"I Didn't Know" and
"I Was Only Doing My Job'
Has Corporate Governance
Careened Out of Control?
A Case Study of Enron's
Information Myopia
ABSTRACT. This paper discusses internal dynamics
of the firm that contribute to the failure of knowl-
edge conditions, using the Enron scandal as a case
study. Ability of the board to effectively monitor
conduct at operational levels includes various
dynamics: senior management being isolated from
those at operational levels; individuals pursuing
subgoals that are contrary to overall corporate goals;
information flow along a narrow linear channel that
effectively forecloses adverse information from getting
to senior management; a corporate culture of intim-
idation, discouraging open expressions of doubt or
skepticism, resulting in reluctance to challenge senior
officials, and pushing the limits of ethics and the
law.
Elements of information blockage in the corpora-
tion include: the "law of diminishing control";
deliberate concealment of information by officers;
motivation to report to the boss what one perceives
the boss wants to hear; theory of "bounded ratio-
nality" that explains surprising role of irrationality in
decisionmaking - unconscious emotions and motiva-
tions. Discussion of behavioralist studies of cognitive
dissonance, belief perseverance, confirmatory bias.
John Alan Cohan is an attorney, writer, teacher and
philosopher. He is a native of Los Angeles, California,
and has heen a lawyer since 1972, with clients
throughout the United States and Europe in the fields
of tax law, aviation law, and farming and livestock law.
He was graduated from the University of Southern
California in 1969, Loyola Law School in 1972, and
admitted to the California Bar in 1972. He has studied
philosophy in the Philosophy Department of UCLA
with the equivalent of a master's degree in philosophy.
foumal of Business Ethics 40: 275-299, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
John Alan Cohan
entity effect, motivated reasoning, group cohesion or
"groupthink," and the false consensus effect. Problem
of overoptimism — tendency of many people to
overrate their own abilities, contributions and talents
— and tendency toward puffery and dismissal of risks
in formulating disclosures and press releases.
Imposing liability on directors for failure of over-
sight is extremely difficult to sustain in a court of
law. Directors are likely to face much greater demands
of accountability in the wake of Enron. Solutions
to enhance flow of information include programs to
encourage employees to expose wrongdoing without
fear of retribution; devising of communication system
that enables important information to move upward
to the proper decisionmaker without getting distorted;
restructuring of audit committees, providing adequate
training for new directors, expanding the number of
independent directors on the board. In the wake of
Enron, corporations may simply have no choice but
to meet increased demands by workers, shareholders,
customers and the government for greater account-
ability.
Appendix to paper discusses the history of the cor-
poration, moral dilemmas of the shareholder-centric
model, and whether important social goods some-
times trump the notion of profit-maximization.
Introduction
We can understand the dissemination of infor-
mation within a corporation only if we can
understand the realities of behavior within. The
focus of this paper will be on the internal
dynamics of the corporation. I will address
276 John Alan Cohan
selected issues involving the failure of knowledge
conditions that arose from the Enron implosion.
The Enron scandal brought to light a recurring
communication dysfunction within the organi-
zational structure of the corporation itself. How
does a corporation behave internally? Where
does corporate accountability break down? Why
is there a failure of knowledge conditions? What
makes up a corporate culture of intimidation?
What dynamics operate to lead individuals and
units to pursue subgoals that are contrary to
overall corporate goals?
In the past various scandals and business con-
spiracies have failed to uncover evidence of
involvement by the senior management.' What
goes on in board rooms remains one of the best
kept secrets of corporate America. The theme
of "directors who do not direct" has received
extensive commentary over the years.^ One
theme is that the board is so isolated from
managers at operational levels that it cannot
effectively monitor or control the conduct of
managers.^ That appears to be due to the decen-
tralized nature of the corporate structure itself,
the hierarchical chain of command that requires
information to travel along a narrow linear
channel, and a technical orientation of those at
operational levels that makes them impervious to
risky behavior.'' At times subordinates who may
want to "blow the whistle" may be thwarted
by an intimidating corporate culture, or simply
because of the hierarchical structure that effec-
tively forecloses adverse information from getting
to senior management.' In addition, the norm in
large American corporations is to have multiple
and autonomous divisions, each self-contained
and headed by a divisional chief with full oper-
ational authority, thus fostering decisionmaking
that is decentralized and prone to subgoals. It is
as if there are several independent corporations
within the larger structure.
What happened at Enron?
How it is that Enron's directors failed to provide
enough oversight to prevent the company's
collapse, and the loss of billions of dollars of
investors' money? An Enron executive, Sherron
S. Watkins, told the House Energy and
Commerce Committee that she beheved Enron's
former chairman, Kenneth L. Lay, was largely
unaware of the severity of the company's
troubles, that he "did not understand the gravity
of the situation. . . ."^ She submitted an anony-
mous memorandum detailing her revelations to
Mr. Lay, and later met with him personally to
discuss it.^ She said that even after she person-
ally explained to him that the company appeared
to have questionable accounting practices that hid
huge losses, Mr. Lay still "didn't get it."^ Enron's
former chief executive, Jeffrey K. Skilling por-
trayed himself as ignorant of the company's ques-
tionable practices in testimony before the same
House committee.^ He said, "This was a very
large corporation. It would be impossible to
know everything going on."'° The practices
under scrutiny were partnerships which investi-
gators say were used to conceal debt and unprof-
itable investments from Enron's shareholders."
Top Enron officials told employees that the
company's stock price would continue rising at
the same time other officials were raising serious
questions about the stability of the company's
finances.^^ The optimism of the company's
chairman, Mr. Lay, occurred even while Ms.
Watkins, who was a senior Enron employee,
explicitly warned him that several years of
improper accounting practices threatened to
bring down the company.'-' This suggests that
Mr. Lay was on notice about the company's
accounting problems even while he was assuring
employees and the investment public that Enron's
stock would rebound. According to an econo-
mist at Enron Energy Services, "It was impor-
tant for employees to believe the hype just as it
was important for analysts and investors to believe
it."''* Some in Congress claim that Wall Street
analysts should have seen red flags as early as two
years before Enron's implosion, based upon a
string of warning signs in Enron's public securi-
ties filings.'^ Instead, most analysts still rated
Enron as a "buy" or "strong buy" on November
8, 2001, the same day Enron acknowledged it
had overstated profits by almost $600 million.'^
The problem may be that analysts who question
the value of a popular company are branded as
controversial, and "[i]f you want to move up the
 "I Didn't Know" and "I Was Only Doing My Job"
hierarchy of the Wall Street establishment, you
don't rock the boat."'''
Jeffrey McMahon, Enron's new president, told
a congressional committee that Enron had a
corporate climate in which anyone who tried
to challenge questionable practices of Enron's
former chief financial officer, Andrew S. Fastow,
faced the prospect of being reassigned or losing
a bonus.'^ Ms. Watkins described a culture of
intimidation in which there was widespread
knowledge of the company's tenuous finances,
but no one felt confident enough to confront
Mr. Skilling or other senior officials, about it."
Ms. Watkins was alarmed at the information she
was receiving about Enron's manipulation of
income, but was not comfortable confronting
either Mr. Skilling or Mr. Fastow with her
concerns. "To do so, I believe, would have been
a job-terminating move. Frankly, I thought
it would be fruitless, that nothing would
happen. . . ."^'' Ms. Watkins said she believed that
Mr. Skilling and Mr. Fastow^ "did dupe Ken Lay
and the board."^'
Two trustees of Enron's 401 (k) plan told
Congress that they did little to protect employees
in the plan as the company's stock plummeted
to less than $1 a share from more than $90.^^
One trustee, Cindy Olson, disclosed that despite
her knowledge of a memorandum that warned
Mr. Lay that Enron could implode because of
accounting irregularities, she did nothing to warn
plan participants about the possible accounting
problems and the damage they could do to
Enron's share price. She said she did not warn
anybody because she thought the assessment
might be untrue.^^
Further, Enron's board was faulted for failing
to ask pertinent questions or to get involved in
"any meaningful examination of the nature or
terms of the dubious partnership transactions that
moved debt off the company's sheet.^'* And even
when the board did ask questions, they were not
given the right answers.^^ By failing to delve
more deeply, the board appears to have missed
the opportunity to uncover fundamental flaws in
the company's accounting practices.
William C. Powers, who became the chairman
of a special committee on Enron's board that
issued a report about Enron's shaky transactions
111
that inflated its reported earnings, told a House
committee that his inquiry had uncovered "a
systematic and pervasive attempt by Enron's
management to misrepresent the company's
financial condition."^* The report concluded
that numerous related-party transactions and
accounting errors were the result of failures at
many levels and by many people in the company.
The report blamed numerous factors for these
failings: "A flawed idea, self-enrichment by
employees, inadequately designed controls, poor
implementation, inattentive oversight, simple
and not-so-simple accounting mistakes, and over-
reaching in a culture that appears to have encouraged
pushing the limits."^^
Enron is widely reputed to have had a "go-
go" culture, in which senior officials cast aside
traditional business controls.^^ The corporate
culture was such that top officers were unaware
of financial details, and cast a relaxed attitude
about conflicts of interest of executives.^^ Joseph
F. Beradino, chief executive of Arthur Andersen,
the former Enron auditor, testified that impor-
tant information about Enron's finances had been
withheld from his firm.^°
Commentators are concerned that other
bombs like Enron's may be ticking.'" The possi-
bility exists that ignorance streams such as these
are not confined to a small range of cases, but
that the modern American corporation harbors
millions of individuals who operate in a state
of communication myopia throughout their
careers.
Overview of the board's oversight
function and the business judgment rule
The failure of oversight by Enron's directors,
many of whom were financially sophisticated,
leaves one wondering what the purpose of a
board is. Corporate law generally provides that
the board of directors is responsible for managing
the corporation, a function that is viewed as
one of oversight.^^ In carrying out their oversight
responsibilities, directors owe fiduciary duties,
including the duties of care and loyalty, to the
corporation. As discussed in the Appendix, there
is a tendentious divergence of opinion as to
278 John Alan Cohan
precisely what stakeholders are entitled to be
beneficiaries of the board's fiduciary duties. But
generally, officers and directors are expected to
perform their duties "in good faith and with
that degree of care that an ordinary prudent
person in a like position would use under similar
circumstances."^''
The business judgment rule generally governs
judicial interpretations of director decisions, and
is an evidentiary presumption that directors, in
making business decisions, act on an informed
basis, in good faith and in the honest belief that
their actions are in the best interest of the
company.'''* The business judgment rule requires
directors to oversee the corporation only insofar
as they should make inquiries where "suspicions
are aroused, or should be aroused" by the
existence of "red flags."''^ In a leading case
addressing the board's oversight responsibilities,
the Delaware Supreme Court rejected a claim
by shareholders that the board has an affirmative
duty to install an internal system of monitoring,
saying
it appears that directors are entitled to rely on the
honesty and integrity of their subordinates until
something occurs to put them on suspicion that
something is wrong. If such occurs and goes
unheeded, then liability of the directors might well
follow, but absent cause for suspicion there is no
duty upon the directors to install and operate a
corporate system of espionage to ferret out wrong-
doing which they have no reason to suspect
exists.^*
The standard of a board's oversight duty 'was
expounded upon in In re Caremark International
Inc. Derivative Litigation,^^ involving the question
of whether the directors breached their fiduciary
duty of care by failing to monitor activities of
the company's employees regarding corrective
measures that may have prevented certain
unlawful conduct. In discussing the liability of
"inattentiveness" the court said that a director's
obligation
includes a duty to attempt in good faith to assure
that a corporate information and reporting system,
which the board concludes is adequate, exists, and
that failure to do so under some circumstances may,
in theory at least, render a director liable for losses
caused by non-compliance with applicable legal
standards.^*
Significantly, the court further noted that:
only a sustained or systematic failure of the board
to exercise oversight — such as an utter failure to
attempt to assure a reasonable information and
reporting system exists — wiU establish the lack of
good faith that is a necessary condition for
liabihty.''
