Legislative threats.

Author:Halfteck, Guy

INDEX OF FIGURES AND TABLES INTRODUCTION I. THE CONVENTIONAL WISDOM ON SOCIAL CONTROL II. LEGISLATIVE THREATS AS REGULATORS OF CONDUCT A. Legislators and the Reality of Legislative Business. 1. Cybersecurity 2. E-piracy 3. Digital obscenity 4. Executive compensation 5. Money laundering 6. Toxic-waste recycling 7. Greenhouse-gas emissions 8. Automobile air pollution 9. Commercial leases 10. Illegal substances B. An Analytic Taxonomy of Legislative Threats 1. Explicit legislative threats 2. Implicit legislative threats 3. Anticipatory legislative threats III. HOW DO LEGISLATIVE THREATS REGULATE SOCIAL CONDUCT AND INDUCE SOCIAL CHANGE? A. A Game-Theoretic Model of Legislative Threats 1. The rules of the game 2. The information structure of the game 3. The game's underlying assumptions 4. A game-tree representation B. The Model's Predictions 1. Predicting the players' equilibrium behavior 2. Refining the predictions: Incorporating the notion of probabilistic threats 3. Extending the analysis to games with perfect and imperfect information IV. CREDIBILITY AND THE INDUCEMENT EFFECT OF LEGISLATIVE THREATS A. The Role of Commitments B. The Role of Reputation C. The Role of Emotions V. THE EFFECTS OF STRATEGIC INTERACTION WITHIN GROUPS ON THREATINDUCED COMPLIANCE A. Homogeneous Groups B. Heterogeneous Groups VI. BARGAINING IN THE SHADOW OF LEGISLATIVE THREATS CONCLUSION: THE LAW'S LIMITS AND THE CHALLENGE OF SOCIAL CONTROL INDEX OF FIGURES AND TABLES Figure 1. Extensive Form Representation of the Legislative Threat Game with Perfect Information and One Type of Threatened Legislation Figure 2. Extensive Form Representation of the Legislative Threat Game with Perfect Information and Three Levels of Severity Figure 3. Extensive Form Representation of the Legislative Threat Game with Imperfect Information and Three Levels of Severity INTRODUCTION

As compensation gaps between corporate executives and rank-and-file employees widen, and as more public companies grant their senior officers stock option plans, bonuses, and severance benefits that appear to sever the hallmark link between pay and performance, executive pay has become a hotly contested political, economic, and regulatory issue. Responding to investor concern over the lack of transparency of executive pay, the Securities and Exchange Commission (SEC) announced new rules in July 2006 that sought to tighten disclosure of executive and director compensation. The SEC relaxed the rules in December 2006, however, having been persuaded by business lobbies that the rules had the misleading--and hence undesirable--effect of inflating pay figures, (1) Responding to the SEC's move, Representative Barney Frank, the incoming chairman of the House Financial Services Committee, which oversees the SEC, announced he would push for stricter legislation. Sending an unambiguous signal to corporate America, Representative Frank proclaimed that "[b]acktracking by the SEC on this important matter of stock options reinforces my determination that Congress must act to deal with the problem of executive compensation that is now unconstrained by anything except the self-restraint of top executives, a commodity that is apparently in insufficient supply...." (2) Making these public statements, Representative Frank not only expressed his dismay with the SEC's recent move and his concern over corporate America's compensation practices; he also laid out his legislative agenda, warning of the risk and consequences of the threatened, unfavorable legislation.

This story demonstrates the strategic use of legislative threats, an increasingly prevalent but virtually unnoticed modus operandi of legislators and regulators on both the national and state levels. Conceptualized in this Article, legislative threats encompass threats exerted by one or more legislators on firms (e.g., business corporations), professions, industrial sectors and trade bodies, universities and public institutions, federal agencies, and even U.S. states, according to which the legislator will exercise his legislative mandate and enact adverse legislation in order to regulate the conduct in question, unless the threat recipients alter their behavior to bring it in line with the legislator's demands. Implicit in the threat is the inverse promise that the legislator will forgo the threatened legislation if, and only if, the threat recipients duly meet such expectations. Under certain conditions, legislative threats induce entities to modify their conduct and abandon targeted practices, averting the risk and consequences of the threatened legislation.

