW ADAPTATION BUILDS COMPLEXI TY 10–

12 (1995).