The court added that
absent grounds to suspect deception, neither cor-
porate boards nor senior officers can be charged
with wrongdoing simply for assuming the integrity
of employees and the honesty of their dealings on
the company's behalf'"'
Thus, imposing liabihty on directors for failure
of oversight is extremely difficult to sustain in a
court of law unless there is evidence tatamount
to total abdication of responsibilities.'*'
In the wake of Enron, boards may scramble
to review just how they go about monitoring in
the corporate hierarchy. The right degree of
monitoring can to some extent help vv^orkers
know that violations of the law or of corporate
policies will be detected and punished. But
excessive monitoring of workers creates an
atmosphere of distrust.''^ Excessive monitoring
gives the impression that people in the company
cannot interact on an assumption of good faith,
and this can backfire by eroding the level of
commitment of workers throughout the
company, and by shifting time and attention from
doing "real 'work" to managing the impressions
of the monitor. "[Pjeople do not like to be mon-
itored. They may well mistake monitoring and
questioning for distrust. . . .'"*^ Another cost of
distrust is that people are less healthy and less
happy'*''
Elements that constitute information
blockage in the corporation
Information blockage is a pervasive problem
within large corporations.'*' Enron is hardly the
first company to have come under fire for
 "I Didn't Know" and "I Was Only Doing My Joh"
holding back adverse financial news from the
public until the last possible moment, leading to
a rapid plunge in its stock price once the adverse
information hit the news, followed by lawsuits
from unhappy investors based on material mis-
representations by officers who kept an optimistic
public face. Scores of cases decided by the
courts each year under the antifraud provision
of the SEC's regulations. Rule lOb-S,"*^ fall into
this category.'*' The tendency to report informa-
tion selectively, emphasizing the positive while
omitting the negative, is characteristic of all
bureaucratic organizations, from the Army to the
Red Cross. The SEC and congressional reports
have chronicled this alarming situation, dating
back many years, in such corporate collapses as
Penn Central and Stirling Homex.'*^ One com-
mentator remarked that the board "was always
the last group to hear of trouble in the great
business catastrophes of the century.'"*^ One
econotnist put the problem this way: "[T]he
larger and more authoritarian the organization,
the better the chance that its top decision-makers
will be operating in purely imaginary worlds."^"
Information blockage can occur by deliberate
concealment of information by officers to other
board members, by the chief executive officer to
the public, even in the face of direct inquiries
by the press, by attorneys in rendering opinions
to the board on sensitive transactions, and by
outside accountants who may tolerate the falsi-
fication of corporate books and records without
a fuss.''
The hallmarks of a successful company include
flexibility and the ability to act and react quickly,
but these are thwarted to the extent that infor-
mation is blocked from the board.'^ Supervisory
executives, given they are a step or two removed
from the nuts and bolts of a project, have a com-
promised ability to monitor the situation if they
get no more than distorted information and have
no alternative sources of data to examine.
Sociologist Robert Jackall describes the typical
bureaucratic corporate structure this way:
Power is concentrated at the top in the person of
the chief executive officer (CEO) and is simulta-
neously decentralized; that is, responsibility for
decisions and profits is pushed as far down the
organizational line as possible.
279
. . . [P]ushing details down protects the privi-
lege of authority to declare that a mistake has been
made. . . . Moreover, pushing down details relieves
superiors of the burden of too much knowledge,
particularly guilty knowledge.
. . . [Middle managers] become the "point men"
of a given strategy and the potential "fall guys"
when things go wrong."
In many instances of corporate misdeeds
the misconduct apparently occurs at a level
well below that of senior management.^'* Senior
executives may often enough discover, albeit
much to late, that the truth is indeed quite dif-
ferent from what they had been led to believe.
With Enron, adverse information may not have
reached the board until the crisis became
unavoidable.
A common phenomenon known as the "law
of diminishing control," states: "The larger any
organization becomes, the weaker is the control
over its actions exercised by those at the top."'^
That is why so many boards have limited impact
in most forms of corporate decisionmaking.
"Boards do not set policy, do not veto manage-
ment, seldom intervene short of a major crisis,
and do not even select their own successors or
the next chief executive officer."^^
The board of Enron, along with other modern
corporations, appears to be analogous to
the seventeenth century monarch — holding
absolute power in theory, but cut off from access
to information and thereby manipulated by
the ministers who are its nominal servants.
Occasionally, the board may erupt into forceful
action, but in the long run its domination by its
ministers seems inevitable."
Blockage of information occurs in a variety
of ways. For instance, in a hierarchical structure
it is often the duty of tniddle managers to discern
between the important and unimportant findings,
and to limit the upward flow of information to
relevant and unusual information.^^ This delib-
erate filtering of information is compounded by
a frustrating feature of human nature whereby
messages simply get changed passing from one
supervisor to the next in a hierarchy, with only
280 John Alan Cohan
a very diluted message ever reaching the top
through regular Hnes of communication.^^
It is probably safe to assume that most people
prefer to be known as trustworthy rather than as
untrustworthy, even if they are not. Collectively,
managers have a natural incentive toward
candor.*" The reputations of a company's execu-
tives are usually closely aligned with the ongoing
interests of the firm as reflected in not only its
share price, but in the firm's reputation for truth-
fulness. Concealment usually only delays the
apprehension of the truth rather than perma-
nently putting it out of public view, given the
layers of outside scrutiny from professional
analysts, accountants and lav^ers. To have a rep-
utation for trustworthiness means that people are
likely to place their trust in you. Trusted
managers in an organization are more easily able
to persuade others to accept their decisions, and
cooperation is facilitated if workers are able to
readily accept the decisions of managers.*' Thus,
given the obvious damage to one's reputation,
to the trust reposed in people by the company,
as well as legal consequences, it is puzzling why
employees in the firm would deliberately conceal
the truth.
Motivations to lie or deliberately conceal
the truth in an organization
Corporate officers receive information from
multiple, and sometimes conflicting, sources, that
may well undergo distortion in transmission.
With Enron, the "lies" came in a variety of
forms. There was misrepresentation of hard data,
that is, concealment of debt, lying about
accounting results, as well as about the stream of
earnings, and distortion of the company's future
prospects.
For some, the motivation to lie is that disclo-
sure of the truth may put the company into
bankruptcy, with attendant group firings, and the
loss of one's own job. There is also an emotional
attachment to one's involvement in a project that
motivates one to hold off transmitting informa-
tion if it would flagrantly signal danger to the
firm. Concealment can also buy time, as there is
always the hope of some reversal of fortune after
initial setbacks. Adverse situations are usually
open-ended; that is, poor performance seldom
can be established conclusively, and a turnaround
is always possible. And one may just want to hold
on to one's salary and perquisites for as long as
possible. This can go on until a catastrophe
presents an overwhelming case that requires the
company to acknowledge that wrong decisions
were made.
Disclosure of adverse information can be
embarrassing to executives, leading to a drop in
management morale. Also, disclosing a mistake
means that one will have to "backpedal," which
calls into question one's reputation for
consistency, a highly valued asset in business
organizations.*^ Bad news can also affect overall
optimism among workers as a whole and threaten
continued external support from suppliers,
customers, etc.*^
A further motivation is that the promotion and
termination protocols commonly found in cor-
porations make it tempting to transmit informa-
tion in a way that minimizes the potential for
blaming oneself for bad news, and to convey as
much good news as possible - consistent, of
course, with a general desire to maintain a
reputation for credibihty with senior manage-
ment. This was precisely what Sherron Watkins
alluded to in telling a congressional committee
that confronting senior management with her
concerns "would have been a job-terminating
move."*'* Distortion or concealment can become
a dominant strategy regardless of explicit injunc-
tions of senior management to "give me accurate
information," if workers fear the possibility of
being fired or deadended in hght of a candid por-
trayal of a situation.
Thus, subordinate managers have a pervasive
interest in concealing bad news, and are tempted
to vary the message to conform to their self-
interest.*^ Doing so avoids or delays both personal
embarrassment and the associated risk of being
terminated, and the unpleasant and wealth-
reducing likelihood of a stock price drop. Some
counterbalancing incentive to report bad news
may be the need to foster an ongoing corporate
reputation for credibility with outside suppliers,
customers and lenders. But human nature - often
in the form of self-deception - provides ample
 "/ Didn't Know" and "I Was Only Doing My fob"
reason to believe that managers will often enough
try to sweep the bad news under the rug, or give
it an unrealistically positive spin.
There is also the motivation to report to the
boss what one perceives the boss wants to hear.^*
This is complicated by the fact that junior
managers on the executive track moving from
one role to another every couple of years, feel
pressed to accentuate the positive and distort bad
news or at least defer bad news that might tarnish
one's chances for promotion until one has moved
on to a higher position, thus leaving the problem
for one's successor.
Based on the foregoing motivations, individual
executives in Enron who made the decisions to
hide the company's debts in dubious partnerships
and through other means, feared an erosion of
status within the organization if the company's
expectations to increase income could not be
delivered. Like most successful executives, they
had a rather high regard for their abilities, and
were unconsciously protective of both self- and
external-image. In addition, officials who engage
in misconduct may think they are doing so to
benefit, not to injure, the corporation, because
the results will, in theory at least, help maximize
the company's profits.^^
Information flow in a corporate hierarchy
Apart from lying and deliberate concealment,
there are different features that contribute to a
myopic information fiow in an organization.
First, people usually only have a small amount
of data available to them in most situations - far
short of that necessary to make inferences that
meet anything resembling well-grounded empiri-
cism. Thus, everybody must go about one's
business on the basis of insufficient information.
Through a variety of shortcuts, the mind fills in
the gaps.
Further, we all have limited cognitive capaci-
ties, so that even when people have abundant
data, they might not be able to assimilate it
because the mind lacks the capacity to process
all that is available. Busy executives deal with
information overload by processing the informa-
tion, that is, by sifting through data and
281
extracting what seems relevant.^^ Given the finite
time and mental capacity with which we live,
people tend to adopt simplifying strategies such
as reducing the number of factors considered or
simply seeking some minimal threshold of satis-
faction with a choice, foregoing any more careful
consideration of it or other possibilities.
Second, many companies are information-
based, such as finance, software, media, health
care, and other companies. Information in these
companies is based on individual skills, insights,
knowledge, and talent. Production in informa-
tion-based firms does not proceed in linear,
assembly line fashion - but interactively, with the
creative input of individuals at a number of levels.
For instance, with scientists working on a satel-
lite, the creative fiow of information is multi-
directional, going from the development team
to the software writer to an engineering com-
mittee, and then back again for refinement and
perfection. Members of the production process
must have sufficient understanding of the others'
jobs in order to be able to communicate with
them, to provide feedback, and to help refine
the product. It's like the various members of a
symphony orchestra, each one having specialized
tasks but nonetheless needing to have some
understanding of how one's colleagues' instru-
ments work and interplay with their own sounds;
and they must closely coordinate their work in
order to make the whole piece come out right.
The various members of a surgical team all have
different specialized tasks, but each must have
some understanding, even expert understanding,
of the other members' functions.
Third, in large companies with numerous
decentralized divisions, some economists have
pointed out a kind of corporate schizophrenia
called "subgoal pursuit,"*' by which managers at
lower levels have a bias for the expansion and
growth of their own division, and wiU therefore,
tend to maximize the interests and autonomy of
their own unit rather than the company's welfare
as a whole.^° There may be a lack of congru-
ence between the interests of the corporation and
the career aspirations of executives in the cor-
porate divisions. From this perspective, the
problem of information blockage is not a tech-
nical failure but is instead part of a deliberate and
282 John Alan Cohan
predictable strategy rationally employed by lower
echelons to protect their own interests from both
senior management and the board alike. When
subgoal pursuits are at risk, there is a motivation
to "decouple" topmost management from crucial
information.
Irrationality and cognitive biases in
corporate governance: the formation and
persistence of initial beliefs
Corporate governance operates on the premise
that w^orkers are autonomous and rational beings.
But legal and economics scholars now acknowl-
edge that the neoclassical assumption of ratio-
nality often fails as a descriptive model of
economic actors and their behavior. In other
words, individuals are not rational all of the time.