As such, the concept of legislative threats describes a powerful mechanism to which legislators (and regulators) frequently resort as the means of choice for exercising their institutional mandate to control social conduct and effect public policy. (3) Therefore, the inducement effect of legislative threats on behavior explains ubiquitous instances in which firms announce what at a first glance may seem to be a voluntary adoption of socially desirable policies or a discontinuance of socially harmful practices. (4)

Yet, it is theoretically impossible and practically infeasible to reconcile this novel expose with the conventional concept of the law (as a system of legal norms) or with the institutional role of lawmakers (as originators of legal norms). For instance, first-year law students are led to appreciate universal and fundamental truisms about the nature of the legal system and its role in maintaining social order. (5) One conventional truism, or so it is taught, is that the legal system serves to control social behavior. Students are also taught that well-established sources of law, including statutes and opinions, (6) are relied upon to control individual and organizational behavior. (7) Inevitably, however, the theory of legislative threats calls into question the most fundamental notion of the legal system as a "coercive order of public rules addressed to rational persons for the purpose of regulating their conduct." (8)

Strikingly, these seemingly universal truisms have not been theoretically questioned, nor subject to any rigorous scholarly inquiry. For this reason, and notwithstanding the credence that the conventional view has been afforded, the most fundamental question--namely, whether the conventional view descriptive of and coextensive with how modem social control actually works--has escaped critical examination.

I believe there are several reasons why this question has not been posed, let alone studied. In principle, Anglo-American legal scholarship focuses disproportionately on the judiciary, driven by the outdated assumption that courts are the prime social control agent in the legal system's overall design. (9) Explaining this disproportionate scholarly focus on the judiciary, Richard Posner notes that it "started with Holmes's well-known characterization of the judge as an interstitial legislator, which Cardozo echoes in The Nature of the Judicial Process." (10) Furthermore, even when legislation is the focus of the inquiry, the intellectual enterprise engages issues that lie on "the outer boundaries of the legislative process" (11) (e.g., statutory construction, normative constraints on legislative power), rather than on how legislation in and of itself serves to control social conduct. Moreover, the landscape of modern civil litigation reinforces the overemphasis of the judiciary's role: the confluence of large-scale cases and class action lawsuits in which judges and attorneys fashion complex global settlements (12) militates in favor of the view that courts, not legislatures, play a major role in modern social control. (13) Echoing this view, commentators analogize class action settlements to ad hoc administrative agencies, (14) and class action attorneys to lawmakers. (15)

Whatever the reasons for this failing, however, mounting evidence (presented and analyzed in Part II) warrants a systematic and rigorous treatment of the following question: does the conventional view of the legal system account for how modern social control actually works?

The theory presented in this Article challenges the validity of the conventional wisdom, piercing the fundamental notion of the legal system as a regulatory mechanism and, more broadly, as a social governance institution. Contrary to this wisdom, this theory demonstrates that the threat of legislation in and of itself, rather than legislation, plays a remarkable role in controlling behavior, in setting underlying incentives, in maintaining social order, and in inducing change and effecting social policy. These theoretical insights subvert the long-standing premises on which modem legal systems rest, concerning, in particular, the role of legal norms in controlling activity across diverse social domains. 16 In turn, this Article offers a positive theory of social control that is rooted in reality, rather than idealized premises and bygone truisms, thereby providing explanatory value and predictive power.

The theoretical inquiry implicates important societal interests and high social stakes because, as detailed below, legislative threats are used to control diverse activities, the consequences of which are vital to social welfare. For instance, legislative threats play a critical role in regulating environmental hazards, in reducing health risks, in enhancing consumer protection from product defects, in maintaining the security standards of Internet commerce and in lowering the risks of e-piracy, and in mitigating the risk of terrorist cyberattacks. Threats are similarly employed to reshape the responsibilities of corporate boards, induce banks and financial institutions to adequately monitor money transfers in order to detect money laundering and help deter organized crime, and to curtail the use of steroids and other illegal substances in professional sports. In sum, legislative threats are employed to...

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