(Contemporary Studies in Corporate Law) Anna Donovan - Reconceptualising Corporate Compliance - Responsibility, Freedom and The Law-Hart Publishing (2021)

RECONCEPTUALISING CORPORATE COMPLIANCE
This book offers a comprehensive examination of the issues surrounding

corporate compliance.
Why is it that technical compliance is so widely rejected by society yet so
widely adopted and defended by corporate actors? Why is it that otherwise law-
abiding citizens act contrary to their personal values when making compliance
decisions within a corporation?
In this book, Dr Donovan answers these questions and provides a persuasive
argument for the legitimate role of spirited compliance within a market econ-
omy. In doing so, she employs the lens of classical liberal ideology, challenging
the widespread view that technical compliance is simply ‘capitalism’.
In an examination that has relevance beyond the compliance arena, the
author also explores why and how corporate architecture contributes to the
often atypical decisions that individuals make when acting within a corporate
environment. The book draws upon behavioural psychology and offers insights
into how the often-elusive goal of corporate behavioural change can be achieved.
CONTEMPORARY STUDIES IN CORPORATE LAW
Corporate law scholarship has a relatively recent history despite the fact that
corporations have existed and been subject to legal regulation for three c enturies.
The modern flourishing of corporate law scholarship has been matched by
some broadening of the field of study to embrace insolvency, corporate finance,
corporate governance and regulation of the financial markets. At the same time
the intersection between other branches of law such as, for example, labour,
contract, criminal law, competition, and intellectual property law and the
introduction of new inter-disciplinary methodologies affords new possibilities
for studying the corporation. This series seeks to foster intellectually diverse
approaches to thinking about the law and its role, scope and effectiveness in
the context of corporate activity. In so doing the series aims to publish works of
high intellectual content and theoretical rigour.
Titles in this series
Working Within Two Kinds of Capitalism: Corporate Governance
and Employee Stakeholding: US and EC Perspectives
Irene Lynch Fannon
Contracting with Companies
Andrew Griffiths
The Jurisprudence of the Takeover Panel
Tunde Ogowewo
The Law and Economics of Takeovers: An Acquirer’s Perspective
Athanasios Kouloridas
The Foundations and Anatomy of Shareholder Activism
Iris H-Y Chiu
Corporate Governance in the Shadow of the State
Marc T Moore
Reconceptualising
Corporate Compliance
Responsibility, Freedom
and the Law
Anna Donovan
HART PUBLISHING
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Names: Donovan, Anna H. L. P., author.
Title: Reconceptualising corporate compliance : responsibility, freedom and the law / Anna Donovan.
Description: Oxford, UK ; New York, NY : Hart Publishing, an imprint of Bloomsbury Publishing, 2021. |
Series: Contemporary studies in corporate law | Includes bibliographical references and index.
Identifiers: LCCN 2020051774 (print) | LCCN 2020051775 (ebook) |
ISBN 9781509918744 (hardback) | ISBN 9781509946662 (paperback) |
ISBN 9781509918751 (pdf) | ISBN 9781509918768 (Epub)
Subjects: LCSH: Corporate governance—Law and legislation. | Social responsibility
of business—Law and legislation. | Corporations—Corrupt practices. | Ethics and
compliance officers. | Business ethics.
Classification: LCC K1318 .D66 2021 (print) | LCC K1318 (ebook) | DDC 346/.0664—dc23
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For Jonathan,
In memory of Elsie Pope
vi
Acknowledgements
I
n writing this book I have been incredibly grateful for the generosity of
kindness, wisdom and time that many people having given to me, and whose
acknowledgement here fails to do justice to the debt of gratitude that I owe
to them. However, to the extent it might go some way to expressing my most
sincere thanks and appreciation there are several people to whom acknowledge-
ment is very much due.
This book is the product of research undertaken with sponsorship from
the UCL Centre for Ethics and Law and the UCL Impact Fund, whose support
was invaluable and very much appreciated. I would also like to thank the UCL
Faculty of Laws for the grant of a Research Impact and Innovation Fund award
to enable my archival research at the Hoover Institution at Stanford University,
a trip that was instrumental to the production of several chapters of the book.
Also, no small amount of thanks must be extended to Rosie Mearns and Roberta
Bassi for their help and patience in bringing this work to print.
Throughout this research, I have been truly touched by the support of my
colleagues both at UCL and further afield, who are too numerous to mention
individually. However, the encouragement and counsel of Professor Dame Hazel
Genn and Professor Cheryl Thomas has been particularly invaluable. My thanks
also to Dr Prince Saprai for his consideration of earlier drafts. I am especially
indebted to Professor Charlotte Villiers and Chris Riley for their encouragement
and insightful feedback, which has improved this work immeasurably (although
all errors do of course remain my own).
It is without exaggeration to say that this work simply would not have been
possible without the support of Professor Marc Moore. I owe Marc an abso-
lutely incalculable debt of thanks, not simply for his guidance and expertise
but for being an incredible mentor and showing me the type of academic that
I would one day aspire to be. Marc has been a wonderful friend and colleague
throughout my move to academia and I remain forever grateful. It is perhaps
also at this juncture that I should make clear that any such acknowledgements
do not suggest political endorsement of some of the chapters that follow.
I have been fortunate throughout my career to meet several people who have
shown me support that is above and beyond that expected. In this regard, Profes-
sor John Lowry has been someone who has provided not only mentorship but
shown me incredible amounts of kindness. John has been a true inspiration and
I am not only sincerely thankful for his guidance but consider it a privilege to
call him a colleague.
viii Acknowledgements
It is becoming increasingly apparent that, far from being a solitary affair,