Innumerable studies by behavioralists show that
human beings display a remarkable ineptitude for
understanding causal relations and probability.^^
Members of boards are human beings and, as
such, they are unlike the classical economic actor
who "can perfectly process available information
about alternative courses of action, and can rank
possible outcomes in order of expected utility."^^
Irrationality plays a surprisingly important role
in human decisionmaking. By "irrationality" I
mean such things as unconscious emotions and
motivations. In many ways our lives are governed
and even sustained by unknown, and sometimes
unknowable, motivations and feelings. Maternal
love, friendship, romance, artistic creativity, faith
in an afterlife, and heroic greatness are examples
of the life-affirming power of the irrational in
our lives. We recognize in our own behavior,
something essentially absurd in irrational acts, for
w^hich no explanation can be given. People
failing to abide by the rules of logic is some-
thing behavioralists claim is a consistent and
persistent human trait.^'' In other words, irrational
tendencies in human cognition are systematic and
predictable.'"*
Psychoanalysis takes seriously the important
place unconscious motivations and feelings have
in human conduct, and suggests that irrationality
is at tbe center rather than the periphery of
human experience. Today, cognitive psychologists
claim that perception as well as mental processes
such as memory, judgment, and attention take
place below tbe level of conscious awareness -
and includes instincts, emotions, fantasies, desires,
and conflicts. The behavioral economist Herbert
Simon once observed that "we cannot, of course,
rule out the possibility that the unconscious is a
better decision-maker than the conscious."'^
Neuroscientists also claim that much of what
happens in the brain goes on outside of conscious
awareness.'^ Neuroscientists wbo have studied
unconscious processing of information claim that
most decisions are made subconsciously, with
many gradations of awareness.'^ These findings,
which are gaining wide acceptance, challenge the
notion that people always make conscious choices
about what they want and bow to obtain it.
Cognitive psychology has developed the
concept of bounded rationality, now popular in
the economic literature, to help explain irrational
behavior.'^ The theory of bounded rationality
identifies systematic, and somewhat predictable,
deviations from rational behavior. The theory
focuses on cognitive biases, heuristics, and limi-
tations that lead individuals to depart from
outcomes otherwise predicted by the neoclassical
rational choice model.
Behavioralists have extensively studied and
documented several kinds of cognitive phe-
nomena tbat demonstrate how we form initial
beliefs or hypotheses outside of rational or logical
norms, and how we then maintain a bias for
the persistence of these beliefs even when we
are confronted with thoroughly discrediting
evidence. An examination of these cognitive
biases is helpful to understand how individuals
in a corporate hierarchy are susceptible to irra-
tional decisionmaking in processing, giving or
receiving information to and from others in the
organization.
We start from the premise that managers
become committed to a company's agreed upon
course, and tbey cannot easily step away from it,
even if signs of trouble become prounounced.
There is likely to be distortion in the flow of
information if various cognitive biases are in
operation, and hence, fewer danger signs will be
reported up the hierarchy as "relevant," while
those wbo do report danger signs to senior
 "I Didn't Know" and "I Was Only Doing My Job"
managers will tend to give negative information
a positive spin. Should serious problems arise,
there is a high degree of commitment to support
the prevailing beliefs, that is, a strong motiva-
tion to preserve the status quo.
In general, the various kinds of bias are based
on the longstanding theory of cognitive dissonance,
holding that the human mind has an innate drive
to maintain consistency between its preexisting
attitudes and the information it receives.^^
Behavioralists say that cognitive dissonance is the
tendency to reject or downplay information that
contradicts other, more favorable views, about
oneself or one's state of affairs. This explains why
executives are often overoptimistic. (See discus-
sion below.) With cognitive dissonance, the mind
filters out much information that is inconsistent
with one's prior attitudes. Hence, people uncon-
sciously focus on and relay only the information
that reinforces their preexisting attitudes, and
filter out conflicting information.
For instance, once a project is set into motion,
there is a heavy commitment for the project to
succeed. Those involved with it recognize the
reality that the project can still be killed. Once
a commitment is made to a particular course
of action, adverse information that arises
subsequently is unlikely to be evaluated with the
same objectivity as it would for managers
assessing a proposal to which they have no
prior commitment. Cognitive dissonance suggests
that managers will systematically underestimate
external threats to their projects. Those who
receive risk-related information may sense the
need to give it a positive spin or to use other
defense mechanisms. After all, it is still early
in the project, so that any risks shown by early
data may be speculative and thus can be
discounted.
Revising plans based on discomfirming infor-
mation can be both bothersome and anxiety-
provoking. Bias induces people to simply ignore
information pertaining to risks that seem to
be remote or highly contingent. Only a fairly
vivid or fiagrant threat will be sufficient to
prompt revision. A manageable and stress free
way to handle information that might contradict
decisions that have already been set into
motion is to rationalize it away or ignore it.
283
simply not report it and forget about it, or com-
municate it upward in a way that sanitizes it.^°
It thus becomes easy to preserve an aura of
optimism. Senior management is then unlikely
to sense serious cause for concern. "Troubling
bits of information are subject to dismissal
or rationalization, without much conscious
deliberation. . . ."^'
Cognitive dissonance manifests in various types
of bias that impact the fiow of information in
corporate hierarchies:
1. One cognitive phenomenon is called
confirmatory bias, which involves misreading of
evidence that contradicts one's initial beliefs.^^
The strategy is to construe information and
events in such a way as to confirm prior attitudes,
beliefs, and impressions.^^ People will tend to
reduce the complexity of evidence by focusing
on the portion of evidence that supports one's
initial belief, and when faced with disconfirming
evidence, formulate "alternative interpretations"
to help explain away the evidence.^"* This is
exacerbated if the evidence is ambiguous or
complex. Confirmatory bias also involves the
tendency to exaggerate or imagine a correlation
when doing so confirms one's belief that such a
correlation "should" exist, and to underestimate
a correlation that might go against one's belief.^^
That is, people often perceive correlations
between variables based on their preconceived
biases.
Confirmatory bias helps bolster one's chosen
course of action by construing information
in such a way as to confirm one's beliefs and
impressions, resisting taking in disconforming
information, at least subconsciously. This may
help explain why Enron's lawyers failed to ruffle
any feathers in their investigation of the claims
of accounting abuses voiced by Sharron S.
Watkins.^^ People who commit to a company's
course of action, such as lawyers, may find it
difficult to appreciate evidence of client wrong-
doing, making them less than fully competent
gatekeepers.^^
2. Another cognitive phenomenon is called belief
perseverance, which is the tendency of people to
construct "theories" to account for events or
284 John Alan Cohan
circumstances, and then to disregard evidence
that contradicts their first impressions.^^ Belief
perseverance tends to cause managers to misper-
ceive events and risks, inducing them in their
good faith to perpetuate an unrealistic set of
beliefs.^^ In doing so people may have a kind of
bias against revision, relying, somewhat uncon-
sciously, on stock understandings and precon-
ceived beliefs about people and situations.
There is a significant tenacity in belief perse-
verance: "[IJnitial beliefs may persevere in the
face of a subsequent invalidation of the evidence
on which they are based," even when the initial
evidence is itself weak and inconclusive.'^°
3. Another cognitive phenomena is called the
entity effect, whereby peoples' hypotheses often
take on a life of their own, so that people will
continue to believe something they initially held
to be true even after it is thoroughly and com-
pletely discredited.''
4. Another phenomenon is called motivated rea-
soning, which refers to the tendency of people
to utilize a biased set of cognitive strategies to
arrive at a belief they privately already desired
to obtain.'^ People in organizations often need
to make decisions about the future in a context
that is ambiguous is highly stressful, and to
reduce the anxiety, people unconsciously impose
an order on their environment, a set of causal
explanations that lead to an artificial, but a
more comfortable sense of predictability.'^
This tendency infiuences how people evaluate
evidence, to wit, by picking and choosing from
evidence so as to make it fit into one's precon-
ceived hypothesis. One commentator states that
"the practice of motivated reasoning appears to
be a universal and, perhaps, immutable charac-
teristic of human nature."'"*
5. Another cognitive phenomenon involves ^^rowjj
cohesion. Once a group commits to an idea or a
course of action, there is a strong motivation to
resist evidence that it was the wrong move. This
group cohesion phenomenon functions as a
stress reduction mechanism, and has been dubbed
"groupthink."'^ The possibility of a mistake
means that the group will have to reverse its
position. Members risk exclusion from the group
if they introduce stressful dissonant information
into the group setting.'^ Thus, groups tend to
edit out negative information in order to
maintain cohesion. "This, in turn, leads to the
suppression of information and ideas and cogni-
tive conformity. . . ."'^ Ambiguous information
tends to be dismissed as unmanageable.'^ The
group cohesion tendency works so that if one
member brings up some information that
suggests that the group has failed to consider
something troubling, a certain sense of stress
arises, and members tend to dismiss or rationalize
away the danger signals." Each member of the
group tends to have a strong bias toward the
status quo, and will subconsciously seek to ratio-
nalize away or dismiss any dissonant information,
only bringing it to the group's attention if it is
difficult or impossible to avoid.'°° This not only
aids in reducing stress, but also helps increase the
group's focus, concentration and persistence. It
also increases a sense of group confidence and
trust among members.
In addition, promotion patterns place a
premium on "team players" - those able to
conform their attitudes to the immediate needs
of the team, typically as articulated by senior
managers - and as a result the organization
develops a collective egocentric bias.
6. In boards there may also be a tendency for
people to engage in what psychologists call the
false consensus effect, a tendency to think that
others share one's own attitudes, beliefs and infer-
ences."^' The false consensus efFect distorts deci-
sionmaking because believing that others are in
alignment with you creates the hazard of acting
on the false premise that others will agree in
advance with your choices. The false consensus
effect manifests, often enough, by one person
holding back information because of the mis-
perception that other people on the board, for
instance, are "on the same page," when in fact
they might not be.
These various types of cognitive bias show that
attitudes and beliefs do not change easily, and
indeed can persist even though not justified by
probative evidence. From the board's perspective,
cognitive bias may easily manifest itself by
 "/ Didn't Know" and "I Was Only Doing My Job"
holding onto and promoting originally formed
beliefs so that adverse bits of information are,
first of all, slow to come in, and second, that
the information may be rationalized away and
forgotten, however sanitized it may be at that
point.
Even less committed outsiders, such as lawyers
and accountants, may find it difficult to intro-
duce any dissonant information that would
threaten a company's status quo because they, too,
can be susceptible to cognitive biases. A lav^er
who authorizes certain dubious partnership trans-
actions becomes committed to a certain scheme
from that point on.
Overconfidence and overoptimism in the
firm
As we have seen, much of what people believe
is based on insufficient empirical data, and often
is inaccurate. Their level of confidence in those
beliefs is often enough based on irrational cog-
nitive processes. Many people, in other words,
confidently hold beliefs that are illusions or
myths. Confidence and optimism are closely
related, and both are viewed as genetically
favored in behavioral studies in economics,'°^ and
in biology.'"^ The reason is simple. Doubt and
uncertainty produce inaction, while confidence
is associated with initiative and persistence.
Confidence is energizing, and lack of confidence
debilitating. If I strongly believe that I understand
what is going on, I can feel more confident in
my prediction about where things will end up.
In group settings the opinions of those who
display confidence will often be deferred to by
others."^
An excessively optimistic "face" of the firm
appears to have become the norm in external
press releases of American corporations.'"^
Corporate press releases tend to be in a style that
creates a strong image of confidence and control,
and this prescription creates a certain pressure on
firms surrounding corporate publicity.'°^ Failure
to comply with the norms surrounding the
public's expectation of press releases may result
in the tainting of the organization's image and
the hampering of the flow of support from public
285
markets. Thus, any company that is not careful
to adhere to this norm and instead is entirely
candid risks signaling weakness, setting off
negative reactions, disengagement of relation-
ships, rumors, and reputational loss.
Enron appears to have a generic story in
common with Apple Computer,'°^ Time-
Warner,'"^ Polaroid,'"' and other cases in which
shareholders relied upon statements of "false
optimism," only later to claim that these state-
ments constituted fraud. In most of these cases,
the board undertook a course of action with
respect to some product or strategy and was later
faulted for concealing some bits of adverse infor-
mation later found to be material.
Optimism is an important feature for success.
The most successful person, on average, tends not
to be the realist, but rather the optimist."" Part
of the leadership role of a senior executive is to
communicate confidence and optimism about
the company. Optimism is attractive to others,
enhancing the ability to infiuence and persuade.
Optimism is probably a virtue insofar as it func-
tions as an energy source in a business. Optimism
is important for business leaders, because deci-
siveness and aggressiveness are considered indi-
cators of a successful manager.
A proper dose of optimism and confidence are
not only good internal motivators, but they also
influence others. Exhibitions of confidence and
optimism make people more persuasive and
influential. Managers who are optimistic can help
motivate workers, and create the expectation of
future growth and profitability that leads indi-
viduals to invest their human capital in the firm
more willingly and to defer present consumption
in favor of future rewards. Firms with "can-do"
cultures generate higher levels of internal effort
and, by projecting self-confidence, can be more
successful in attracting external resources.'"
"High levels of optimism and confidence are not
only good internal motivators, but they can also
influence others; exhibitions of confidence and
optimism make people more persuasive and
influential.""^ The risk of failure is reduced if
managers project a strong sense of optimism
about the long-term growth of the company.
On the other hand, many studies show that
people develop higher levels of confidence in the
286 John Alan Cohan
accuracy of their beliefs than is warranted by
the facts. This is the famous "overconfidence
effect,""'' observed especially among American
males. Asked to estimate their confidence in
the accuracy of their judgments, people usually
estimate too high. The tendency towards
distorting reality by overconfidence and overop-
timism are commonplace among skilled, profes-
sional people."'* People want to see themselves as
good and reasonable, and they may rationalize
facts to bolster or maintain a positive self-image,
or subconsciously distort evidence."^ "One tells
stories to oneself that inflate feelings of efiicacy
and control, establishing a sense of identity less
susceptible to the threats of the everyday world.
That is why egos are so prickly, people so averse
to criticism.""^ People will often tend to buffer
anxiety by maintaining an illusion of normalcy,
that is, by interpreting new data as consistent
with the status quo rather than seeing red flags
that suggest danger."^ This strategy helps people
feel that their world is more "understandable,
predictable and controllable than it really is.""^
Behavioralists refer to the term illusion of
controf^^ as the human tendency to "treat chance
events as if they involve skill and hence, are
controUable."^^" Even when confidence is illusory
or irrational, it has an action-guiding function.
A story from World War II told by Albert
Szent-Gyorti captures this perfectly.'^' A platoon
of soldiers got lost in the Alps. They became
gripped with fear and despair, and they did little
until an officer found a map. They then felt ener-
gized, rallied around the map, and finally found
their way to safety. Only later did they learn that
the map was of the Pyrenees, not the Alps, and
hence, was totally useless.
This story is a metaphor for what goes on in
corporate hierarchies. The map metaphor fits
well because in corporate hierarchies the conse-
quences of our actions rarely become evident
immediately. And there often can be a range of
plausible explanations as to why things turned
out a particular way. In the face of ambiguity,
executives may easily develop excessive confi-
dence in their explanations of situations and
events. Executives who are confident enough in
their beliefs and want to sustain them, whether
true or false, can operate according to these
beliefs for long periods of time particularly when
they have sufficiently vague and delayed feedback
from their decisions.'^'^
There is a systematic tendency of many people
to overrate their own abilities, contributions and
talents. People dwell on successes and attribute
them to skill and diligence. Failures are more
likely to be dismissed based on external or
unforeseeable causes.'^'' This finds expression in
excessive optimism and overconfidence, and a
sense of omnipotence regarding one's ability to
control events.'^"^ People tend to claim that
positive events are due to their skill, and that
negative situations are caused by outside cir-
cumstances. Groupthink can increase optimistic
biases, fueling a tendency to place unwarranted
confidence in one's decisions.'^^ The excessive
confidence of senior officials in an organization
only works to solidify the phenomenon of
groupthink.
Excessive optimism is not a virtue, but is
essentially a subconscious tendency to distort
reality in a positive direction.'^^ The phenom-
enon of excessive optimism can trickle down in
a corporate culture, with the persistent belief that
one's own company is superior to competitors,
or that one's company is on a winning streak that
has no end. This can induce a tendency toward
puffery and dismissal of risks in formulating
disclosures and press releases.'^^ An optimistic
culture can blind managers so that, faced with
risk or trouble, they will more likely persist in
normal, functional activity than take appropriate
corrective action, or not see risks clearly or
construe them unrealistically.
The dark side of optimism is that it justifies
the preservation of the status quo, and hence can
result in an entrenchment of denial and lead to
ultimate failure.'^^ Many supervisors, consciously
or not, do not want to know precisely how their
subordinates achieve their results. As long as the
bottom line is profitable, there is little incentive
to discover how those results were achieved.
Focusing on the bottom line also facilitates the
denial of either moral or legal complicity should
severe problems be uncovered.''^'
 •'I Didn't Know" and "I Was Only Doing My Job"
Corporate "culture" and its influence on
information
The corporation is said to be a cooperative
association.'^" "Cooperative association" is a term
that implies that the participants in the enterprise
subscribe to a set of common goals, and they
accept the centrality of the common goals or
purposes of that enterprise."' Each firm has a
particular "culture." Studies of organizational
behavior show that institutions develop belief
systems - shared ways of interpreting a company's
environment, its past, and its future prospects.
These belief systems are important because
they color the interaction and communication
between managers and employees. An organiza-
tion's culture - the norms, routines, and shared
understandings and expectations of those who
work in a firm - impacts how information flows
through the hierarchy. The interpretation of a
given bit of information in a company as a whole
depends upon the social processes, the patterns
- the overall institutional culture, that one learns
as one becomes a member of that firm.
There are pre-given social mechanisms in a
corporate culture that determine the context and
the content of individual decisionmaking and
choices. For instance, many corporate cultures
discourage open expressions of doubt or skepti-
cism, which stifles the flow of information."^ Or,
if a company's CEO promulgates a culture of
trust, transparency of communication, direct lines
of communications despite decentralized man-
agement - stressing honest behavior, honoring
the spirit as well as the letter of the law, putting
safety before profits, encouraging kind acts and
respect to all employees, and frowning on back-
biting and internal politicking - this company
will have a markedly different culture than one
that emphasizes profit-maximization at all costs,
and that cheating is okay if you can get away
with it. We can find one decent and the other
reprehensible.
Senior officials in a company often develop
large egos, bolstered by the repeated promotions
and increasing responsibility they have accrued,
and they are likely to exhibit considerable con-
fidence in their own managerial and decision-
making abilities. Ego in organizational settings
287
can reverberate by inducing subordinates to
conform their presentations to what they think
their boss wants to hear, even when the boss
emphasizes the need for accuracy and account-
ability.''''' Many a CEO is strong-willed, impe-
rious and dominating, and seldom confides
in or relies upon the board. "'* Robert Jackall
once said that middle management is guided first
and foremost by the maxim, "When [the CEO]
sneezes, we all catch colds."'^^
Senior officials might impart the sense that the
board would rather not be put on formal notice
as to the ugly "facts of life" of illegal or improper
activity. Senior managers in a company may well
have a particular facility for rationalization. "As
a result, the leader's vanities often trigger a
cascade of conforming behaviors that, in turn,
reinforce those vanities."'^^
Ego blindness explains why people will not
give enough attention to situations that trigger
some worry response. That is, the ego will want
to quickly dismiss one's gut reaction, and forget
about it. This pattern of cognitive dissonance
occurred in the actions of Beech-Nut executives
who allowed the introduction of increasing levels
of foreign substances into apple juice that a large
number of children consumed.'^^
The diffusion of authority in a hierarchical
organization tends to reduce an individual's sense
of moral responsibility for his or her actions.'''^
For instance, when supervisors parcel out
subtasks to a number of subordinate employees,
none of the subordinates may have more than
an inkling of what the entire project is about,
while the supervisor may know little of the
details of each subordinate's subtasks. No one in
the firm might recognize a moral problem,
because the problem arises not out of what any
single worker is doing, but out of everyone's
action as a whole. The fact that everyone is
merely a member of a large work force helps
workers feel a sense of security, with little need
to find out more about what is going on even if
they have their suspicions.
A particular person can always choose to
violate a norm and adopt behavior that bypasses
the company's norms. There may be a shared
feeling on the part of subordinate officials that
they owe their loyalty chiefly to senior manage-
288 John Alan Cohan
ment and not to the board. Cynicism in a cor-
porate culture can foster the breaking of rules as
a means to succeed. An element of cynicism in
a company's culture about accounting norms or
about SEC regulatory protocols may affect the
actor's evaluation of the legitimacy of the regula-
tion. One might understand that certain ethical
rules are underenforced, that the probability of
sanction from some violation is remote, or that
successful people can question the legitimacy of
ethical principles and make excuses.'''^ To be
successful in a highly competitive environment
one needs to filter legal and ethical expectations
through the group lens. "For many, that filtra-
tion will involve an implicit and unconscious
search for ways to maintain consistency between
the desire to be good and the desire to be
successful. This form of rationalization can
readily blunt the power of 'official' norms."'"*"
It has been pointed out that people in corpo-
rations tend to make decisions that may not be
in keeping with their own sense of morality.
People working within corporations often have
a distinct business persona, different from the one
they display within their family relationships or
in other roles in society. The idea is that people
may act in seemingly altruistic ways outside the
corporation, but in the firm there is a business
morality that is somehow different from one's
personal morality, that "business is business," with
the focus being to maximize profit without
regard to other considerations.'""
Benjamin Cardozo, the judge and moral
scholar, referred to distinct "morals of the market
place"'"*^ that are different from everyday morality
outside the business world. Robert Jackall com-
mented regarding corporate culture that
independent morally evaluative judgments get sub-
ordinated to the social intricacies of the bureau-
cratic workplace. Notions of morality that one
might hold and indeed practice outside the
workplace . . . become irrelevant. . . . Under
certain conditions, such notions may even become
dangerous. For the most part, then, they remain
unarticulated lest one risk damaging crucial rela-
tionships with significant individuals or groups.''*''
This idea conjures up a culture in which corpo-
rate agents who engage in business wrongdoing
escape "not only moral and psychological
responsibility but legal responsibility as well.
Legal rules designed to deter individual wrong-
doing are simply not directly transferable to the
corporate setting."'''* Thus, the convergence of
various factors, including the pressure people feel
from their superiors, their peers and the norms
of corporate culture, the fact that most corpo-
rate cultures hold power in high esteem and
have a diffusion of responsibility, may contribute
to a sense that certain wrongful conduct is
permissible.'*'
People who act in groups may impose greater
risks to society, and thus deserve greater blame
(or at least some blame) when they act wrongly,
than individuals acting alone. That is, there are
special dangers associated with group plots, as
reflected in the common law of conspiracy.'"**
As noted by a classic commentary, "[I]t is more
difficult to guard against the antisocial designs
of a group of persons than those of an individual.
. . . The advantages of division of labor and
complex organization characteristic of modern
economic society have their counterparts in
many forms of criminal activity."'*^
The fact that there is a certain permissive cor-
porate culture in a given company should not
excuse conduct any more than a criminal syndi-
calist associating with bad associates would be
excused from responsibility due to keeping bad
company. That is, blaming a culture does not
excuse or mitigate the conduct of the individuals
who are part of it, in my opinion.
We all move in and out of various roles during
the day, operating as moral agents in being a
parent, being a driver, being a friend to someone,
or being a consumer, and so on. It seems unrea-
sonable to demand that anyone operate in the
firm with blinkers shielding one from the moral
awareness that operates in other sectors of one's
life.