writing a book is anything but. The support of my friends and family has been
unwavering. Sadie, I feel so blessed that you were behind the door. I simply don’t
have the words for how important our friendship is and how excited I am to see
Bert grow up. Mayyah, thank you for keeping me strong (and sane), for being a
constant source of encouragement and such a wonderful friend. To the strong
team, too many to mention individually, thank you for being an amazing family
that I feel blessed to be a part of. Candice, I feel so lucky we met and truly
treasure our friendship. Erika and Jerry, what can I say? You are a constant
source of inspiration and I am so happy that our (international) paths crossed.
Finally, Steve, thank you for helping me find my words.
As with all my endeavours to date, I want to thank my parents for their
support (in more ways than one!) in my pursuit of this book. I also wanted to
thank my brother, Edward, whose commitment to the truth is more of an inspi-
ration to me than I suspect he knows. To Freya, my sidekick for life, I cannot
wait for the adventures we have yet to share.
It is with great sadness that in endeavours as long as these, not everyone is
able to share in their completion. As such, I write this in the memory of Elsie
Pope whose resolute belief in education and to doing the right thing will forever
remain guiding principles in my life.
Finally, but by no means least, this work simply would not have happened
without the love of my husband Jonathan, who has shown nothing but unwaver-
ing support in all that I do. For your patience, understanding and belief in me,
I thank you and dedicate this work to you.
Table of Contents
Acknowledgements��vii
Table of Cases�� xiii
PART I
CONTEXT
1. Capitalism’s Compliance Crisis��3
I. Why Narrative Matters��5
II. The Consequences of Creativity: What Harm is it Really?��8
III. Recontextualising Compliance: From Subject to System��10
IV. Scope of the Book��11
V. Structure of the Book��13
VI. Conclusion��17
2. Creative Compliance in Practice��19

I. The Rise and Rise of Creative Compliance��20
II. Loopholes in the Law: A Focus on Tax Avoidance��25
A. Towards a Judicial Anti-Avoidance Doctrine?��25
B. The 2012 Tax Scandals��30
III. The (Current) Limitations of Legislation��33
IV. Conclusion��39
3. Constructing Compliance: Freedom to Choose?��41

I. The Social Construction of (Creative) Compliance��43
A. Social Constructionism: Driving Divergent Definitions��43
B. Intra-Group Convergence: Habitualisation
and Isomorphism��46
C. The Implications of Compliance as a Social Construct��48
II. The Meaning and Influence of Norms��49
A. Defining ‘Norms’��50
B. The Behavioural Impact of Norms��51
C. The Interaction between Descriptive and Injunctive Norms��54
III. The Homogeneity of Corporate Norms��57
A. The Expressive Function of Law��57
B. The Dominance of the Shareholder Wealth Maximisation
Norm��59
x Table of Contents
IV. The Function of Norms: Free to Choose?��62

A. Norms and Freedom of Choice: Taxes and Subsidies��62
B. Influencing Norms to Influence Behaviour��63
V. Conclusion��64
4. Motivating Compliance: Freedom to Act?��65

I. Deterrence-Based Compliance: Motivating ‘Amoral Calculators’��67
A. It’s Called Capitalism … Again��68
B. Explanatory Limitations of a Deterrence-Based Approach��69
C. Regulatory Relationships and Practical Challenges��71
D. Retaining a Role for Deterrence?��73
II. Legitimacy-Based Compliance��74
A. Legitimacy-Based Compliance��74
B. Procedural Justice: The Legitimacy of the Originating
Authority��76
C. Procedural Justice: The Legitimate Exercise of Authority��78
D. The Duality of Authority��82
III. Legitimising Creative Compliance: Dissonance Reduction
and Over-Rationalisation��83
A. The Duality of Norms��84
B. The Salience of Corporate Norms��85
C. Cognitive Dissonance and Over-Rationalisation��89
IV. The Compliance Degeneration Cycle��92
A. Stage One: Initial Drivers of Creative Compliance��92
B. Stage Two: Undermining Legitimacy��93
C. Stage Three: Illegitimacy and Creative Compliance��94
V. Conclusion��95
PART II
THE CASE FOR REFORM
5. Compliance, Predictability and the Market Order��99
I. (Mis)Conceptions of the ‘Liberty Tradition’�� 102
A. Perceptions of Self-Interest and Illegitimate Government
Interference�� 103
B. The Emergence of ‘Everyday’ Liberalism�� 105
II. Defining (and Constraining) Freedom within the Classical
Tradition�� 106
A. Freedom of the Individual�� 107
B. Limited State Interference�� 109
C. Dispelling the Paradox: Individualism and Cooperation�� 111
Table of Contents xi
III. In Defence of the Market Order�� 113