Solutions
I have attempted to explain how insiders may
overlook danger signs obvious to a neutral
observer. What sort of solutions are possible to
move the board closer to the locus of problems?
 "I Didn't Know" and "I Was Only Doing My Job"
How can a company be structured so that the
board can monitor the corporation's internal
environment, and discover or correct trouble
before it reaches the emergency stage?
1. Companies should implement programs to
encourage employees to expose wrongdoing
without fear of retribution. Organizational
theorists agree that in order for information
sharing within an organization to be optimal
there must be a reasonable degree of trust and
confidence between the informant and the
recipient.'''^ There needs to be incentives for
subordinates to divulge potentially adverse infor-
mation. A complication is that any potential
informer may be reluctant to supply information
because there may be feelings of loyalty to one's
superior and coworkers. There is concern for
backlash, retaliation, and ruination of one's own
chance for advancement, and the risk of losing
one's position and accumulated benefits even if
there is a strong company policy to prevent such
backlash. Directors need to implement proce-
dures through which employees with knowledge
of wrongdoing may make such information
known in a manner that will permit objective
evaluation of the information.
An ombudsman of some sort, with direct
access to a senior official, would be helpful.
Exxon Corporation, among other companies, has
enacted a policy requiring employees who notice
possible misconduct or dangerous or troublesome
situations, to notify their superiors in writing,
and if no written response is forthcoming, the
employee must jump the chain of command and
inform senior executives.'*'
2. The reputational risk of concealment of infor-
mation, both to the company and to top execu-
tives, is substantial. Corporations need to devise
some kind of communication system that enables
important information to move upward to the
proper decisionmaker without getting distorted.
I would not recommend the simplistic solution
of allowing all units of a company to communi-
cate directly with senior management. That
could easily create informational overload, an
overabundance of irrelevant information, and
the problem of sensory decoupling on the part
289
of senior management, and thus might be
ineffective.
3. Directors should make it an affirmative duty
for individuals in the firm to discern the nature
of their own projects and to know what other
employees are working on the same project. This
will enable them to know where they can go to
gather further information about the project, or
to "compare notes."
4. The directors must satisfy themselves period-
ically through reports that the company has
appropriate programs in place to inform its
employees on an ongoing basis of the need to
avoid conflicts of interest, and of the need to
comply with laws applicable to its operations.
Directors should understand that even the
unqualified advice of legal counsel as to the law-
fulness of conduct will not necessarily immunize
the board or the corporation from legal sanctions.
5. In corporate settings power and responsibility
are diffused, but connected. Many boards seem
to lack the time and expertise to deal with all
the complexities of modern public corporation
business. Often directors seem to perform a
largely reactive function. Thus, developing an
effective program for discovering corporate
wrongdoing and preventing its reoccurrence is a
daunting task.'^° But it is always possible to
implement some system of corporate checks and
balances that reduce the likelihood that one or a
small number of biased managers will cause
significant failure of disclosure. It is important
to work out a policy to reduce the likelihood that
plans may subsequently turn into unethical or
unlawful operations. A commitment is required
from both the board and senior management that
deviations from the policy of compliance with
the law will not be tolerated.
Implementation of such a policy requires an
adequate monitoring system at both the board
and management levels. Of course, monitoring
has its own problems in accomplishing the aim
of oversight while avoiding the negative feature
of setting up such an elaborate system of signals,
checks, balances, and reviews as to stifle all
activity. A good monitoring program will protect
290 John Alan Cohan
the interests of the shareholders by avoiding
governmental and private litigation against the
company and the depletion of the corporate
reputation, not to mention its stock value.
6. Some companies may want to have more
widespread use of an outside director who plays
a lead role. One of the more radical solutions
involving outside directors was proposed by
Ralph Nader in 1976, namely the "politiciza-
tion" of the corporation by requiring the
presence of various representatives of "public
interest" groups on the corporate board.'^' The
suggestion here is that each director would
represent a specified special interest constituency,
such as environmentalists or consumers, and
others whose goals may be in conflict with the
goal of profit maximization. It is far from clear,
however, how such a restructuring of the board
would solve the problem of information blockage
from lower echelons to the board, and it inter-
jects a more acute adversarial dimension between
the board and management, not to mention
within the board itself.
7. In cases where a corporation's own system of
internal accountability has broken down, the
SEC has structured consent orders to force
companies to restructure their audit committee,
provide adequate training for new directors,
install a majority of independent directors, and
expand the number of independent outsiders on
the '''
8. Another solution is to hire emotionally intel-
ligent workers. A CEO who throws his or her
weight around, intimidates other directors - the
table-pounding type - might be temperamentally
ill-suited for the job. Search committees should
look for people with people skills.
Emotions are relevant in deciding an issue.
Appropriate appeals to emotion are important
ingredients that contribute to, rather than
sabotage, corporate decision making.'^'' Emotion
tends to mold strict logic to achieve truly
balanced quest for the truth. Proving the truth
of an issue requires not just an analysis of the
concrete evidence, but the shading of emotional
sensitivities.
Emotional responses can send us important
messages to which we should listen. Emotions
help us sort through vast quantities of informa-
tion, highlight those aspects that have particular
meaning for us, and help us assign meaning
to things that might otherwise seem chaotic.
Emotions open us to the possibilities of enhanced
awareness and improved judgment.
Emotions serve as warning signals that certain
judgments or decisions need to be scrutinized
more carefully. People should be aware of
warning signals that may prompt them to recon-
sider a particular decision or action. If we feel a
negative feeling immediately upon hearing a
proposal, this is what researchers refer to as intu-
ition.'^* We cannot rationally explain this initial
gut reaction, but we commonly take the negative
feelings to mean that something is wrong, and
feel moved to search for more facts or to reflect
further on the issue. Once people are aware of
the validity of intuitive feelings, they can deploy
rather than suppress powerful feelings that can
help guide decisionmaking. Intuition doesn't
guarantee truth, but it is a form of knowledge
which we can develop and let run alongside our
rational thinking.
According to Justice William J. Brennan,
Jr., ignoring what our passions tell us cuts us
"off from the wellspring from which concepts
such as dignity, decency, and fairness flow."'^^
Understanding reality and responding to it appro-
priately requires "the full measure of all our
human capacities."''^
Emotion can be used by a forceful manager
to block communication or to shut down
dialogue. This is an abusive and wrong use of
emotion. Outbursts of anger and table-pounding
in an attempt to suppress critical questioning of
others closes down creates a corporate culture
that denigrates legitimate discourse, and limits
the quest for the truth.
Conclusion
There are numerous subtle but powerful forces
at work in corporations. The mere existence of
a hierarchical structure prevents individuals from
obtaining complete knowledge needed to make
 "I Didn't Know" and "I Was Only Doing My Job"
informed moral decisions, and prevents them
from really knowing the role their acts play in
the larger corporate scheme. Directors are likely
to face much greater demands of accountability
in the wake of Enron. There is growing aware-
ness among directors themselves of the need to
take their role seriously.'" Companies are likely
to put more emphasis on having directors who
are not afraid to challenge senior management by
asking inconvenient questions.
The public has traditionally regarded infor-
mation disclosed by corporations with a certain
degree of trust, on the assumption that managers
have unique access to certain kinds of risk-related
information, and that securities laws make it pun-
ishable to mislead investors. Business organiza-
tions are undeniably human affairs, and classic
occurrences of information blockage undermine
the board's ability to monitor the company. Savvy
investors and market professionals are able to
discount many kinds of corporate hype. But there
is a difference between corporate hype and cor-
porate deception and fraud that are due to infor-
mation flow blockages. A corporation's disclosure
to investors may sometimes be distorted, not in
bad faith, but rather because cognitive forces and
information flow problems lead to a skewed per-
ception of reality by senior officials.
In my opinion, the true purpose of corpora-
tions is to make society better off, and to create
societal wealth, not just to create wealth for
shareholders. To accomplish this, the corporation
must be viewed as a holistic blend of con-
stituencies with multiple and changing interests,
neither a shareholder-centric model nor a stake-
holder model, but a corporate constituency
model, that balances the two (see Appendix).
This concept focuses on the interests of "the cor-
poration" broadly construed as representing
various constituencies.
Perhaps rejection of traditional corporate
norms will come from an internal desire to
become socially responsible together with
society's pullings for the corporation to act on
conscience, and to operate on the maxim that
there are other important social goods that some-
times trump the notion of profit-maximization.
And in the wake of Enron corporations may
simply have no choice but to meet increased
291
demands by workers, shareholders, customers and
the government for greater accountability.
Appendix
Reevaluation of the shareholder-centric model
The problem of the nature and purpose of the
corporation, its function in society, has been of
longstanding concern. Corporations make things,
do things, buy things and sell things, they have
different commitments and different goals, and the
levels of commitment to these goals vary. That is, the
duties of the board entail focusing on a panoply of
concerns, above and beyond maximizing shareholder
profits.'^«
Directors owe fiduciary duties to "the corpora-
tion."'" For decades the prevailing theory of corpo-
rate governance rested on the shareholder-centric
model, that is, on the assumption that the primary
duty, or even the sole task, of officers and directors
was to maximize shareholder wealth.''"
Corporations are granted limited liability for share-
holders and given life in perpetuity because they are
thought to be business vehicles that serve the goal of
promoting overall societal wealth. The genius of U.S.
corporate law is that it gives directors and officers
the flexibilty to balance shareholders' interests against
other stakeholders.""' The corporate vehicle for pro-
viding dividends to shareholders is not an end in itself,
but is a means to the further end of benefiting society.
Increasingly we see that the model of "shareholder
primacy" certainly does not tell the whole story, and
it may not be the appropriate corporate governance
norm. Today it seems that most corporate officers and
directors take their job to be a much more complex
balancing act in which they must serve not just share-
holders' interests, but also those of other stakeholder
groups such as managers, creditors, employees, other
companies, the community and the environment.
The idea that directors owe their duty solely to
shareholders leads to perplexing dilemmas, troubling
results, and long-term disadvantages for society.
Which shareholders ought to be the focus of maxi-
mizing shareholder wealth? Shareholders of the
moment? Long-term shareholders? Should actions be
directed to maximize the current share price? What
about action that will be detrimental to the current
share price but will, at least in the directors' view,
benefit long-term shareholders, or shareholders at a
much later date? And in principal how can corpo-
rate action taken today to benefit long-term share-
292 John Alan Cohan
holders be detrimental to the current share price -
oughtn't it help increase today's share price?
Should the directors regard polluting as a matter of
trade-offs? That is, are the costs of polluting including
the amount of any potential fine, less than the cost
of not polluting? If so, then pollute. The fact that pol-
lution could have devastating side efFects on the envi-
ronment and on members of the public might be
irrelevant under the shareholder-centric model if no
harm is expected to be visited on the polluting cor-
poration's share price. The only question is whether
more money can be made from destroying the last old
growth of ponderosa pines than from not doing so.
It is not entirely clear how the notion focusing on
promoting shareholder interests started to dominate
academic discussions of corporate law. In fact, the
concept that directors owe their fiduciary duty exclu-
sively to shareholders is not now the law nor has it
ever been the law in this country.'" Rather, the law
generally grants directors trustee status for the firm
as a whole, meaning that they have the discretion to
consider the interests of other corporate constituen-
cies, in addition to the interests of shareholders, in
shaping business policy.
In the late eighteenth and early nineteenth cen-
turies, American corporations were chartered with
the integral purpose of serving public interests.'" As
one commentator observed:
Almost all of the business enterprises incorporated
. . . in the formative generation starting in the
178O's were chartered for activities of some com-
munity interest - supplying transport, water, insur-
ance or banking facilities, that such public-interest
undertakings practically monopolized the corpo-
rate form implied that incorporation was inher-
ently of such pubhc concern that the public
authority must confer it.'"
The courts recognized that this integral public-interest
purpose was exacted as "a regulatory quid pro quo"
in exchange for conferring the corporate entity
status.'*^ While it was clear that shareholders in early
American corporations had legal control over the cor-
poration, the early charters emphasized the corpora-
tion's larger public-interest purposes. Charters
imposed strict limits on corporate organization,
function, and even length of existence.'*' Similarly,
starting with the earhest court cases, the directors'
fiduciary duties were interpreted so as to subsume the
shareholders' interests to the larger sphere of duties to
"the corporation" itself.'"