A. The Market as a Conduit of Knowledge�� 113
B. Conveying Knowledge Through the Price Mechanism�� 115
C. Polycentric Systems and Market Order�� 116
IV. Complex Systems and Spontaneous Order�� 118
A. The Architecture of Order�� 119
B. Predictability, Order and the Rule of Law�� 121
V. Conclusion�� 122
6. The (Ostensible) Equality Paradox: Privilege and Obligation�� 124

I. Defining ‘Equality’ before the Law�� 126
A. The Rule of Law: Precepts and Conceptions�� 126
B. Equality of Law, not Outcome�� 129
C. The Rule of Law: Between Thick and Thin Conceptions?�� 132
II. Constraining ‘Lawful’ Conduct�� 134
A. Equality as a Meta-Legal Principle�� 135
B. A Positive Obligation to Maintain Equality before
the Law?�� 137
III. Inequality and Legal Privilege�� 139
IV. Conclusion�� 142
PART III
BARRIERS TO REFORM
7. A Person without Personality: The Fiduciary Ladder of Corporate
‘Personhood’�� 147
I. Separate Personality, Limited Liability and the Reification
of the Corporation�� 149
II. Redefining the Beneficiary: From ‘Company’ to ‘Market’�� 152
A. Shareholder Wealth Maximisation as a Proxy for Rentier
Shareholders�� 153
B. Distorting Fiduciary Duties; the Changing Status of the
‘Company’ Beneficiary�� 156
III. The Corporate Fiduciary Ladder�� 158
A. The Structure of the Fiduciary Ladder�� 158
B. The Psychological Consequences of the Fiduciary Ladder�� 162
C. Responding to the Fiduciary Ladder�� 166
IV. Contrasting Other Actors�� 167
V. Conclusion�� 169
xii Table of Contents
PART IV
REFORM
8. It is Called Capitalism: Towards a New Market Integrity�� 173
I. Responsibility, Freedom and the Law�� 175
A. Market Order, Integrity and Freedom�� 175
B. Freedom, Choice and Responsibility�� 177
II. Radical Integrity�� 178
A. Towards a More Radical Integrity�� 179
B. A Roadmap for Reform�� 180
III. Conclusion�� 182
Bibliography�� 184
Index�� 195
Table of Cases
Aberdeen Railway Co v Blaikie Bros (1954) 1 Macq 461�� 160
Adams v Cape Industries Plc [1990] Ch 433�� 149
Bligh v Brent (1837) 2 Y. & C. Ex 268�� 152
Barclays Mercantile Business Finance Ltd v Mawson [2005] 1 AC 684��29
Borland’s Trustee v Steel Brothers & Co Limited [1901] 1 Ch 279�� 152
Broderip v Salomon [1895] 2 Ch 323��21
Buckeridge v Ingram (1795) 2 Ves. Jun 652�� 152
Canadian Eagle Oil Co. Ltd v R. [1946] AC 119��25
Cape Brandy Syndicate v I. R. C. [1921] 1 KB 64��25
Carlen v Drury (1812) 1 Ves & B 154�� 157
Dodge v Ford Motor Co 170 NW 668�� 147
Dovey and the Metropolitan Bank (of England and Wales)
v John Cory [1901] AC 477�� 161
Ex parte Belchier (1754) 27 ER 144�� 161
Extrasure Travel Insurances Ltd v Scattergood [2003] 1 BCLC 598��60
F. G. (Films) Ltd, Re [1952] 1 WLR 483�� 151
Furniss (Inspector of Taxes) v Dawson [1984] AC 474�� 26, 28
Gaiman v National Association for Mental Health [1971] Ch 317��148, 157
Geys v Société Générale, London Branch [2012] UKSC 63�� 159
Gilford Motor Co Ltd v Horne [1933] Ch 935�� 151
Greenhalgh v Arderne Cinemas Ltd and Others [1951] Ch 286��148, 157
Helvering v Gregory 293 U.S. 465 (1935)��7
Inland Revenue Commissioners v Barclays Bank [1951] AC 421��25
Inland Revenue Commissioners v Burmah Oil Co. Ltd
(1982) SC (HL) 114�� 7, 26
Inland Revenue Commissioners v McGuckian [1997] 1 WLR 991�� 26, 28
Inland Revenue Commissioners v Willoughby [1997] 1 WLR 1071��18
Jones v Lipman [1962] 1 WLR 832�� 151
Latilla v Inland Revenue Commissioners [1943] AC 377��26
Levene v Inland Revenue Commissioners [1928] AC 217��26
Lord Howard de Walden v Inland Revenue Commissioners
[1942] 1 KB 389��26
MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311��28
Owners of Cargo Laden on Board the Albacruz v Owners
of the Albazero (The Albazero) [1977] AC 744�� 149