Only in the past century and a half has the United
States treated the corporation as private property
rather than as a creation of the state designed to serve
a public function.
These core principles underscore the view that the
interests of the corporation historically go beyond the
wealth-maximization concerns of shareholders. Its
interests also include
the interwoven interests of its various constituen-
cies, such as . . . employees, customers, the local
community, and others. Linking these interests to
the corporation's interests resolves much of the
tension that would otherwise exist. . . . [T]hese
constituencies' interests are balanced by the board
of directors acting in the best interests of the cor-
poration as a whole, as opposed to the best inter-
ests of any one particular constituency [such as the
shareholders].'^*
The idea that corporate managers are trustees who
must serve the public interest has been debated for
many years. A debate from the 1930s involved
Professors Adolph A. Berle, Jr. and E. Merrick Dodd,
Jr., who debated the obligations of the corporation in
Harvard Law Review."' Professor Berle argued that
the corporation was responsible only to its stock-
holders."" Professor Dodd argued that a corporation
must not only profit its stockholders, but must also
engage in social service.'"
The debate focused on the idea that the law may
be approaching a position in which it will regard all
business as afFected with a public interest. Their
debate discussed the public opinion of the 1930s,
which had been moving towards the view that com-
panies are economic institutions that have a social
service as well as a profit-making function, and that
it was unwise for corporations to emphasize the
profit-maximization function. Professor Dodd noted
that before modern corporations arose the law
regarded engaging in business to be a pubhc profes-
sion rather than a purely private matter, with certain
high fiduciary standards that have survived in duties
owed by public carriers and innkeepers."^ Based on
the court of public opinion. Professor Dodd argued
that "our corporate managers who control business
should voluntarily and without waiting for legal com-
pulsion manage [business] in such a say as to fulfill
these responsibilities."'"
Professor Berle's view that the fiduciary responsi-
bility of directors is for the exclusive benefit of share-
holders has been embraced by the courts."" Thus,
while the general view prior to the 1930s was that
corporations have a certain societal orientation, this
view got eclipsed by the "modern" belief that profit
 "I Didn't Know" and "I Was Only Doing My Job"
maximization for shareholders was the controlling
function of firms except those classified as public
utihties.'"
But it seems to me that concern for the prof-
itability of stockholders and ethical concerns are not
inherently separate and apart. Society is free to impose
its collective will on the behavior of corporate agents
in light of shifting values. Evidence of consumer
boycotts against companies that engage in socially
irresponsible action, unfair labor practices, or that do
business in violation of human rights or in violation
of environmental norms — indicates that society wants
companies to take account of social concerns in cor-
porate decisionmaking."* This observation is sup-
ported by the fact that over half the states (and almost
all the states, absent Delaware, that have a significant
number of public companies incorporated in their
jurisdiction) have adopted "corporate constituency"
statutes.'" These laws allow boards to take into
account the interests of a variety of constituencies suf-
ficiently broad enough to accommodate most social
concerns."* These laws seem to endorse Professor
Dodd's view, discussed above, by making it clear that
directors do not owe their fiduciary duty exclusively
to shareholders, and giving corporate managers a
green light to behave as morally whole persons both
inside the corporate bureaucracy. These laws suggest
a growing public policy that encourages directors to
take into account other corporate constituencies.
Proponents of shareholder primacy seemingly ignore
these ubiquitous state laws that reject the shareholder-
only model.
Professor Dodd's view is not inconsistent with the
objective of maximizing shareholder profits, but rather
provides a certain fiexibihty. When acting to fulfill
their fiduciary duties to society and stakeholders at
large within certain parameters, directors need not
fear legal action on the part of shareholders for the
exercise of its authority in this manner. This does not
mean abandonment of the profit motive, but com-
plements it with a broader mandate to permit cor-
porate actors to be more responsive, and more
responsible, as a market-driven institution. It means
allowing corporate agents to make decisions grounded
in their many relations and obligations in life, from
the wellspring of their whole moral arena.
Proponents of the shareholder-primacy model may
want to point out, however, that management is
under no obligation to forego stockholder-centric
philosophy in favor of public interest. Management
simply has the freedom to choose among the con-
flicting interests involved. If it does not want to do
so in any particular case, it does not violate the law.
293
Notes
' John C. CofFee, Jr., Beyond the Shut-Eyed Sentry:
Toward a Theoretical View of Corporate Misconduct and
an Effective Legal Response, 63 Va. L. Rev. 1099, 1132
(1977).
^ The theme dates back to at least 1907, with the
discussion, Dwight, Liability of Corporate Directors, 17
Yale L.J. 33 (1907).
^ Id. at 1133.
' Id.
' Id.
' See Richard A. Oppel, Jr., Enron Official Says Many
Knew About Shaky Company Finances, N.Y. Times,
Feb. 15, 2002, at Al.
' See "Lone Voice": Excerpts From Testimony of
Executive Who Challenged Enron (excerpts from the
testimony of Sherron S. Watkins), N.Y. Times, Feb.
15, 2002, at C7.
* See Richard A. Oppel, Jr., supra note 6 at C6.
' See Stephen Labaton and Richard A. Oppel, Jr.,
Testimony of Enron Executives is Contradictory, N.Y.
Times, Feb. 8, 2002, at Al.
'° Id.
" Id.
'^ See Steven Greenhouse and Stephen Labaton,
Enron Executives Say They Debated Freeze on Pension,
N.Y. Times, Feb. 6, 2002, at Al, C8.
'•^ See Don Van Natta, Jr. and Alex Berenson, Enron's
Chairman Received Warning About Accounting, N.Y.
Times, Dec. 29, 2001, at Al.
''' See Neela Banerjee, At Enron, Lavish Excess
Often Came Before Success, N.Y. Times, Feb. 26, 2002,
at C l .
'^ See Richard A. Oppel, Jr., Wall St. Analysts Faulted
on Enron, N.Y. Times, Feb. 28, 2002, at Al.
'* Id.
" Id.
'« Id.
" See Richard A. Oppel, Jr., supra note 6.
^° See "Lone Voice": Excerpts From Testimony of
Executive Who Challenged Enron (excerpts from the
testimony of Sherron S. Watkins), supra note 7.
'' Id.
^^ See Steven Greenhouse, U.S. Pressing For Trustees
Of Enron Plan To Step Down, N.Y Times, Feb. 11,
2002, at A20.
" Id.
'^* See Reed Abelson, Enron's Board Quickly Ratified
Far-Reaching Management Moves, N.Y. Times, Feb. 22,
2002, C6.
" Id.
^^ See Excerpts From Testimony Before House
294 fohn Alan Cohan
Subcommittee on Enron Collapse (quoting from a
prepared statement by William C. Powers, Jr.), N.Y.
Times, Feb. 5, 2002, at C4.
^' Id. (emphasis added.)
^^ See Neela Banerjee, supra note 14.
'' Id.
'" See Steven Greenhouse and Stephen Labaton, Enron
Executives Say They Debated Freeze on Pension, N.Y.
Times, Feb. 6, 2002, at Al, C8.
'' See, e.g., Gretchen Morgenson, A Bubble No One
Wanted to Pop, N.Y Times, Jan. 14, 2002, at At.
Aggressive accounting like Enron's method of shifting
large obligations off its balance sheet, is not limited
to Enron, but has become not uncommon in recent
years. See id. Moreover, Wall Street analysts cannot be
relied upon to dig deeply into the books of firms
because they are eager to generate business selling
securities to investors and have made it a habit to
ignore negative data regarding corporate misdeeds. See
id.
" See, e.g., Del. Gen. Corp. Law § 14t(a) (Del. Code
Ann. tit. 8 § 141(a)(t991).
" See, e.g., N.Y [Bus. Corp.] law §7t7(a). See also
Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125,
130 (Del. 1963), in which the Delaware Supreme
Court stated that "directors . . . in managing the cor-
porate affairs are bound to use that amount of care
which ordinarily careful and prudent men would use
in similar circumstances."
^'' See generally Dennis J. Block, Nancy E. Barton and
Stephen A. Radin, The Business Judgment Rule:
Fiduciary Duties of Corporate Directors (4th ed.
1993) at 5-28.
''^ See S. Samuel Arsht, Fiduciary Responsibilities of
Directors, Officers and Key Employees, 4 Del. J. Corp.
L. 652, 659 (1979).
^* Graham v. AUis-Chalmers Manufacturing Co., 188
A.2d 125 (Del. 1963).
•" In re Caremark International Inc. Derivative
Litigation, 698 A.2d 959 (Del. Ch. 1996).
'* Id. at 970.
' ' Id. at 971.
"^ Id. at 969.
•" See Samuel Arsht, Fiduciary Responsibilities of
Directors, Officers and Key Employees, 4 Del. J. Corp.
L. 652, 659 (1979); E. Norman Vessey and Juhe M.
S. Seitz, The Business Judgment Rule in the Revised
Model Act, the Trans Union Case, and the ALI Project —
A Strange Porridge, 63 Tex. L. Rev. 1483 (1985);
Charles Hansen, The Business Judgment Rule and the
American Law Institute Corporate Governance Project, 48
Bus. Law. 1355, 1360 (1993); Bayless Manning, The
Business Judgment Rule and the Director's Duty of
Attention: Time for Reality, 39 Bus. Law 1477, 1494
(Aug. 1984).
^^ See Julian P. Rotter, Interpersonal Trust, Trust-
worthiness, and Gullibility, 35 Am. Psychol. 1 (1980).
""^ Carol M. Rose, Trust in the Mirror of Betrayal,
75 B.U. L. Rev. 531, 540-541 (1995). See also
Michael E. Porter, Clusters and the New Economics of
Competition, Harvard Bus. Rev. Nov.—Dec. 1998, at
9, 10 (noting that German and Japanese companies
are more relationship-oriented in contrast with
American companies, which are more "transaction-
driven"). The "stick" style of monitoring that often
is found in American companies is in sharp contrast
to the management practices of other countries with
a more benign approach, such as German, Japan and
the Scandanavian countries. David M. Gordon, Fat
and Mean: The Corporate Squeeze of Working
Americans and the Myth of Managerial "Down-
sizing" (1996) As the French philosopher Michel
Serres remarked, "In America, money is the goal and
things are the means to achieve it, while in Europe
our goal is to achieve things, with money as the
means."
'*'* See, e.g., Julian P. Rotter, Interpersonal Trust,
Trustworthiness, and Gullibility, 35 Am. Psychol. 1
(1980) (providing empirical support for the proposi-
tion that higher trusting people are more likely to be
happier than lower trusting people); Morton Deutsch,
Trust and Suspicion, 2 J. Conflict Resol. 278 (1858)
("trusting people are 'nicer' than suspicious people").
••^ John C. CofFee, Jr. supra note 1 at 1131.
"* 17 C.ER. §240.10b-5 (2000).
'" See Donald Langevoort, Organized Illusions: A
Behavioral Theory of Why Corporations Mislead Stock
Market Investors {And Cause Social Harms), 146 U. PA.
L. Rev. 101 (1997).
''* See John C. CofFee, Jr., supra note 1 at 1134.
'" Peter Drucker, Management: Tasks, Responsi-
bilities, Practices 628 (1973).
^° Kenneth Boulding, The Economics of Knowledge and
the Knowledge of Economics, Am. Econ. Rev., May,
1966, at 1, 8.
' ' See John C. Coffee, Jr. supra note 1 at 1127—
1129.
^^ See Lawrence E. Mitchell, Cooperation and
Constraint in the Modern Corporation: An Inquiry into
the Causes of Corporate Immorality, 73 Tex. L. Rev. 477,
508 (1995).
" Robert Jackall, Moral Mazes: The World of
Corporate Managers 17, 20-21 (1988).
^^ See John C. Coffee, Jr., supra note 1 at 1104-1105.
^^ Anthony Downs, Inside Bureaucracy (1966) at
143.
 "I Didn't Know" and "I Was Only Doing My Joh"
^'' John C. CofFee, Jr., supra note 1 at 1136.
" Id. at 1143.
^^ See Roy Radner, Hierarchy: The Economics of
Managing, 30 J. Econ. Literature 1382, 1387-1401
(discussing corporate hierarchies).
^' See John C. Coffee, Jr., supra note 1 at 1138.
'" See Frank H. Easterbrook and Daniel R. Fischel,
Mandatory Disclosure and the Protection of Investors, 70
Va. L. Rev. 669, 613-611 (1984) (describing man-
agement's interest in its own trustworthiness).
" Tom R. Tyler and Peter Degoey, Trust in
Organizational Authorities: The Influence of Motive
Attributions on Willingness to Accept Decisions, in Trust
in Organizations: Frontiers of Theory and Research
(Roderick M. Kramer and tom R. Tyler eds., 1995)
at 331.
^^ See Barry M. Staw, The Escalation of Commitment
to a Course of Action, 6 Acad. Mgmt. Rev. 577,
580-581 (emphasizing the virtue of appearing
consistent).
'•' The temptation to distort disconfirming informa-
tion increases until the information becomes so clear-
cut that its implications are unavoidable. In a company
that may take some time, but at some point the
project's risks or dangers crystallizes. At that point an
active cover-up might begin. As one of the more
polite sayings goes, the managers may find themselves
"knee-deep in the big muddy." Barry M. Staw et al.,
Knee-Deep in the Big Muddy: A Study of Escalating
Commitment to a Chosen Course of Action, 16 Org.
Behav. & Hum. Performance 27 (1976) (quoting the
title).
*'' See "Lone Voice": Excerpts From Testimony of
Executive Who Challenged Enron, supra note 7.
*' See, e.g., Kenneth J. Arrow, The Limits of
Organization 75 (1974) ("The efficiency loss due to
informational overload is increased by the tendency
in that situation to filter information in accordance
with one's preconceptions.").
" See Canice Prendergast, A Theory of "Yes Men", 83
Am. Econ. Rev. 757 (1993).
*' Id. at 1105. On the other hand, action undertaken
to maximize corporate profits in the short run at the
expense of long-term growth brings to the surface a
conflict of interest between management and
investors. Management's interest may be particularly
focused on the short term, because salary, bonuses and
stock options are likely to be based upon performance
in the short term, while the investor usually is more
interested in long-term capital appreciation. See
Bower, On the Amoral Organization, in The Corporate
Society (R. Morris, ed. 1974) at 178, 191-192.
'* See Donald C. Langevoort, supra note 47 at 135.
295
*' See, e.g., O. Williamson, Corporate Control and
Business Behavior (1970) at 47-49.
™ Id.
^' See Jon D. Hanson and Douglas A. Kysar, Taking
Behavioralism Seriously: The Problem of Market
Manipulation, 74 N.Y.U. L. Rev. 630, 672 0une 1999).
^^ Robert C. Ellickson, Bringing Culture and Human
Frailty to Rational Actors: A Critique of Classical Law
and Economics, 65 Chi.-Kent L. Rev. 23, 23 (1989).
'' Id.
•"* See Jon D. Hanson and Douglas A. Kysar, supra
note 71 at 633.
^^ Herbert A. Simon, A Behavioral Model of Rational
Choice, 69 Q. J. Econ. 99, 104 (1955).
'' See id.
'^ See Sandra Blakeslee, Hijacking the Brain Circuits
With a Nickel Slot Machine, N.Y. Times, Feb. 19, 2002,
at D l .
^* See Anne C. Dailey, Striving for Rationality, 86 Va.
L. Rev. 349, 383 (Mar. 2000).
^' See L. Festinger, A Theory of Cognitive
Dissonance (1957).
*" Id.
*' Donald C. Langevoort, supra note 47 at 136.
^•^ See Jon D. Hanson and Douglas A. Kysar, supra
note 71 at 646.
^^ See Susan T. Fiske and Shelley E. Taylor,
Social Cognition 149-151, 150 (2d ed. 1991) ("Well-
developed schemas generally resist change and can
even persist in the face of disconfirming evidence.").
*"* Jon D. Hanson and Douglas A. Kysar, supra note
71 at 648.
'= Id. at 649.
** See text accompanying note 20 supra.
*' See Donald C. Langevoort, Where Were the
Lawyers?: A Behavioral Inquiry into Lawyer Responsibility
for Clients' Fraud, 46 Vand. L. Rev. 75, 111 (1993)
("[Tjhere are reasons . . . to doubt that lawyers will
be very good gatekeepers once they have committed
to representation and built a positive schema regarding
the client and the situation.").
** See Jon D. Hanson and Douglas A. Kysar, supra
note 71 at 646.
*' See, e.g., Marjorie A. Lyles and Charles R.
Schwenk, Top Management, Strategy and Organizational
Knowledge Structures, 29 J. Mgmt. Stud. 155, 170
(1992) (noting that "[s]trategic responses to new
situations may be the result of generalizing from the
existing knowledge structure"); 5ee also William H.
Starbuck, Congealing Oil: Inventing Ideologies to Justify
Acting Ideologies Out, 19 J. Mgmt. Stud. 3.
"^ See Craig A. Anderson, Mark R. Lepper, Lee
Ross, Perseverance of Social Theories: The Role of
296 John Alan Cohan
Explanation in the Persistence of Discredited Information, Analysts and arbitrageurs rely on facts in determining
39 J. Personality & Soc. Psychol. 1037, 1045 (1980).
" Jon D. Hanson and Douglas A. Kysar, supra note
71 at 650.
' ' Id. at 653.
'^ Donald C. Langevoort, Taking Myths Seriously: An
Essay for Lawyers, 74 Chi.-Kent L. Rev. 1569, 1571
(2000).
'•* Jon D. Hanson and Douglas A. Kysar, supra note
71 at 654.
" Irving L. Janis, Groupthink 9 (1982).
" See Donald C. Langevoort, supra note 93 at 1578.
" Id.
'* See Craig D. Parks and Rebecca A. Cowlin,
Acceptance of Uncommon Information into Group Decisions a duty to the corporation to perform the director's
When That Information Is or Is Not Demonstrable, 66
Org. Behav. & Hum. Decision Processes 307, 307
(1996) ("Facts that are known by only one member
are treated with skepticism by others and do not factor
terribly into the group's decision.").
" See Irving L. Janis and Leon Mann, Decision
Making: A Psychological Analysis of Conflict,
Choice, and Commitment 129 (1977) (The authors
claim that when adverse information is introduced
into a group, "the members use their collective cog-
nitive resources to develop rationalizations supporting
shared illusions about the invulnerability of their
organization or nation and display other symptoms
of 'group-think' — a collective pattern of defensive
avoidance."
^°° See id. at 280-284.
*°' See Gary Marks and Norman Miller, Ten Years of
Research on the False-Consensus Effect: An Empirical and 1109, 1119 (9th Cir. 1989).
Theoretical Review, 102 Psychol. Bull. 72, 72 (1987).
'"^ See generally, Richard R. Nelson, Recent
Evolutionary Theorizing About Economic Change, 33 J.
Econ. Literature 48 (1995).
'°^ In sociobiology literature. See generally Lionel
Tiger, Optimism: The Biology of Hope (1979).
'"'' See, Paul Zarnoth and Janet A. Sniezek, The Social
Influence of Confidence in Group Decision Making, 33 J. "^ Donald C. Langevoort, supra note 47 at 154.
Experimental Soc. Psychol. 345 (1997).
'"' Courts have been increasingly protective of opti-
mistic statements by corporate officials, requiring
significant evidence of bad intent or scienter in secu-
rities fraud cases. See, e.g.. In re Apple Computer Sec.
Litig., 886 F2d 1109, 1113-1115, 1118-1119 (9th
Cir. 1989), cert, denied, 496 U.S. 943 (1990); Raab
V. General Physics Corp., 4 F.3d 286, 290 (4th Cir.
1993) ("No reasonable investor would rely on these
statements [i.e., statements of "puffing" that predicted
the company's growth], and they are certainly not
specific enough to perpetrate a fraud on the market.
the value of a security, not mere expressions of
optimism from company spokesmen. . . . '[PJrojec-
tions of future performance not worded as guaran-
tees are generally not actionable under the federal
securities laws.'" [citations omitted]; 5ee also Carl W
Schneider, Soft Disclosure: Thrusts and Parries When Bad
News Follows Optimistic Statements, 26 Rev. Sec. &
Commod. Reg. 33 (1993). Moreover, corporate law
typically insulates the business judgments of corpo-
rate officials when made in good faith, so long as the
process of dehberation is not grossly deficient. See
American Law Institute, Principles of Corporate
Governance §4.01 (1992) ("A director or officer has
or officer's functions in good faith, in a manner that
he or she reasonably beheves to be in the best inter-
ests of the corporation, and with the care that an ordi-
narily prudent person would reasonably be expected
to exercise in a like position and under similar cir-
cumstances.") For a criticism of this rule, 5ee Franklin
A. Gevurtz, The Business Judgment Rule: Meaningless
Verbiage or Misguided Notion?, 67 S. Cal. L. Rev. 287
(1994).
'"' See, e.g., Jeffrey PfefFer, Management as Symbolic
Action: The Creation and Maintenance of Organizational
Paradigms, in 3 Research in Organizational Behavior
1, 4 (L.L. Cummings and Barry M. Staw eds., 1981
(stating that "it is the task of management to provide
explanations, rationalizations, and legitimization for
the activities undertaken in the organization").
'"' See In re Apple Computer Sec. Litig. 886 F.2d
'°^ See In re Time Warner Sec. Litig. 9 R3d 259 (2d
Cir. 1993).
"*' See Backman v. Polaroid Corp., 910 E2d 10 (1st
Cir. 1990).
"" See Susan T. Fiske and Shelley E. Taylor, Social
Cognition 543-550 (2d ed. 1991).
" ' See Donald C. Langevoort supra note 47 at 155.
"^ See Max H. Bazerman, Judgment in Managerial
Decision Making 37-39, 46 (3d ed. 1994).
"'' See Donald C. Langevoort, supra note 93 at 1581.
"^ See id. at 74.
" ' Id. at 1575.
'*' See, e.g., Dennis A. Gioia, Pinto Fires and Personal
Ethics: A Script Analysis of Missed Opportunities, 11 J.
Bus. Ethics 379 (1992).
"* See Donald C. Langevoort, supra note 93 at 74.
" ' See Ellen J. Langer, The Illusion of Control, 32 J.
Personality & Soc. Psychol. 311 (1975).
'^° See Robyn M. Dawes, Rational Choice in an
 "I Didn't Know" and "I Was Only Doing My Joh" 297

Uncertain World 256 (1988) (reviewing modern then were motivated to justify their actions to them-
origins of rationality theory). selves, rationalizing away data as being a simple mis-
'^' See Donald C. Langevoort, supra note 93 at 1574. understanding, that the existence of a health threat
'^^ See id. at 1574. was inconclusive, and acknowledging that the supplier
' " See Donald C. Langevoort, Selling Hope, Selling had a good reputation in the past. The executives
Risk: Some Lessons for Law from Behavioral Economics convinced themselves that their actions were neither
About Stockbrokers and Sophisticated Customers, 84 Cal. harmful nor wrong. This false consensus efFect
L. Rev. 627 at 639 (May 1996). fostered the likely assumption that most others would
'^'' See Max H. Bazerman, Judgment in Managerial share their perception. Thus, they allowed the use of
Decision Making 37-39 (3d ed. 1994) (discussing the adulterated apple juice to continue unchecked
overconfidence among managers). until it blew up in their face.
'^^ See Donald C. Langevoort, supra note 47 at 140. Another example of the false consensus efFect
'^"^ See Martin E.P. Seligman, Learned Optimism involved Michael Milken and the demise of Drexel
(1991), 98-101. Burnham Lambert. Milken invented the junk bond
•=" See id. at 141. market and apparently sincerely believed that it was
'^^ See Andrew D. Brown, Narcissism, Identity and a significant financial boon to investors and his
Legitimacy, 22 Acad. Mgmt. Rev. 643, 651-660 company. He apparently took small steps along the
(1997). way to conceal some of the more tentative features
'^' See Jack Katz, Concerted Ignorance: The Social of the scheme. Each incremental action was part of a
Construction of Cover-up, 8 Urb. Life 295, 297 (1979) slippery slope, and the accumulated efforts at con-
(discussing insulation of individual from group cealment eventually resulted in flagrant improprieties.
culpability that can result from concerted ignorance); But a host of self-protective posturing, including
5ee also John C. Coffee, Jr., supra note 1 (discussing rationalizations, optimism about the market and the
similar observed phenomenon in corporate hierarchies wealth that he had produced for some clients, appar-
of directors acting as "shut-eyed sentries" — deliber- ently deflected concerns that he might be engaging
ately looking away from management operations in in fraudulent conduct. See Jesse Kornbluth, Highly
order to avoid witnessing misconduct). Confident: The Crime and Punishment of Michael
"° See Lawrence E. Mitchell, supra note 52 at 481. Milken 367 (1992).
'^' There might also be subsidiary motivations " ' See Richard T De George, Business Ethics 90-96
whereby a worker may be interested in adopting the (2d. ed. 1986).
company's "mission" because he or she wants to keep " ' "No feelings of guilt are required, no attributions
the job, while another worker may be interested of moral blame permitted" in corporate decision-
in building his or her reputation and rising in the making "because [t]he institution defines the moral
hierarchy. role, and in the case of the corporation the moral role
"^ See Chris Argyris, Overcoming Organizational is narrow indeed." Lawrence. E. Mitchell, supra note
Defenses 14-31 (1990). 52 at 523-524.
'^^ See Canice Prendergast, A Theory of "Yes Men", "" Donald C. Langevoort, supra note 93 at 1590.
83 Am. Econ. Rev. 757, 769 (1993). '"" See Lawrence E. Mitchell supra note 52 at 522.
'^'' See, e.g.. Clearing Payoff Storm, Northrop Chief "•' See Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y.
Keeps Firm Hand on Controls, Wall St. J., Dec. 15, 1928).
1976, at 1. '•*' Robert Jackall, supra note 53 at 105.
'^^ Robert Jackall, supra note 53 at 22. *'*' Dennis R. Fox, The Law Says Corporations are
*^* See, e.g., Donald C. Langevoort, Ego, Human Persons, but Psychology Knows Better, 14 Behav. Sciences
Behavior, and Law, 81 Va. L. Rev. 853, 873-874 7 Law 339, 349 (1996).
(1995). ^''^ See David Luban, Alan Strudler and David
'^' See Philip G. Zimbardo and Michael R. Leippe, Wasserman, Moral Responsibility in the Age of
The Psychology of Attitude Change and Social Bureaucracy, 90 Mich. L. Rev. 2348 (1992). In contrast
Influence 120-121 (1991). At the outset, a cheating to ordinary moral choices confronting individuals,
supplier introduced small amounts of the substances, certain knowledge conditions are frequently absent in
which raised some suspicion in quality control. corporations:
Executives felt that preliminary data was inconclusive (1) The actor might not have any time constraint
so they choice to continue using the supplier pending regarding when a decision must be made.
results of an internal investigation. The executives (2) There may not be much clarity that a decision
298 John Alan Cohan
needs to be made in the first place on a given point
or at a given juncture in a project.
(3) The actor may not know the full range of avail-
able options in making a decision.
(4) The actor may have only piecemeal informa-
tion and therefore, be further in the dark.
By contrast, when we make individual moral deci-
sions, as we do every day, we know that a decision
must be made, when a decision must be made, what
options are available, and what steps are necessary in order
to make the decision. For instance, as a lawyer con-
fronted with a client who intends to lie on the witness
stand, I know that a decision must be made on my
part, when it must be made, what choices are available
(be silent or blow the whistle, or resign as attorney),
and what is needed to make the choice. See id. at 2364
from which this four-prong analysis is derived. If these
conditions are missing, most moral systems allow that
the agent "knew not what he was doing," and should
therefore be excused from moral blame.
''"' A conspiracy is an agreement by two or more
persons to commit an unlawful act. See W. LaFave and
A. Scott, Criminal Law 453 (1972) The crime of con-
spiracy is completed, and may be prosecuted, before
any overt action occurs beyond the formation of
the agreement. See Thomas Church, Jr., Conspiracy
Doctrine and Speech Offenses: A Reexamination of Yates
V. United States/row the Perspective of United States v.
Spoke, 60 Cornell L.R. 569, 572 (Apr. 1975). An
"overt act" refers to any legal or illegal act in fur-
therance of the conspiracy. A conspiracy is thought
to pose a greater threat than the same plot in the mind
of a single individual because the joint illegal intent
of two or more individuals is significantly more dan-
gerous than a similar intent on the part of an indi-
vidual. Id.; see also LaFave and Scott, supra, at
459-460.
When two agree to carry [a plot] into efFect, the
very plot is an act in itself. . . . The agreement is
an advancement of the intention which each has
conceived in his mind; the mind proceeds from a
secret intention to the overt act of mutual consul-
tation and agreement.
State V. Carbone, 10 N.E. 329, 336-337, 91 A.2d
571, 574 (1952).
'''^ Note, The Conspiracy Dilemma: Prosecution of
Group Crime, 62 Harv. L. Rev. 276, 283-284 (1948)
(footnotes omitted).
*"* See John C. CofFee, Jr., supra note 1 at 1265.
'•^ See David Luban, Alan Strudler and David
Wasserman, supra note 145 at 2389.
''° This task involves problems similar to those faced
by any law enforcement agency, including the diffi-
culty of securing reliable evidence of wrongdoing, the
need to protect the rights of potential accused, the
need to encourage disclosure, and the need to apply
appropriate sanctions. The handling of information
concerning corporate misconduct is a delicate matter,
since there will tend to be support, at least initially,
for a manager who has performed well and in whom
trust has been reposed by the company. In addition,
the accuracy and motivates of the informant may be
suspect for several reasons, including incomplete
information, unreliable or ambiguous facts, reason-
able disagreement over the ethical or legal conclu-
sions, and ulterior motives of the informant such as
desire for advancement, or personal antagonism.
''' See R. Nader, M. Green and J. Seligman,
Constitutionaliational of the Corporation: The Case
for the Federal Chartering of Giant Corporations
(1976).
*" See John C. CofFee, Jr., supra note 1 at 1236.
' " See D Don Welch, Ruling From the Heart: Emotio-
based Public Policy, 6 S. Cal. Interdisc. LJ. 55 (1997).
''"' Research has identified intuition as a brain
function. A brain region called the limbic system,
which is involved with emotions, interacts with
another brain region called the prefrontal cortex,
involved in decisionmaking. When people think
about doing something, the prefrontal cortex calls up
knowledge related to feelings they recall from their
memory about earlier similar situations.
We are not conscious of the signals, although more
sensitive people are. These emotional signals are very
active and they trigger what we call intuition. See
Sandra Blakeslee, "Study Links Antisocial Behavior to
Early Brain Injury That Bars Learning," N.Y. Times,
Oct. 19, 1999, Science Section.
Scientists define intuition as a sudden, strong "gut
feeling" to do something, or coming to suddenly get
a hunch or premonition, a kind of knowing, without
any rational explanation or how this idea came about
at this moment. Intuition is like an inner voice giving
you a strong feeling about what's right, sometimes
subtle enough to be easily disregarded,. Sometimes
it manifests like a fiash of knowledge, or sudden
insight.
Intuitions are things which we "know" immedi-
ately — they are unmediated, non-inferred feelings, a
sense of knowing tied to a feeling or an emotional
draw, an attractive emotional draw or a negative one.
You may feel a strong intuition about something but
there is no guarantee that your hunch is true. Time
will tell. People who are rigidly logical have blocked
 "I Didn't Know" and "I Was Only Doing My Job"
their intuitive skills. Japan is often cited as a culture
that encourages and fosters intuition in workers,
which they think helps advance science and tech-
nology. Also, as people hecome experts in their given
field, they tend to be more in touch with intuition.
''^ 5ee William J. Brennan, Reason, Passion and "The
Progress of the Law" Forty-Second Annual Benjamin
N. Cardozo Lecture delivered at the Association of
the Bar of the City of New York (Sept. 14, 1987),
reprinted in 10 Cardozo L. Rev. 3, 22 (1988).
' " Id. at 22-23.
' " See Reed Abelson, Enron's Board Quickly Ratified
Far-Reaching Management Moves, supra note 24.
'^* See^ e.g., Paramount Communications v. Time,
Inc., 571 A.2d 1140, 1150 (Del. 1989) ("[A] board
of directors, while always required to act in an
informed manner, is not under any per se duty to
maximize shareholder value in the short term. . . .").
' " Fiduciary duties are governed by state law in this
country, and the majority of states describe fiduciary
duties of directors in this manner. See Lawrence E.
Mitchell, Theoretical and Practical Framework for Enforcing 583
Corporate Constituency Statutes, 70 Tex. L. Rev. 579,
630-640 (1992).
""^ See. e.g., Frank Easterbrook K. and Daniel Fischel,
The Economic Structure of Corporate Law (1991);
see also Andrei Shleifer and Robert W. Vishny, A
Survey of Corporate Covernance, 52 J. Fin. 737, 738,
740-748 (1997).
'*' See Steven M.H. Wallman, Understanding the
Purpose of the Corporation, 24 J. Corp. L. 807 (Summ.
1999).
"^^ See id. at 813.
' " See.-rf.
'*'' James Willard Hurst, The Legitimacy of the
Business Corporation in the Law of the United States,
1780-1970, 15-17 (1970).
' " Id. at 15.
' ' ' See, e.g., cases cited in John C. Coates IV, State
Takeover Statutes and Corporate Theory: The Revival of
an Old Debate, 64 N.Y.U. L. Rev. 806, 834 n. 175
(1989).
299
' " See Dennis R. Fox, supra note 144 at 344.
""^ Steven M.H. Wallman, The Proper Interpretation
of Corporate Constituency Statutes and Formulation of
Director Duties, 21 Stetson L. Rev. 1, 170-171 (1991).
"'^ See A. A. Berle, Corporate Powers as Powers in
Trust, 44 Harv. L. Rev. 1049 (1931); A. A. Berle, For
Whom Corporate Managers Are Trustees: A Note, 45
Harv. L. Rev. 1365 (1932); and E. Merrick Dodd, Jr.,
For Whom Are Corporate Managers Trustees?, 45 Harv.
L. Rev. 1145 (1932).
™ See id. at 44 Harv. L. Rev. 1049, 1049.
"^ See E. Merrick Dodd, Jr. supra note 169 at 1148.
*^2 See id. at 1148.
™ Id. at 1153-1154.
"'' See, e.g., Bangor Punta Operations, Inc. v. Bangor
& A.R.R., 417 U.S. 703 (1974) in which a majority
of the Court seemed to accept the proposition that
directors are fiduciaries only for those possessing a
"tangible interest in the corporation," not the public
at large. See id. at 716 n. 13.
*" See A.P Smith Mfg. Co. v. Barlow, 98 A.2d 581,
(N.J. 1953) (tracing the general shift in the per-
spective on corporate activity from a public service
focus, which dated from at least 1702, to a more
profit-based orientation in the 1930s).
"^ See Lawrence E. Mitchell, supra note 52 at
534-535.
"^ See Steven M.H. Wallman, supra note 161 at 810.
''^ See, e.g.. Conn. Gen. Stat. Ann. §33-313(e)
(West Supp. 1994); Fla. Stat. Ann. §607.0830(3)
(West 1993); La. Rev. Stat. Ann. §12:92(g) (West
1994); Ohio Rev. Code Ann. §1701.59(D) (Baldwin
1993); R.I. Gen. Laws §7-5.2-8 (1992).
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