Partington v Attorney General (1869) LR 4 HL 100��25
People’s Department Stores v Wise [2004] SCC 68�� 157
Percival v Wright [1902] 2 Ch 421 �� 157
xiv Table of Cases
R (on the application of Cart) v The Upper Tribunal [2011] UKSC 28,
[2011] 3 WLR 107�� 124
Railway Express Agency Inc v New York 336 US 106,
112–113 (1949)��122, 140
Regentcrest plc v Cohen [2001] BCC 494�� 157
RFC 2012 Plc (in liquidation) v Advocate General for Scotland
[2017] UKSC 45��29
Salomon v A. Salomon & Co Ltd [1897] AC 22�� 21, 149–150, 152
Smith & Fawcett, Re [1942] Ch 304�� 157
Smith, Stone & Knight Ltd v Birmingham Corporation
[1939] 4 All ER 116�� 151
The Commissioners of Inland Revenue v His Grace the Duke
of Westminster [1936] AC 1�� 21–22, 123
Trustor AB v Smallbone & Others (No 2) [2001] 2 BCLC 436�� 151
W. T. Ramsay Ltd v Inland Revenue Commissioners, Eilbeck
(Inspector of Taxes) v Rawling [1982] AC 300��7, 26–27
Weeks v Sibley (1920) 269 Fed. 155�� 100
Woolfson v Strathclyde DC (1978) 38 P & CR 521�� 151
Part I
Context
2
1
Capitalism’s Compliance Crisis
The diagnosis of some asserted social ill and the prescription of the remedy are
undertaken offhand by the first comer, and without reflecting that the diagnosis of a
social disease is many times harder than that of a disease in an individual, and that
to prescribe for a society is to prescribe for an organism which is immortal. To err in
prescribing for a man is at worst to kill him; to err in prescribing for a society is to set
in operation injurious forces which extend, ramify, and multiply their effects in ever
new combinations throughout an indefinite future.1
William Graham Sumner
‘I
t’s called capitalism.’2 This is how Eric Schmidt, the then Chairman
of Google defended his company’s decision to redirect nearly $9.8 billon
of revenue from overseas subsidiaries to Bermuda, effectively halving its
overall tax rate.3 His comments were made in response to the UK public accounts
committee (‘PAC’) inquiry, which had been convened to investigate the pervasive
practice of corporate ‘creative compliance,’4 that is, compliance with the letter of
the law in defeat of its spirit. As the sheer scale of these practices emerged, there
were widespread calls for reform and global condemnation of the fact that corpo-
rations could undermine the intention of regulation in this way. Reflecting public
sentiment, Margaret Hodge (chair of the PAC inquiry) told Matt Brittin5 that
Google’s approach to tax compliance was ‘devious, calculating and unethical’.6
1 WG Sumner, ‘Sociology’ in RC Bannister (ed) On Liberty, Society and Politics The Essential
Essays of William Graham Sumner, (Liberty Fund Inc, 1992), 186.

2 ‘Google’s Tax Avoidance is Called “Capitalism,” Says Chairman Eric Schmidt,’ The Telegraph
(12 December 2012).

3 Jesse Drucker, ‘Google Revenues Sheltered in No-Tax Bermuda Soar to $10 Billion,’ Bloomberg
(10 December 2012) https://www.bloomberg.com/news/articles/2012-12-10/google-revenues-sheltered-

in-no-tax-bermuda-soar-to-10-billion (accessed 30 January 2021).
4 For a broader discussion of creative compliance see D McBarnet’s work in this area, including:
D McBarnet, ‘After Enron Will “Whiter Than White Collar Crime” Still Wash?’ (2006) 46(6) British
Journal of Criminology 1091; D McBarnet, ‘After Enron: Corporate Governance, Creative Compli-
ance and the Uses of Corporate Social Responsibility,’ in J O’Brien (ed) Governing the Corporation:
Regulation and Corporate Governance in an Age of Scandal and Global Markets (John Wiley &
Sons, 2005) 205–222; D McBarnet and C Whelan, ‘The Elusive Spirit of the Law: Formalism and the
Struggle for Legal Control’ (1991) 54 Modern Law Review 849.
5 Google’s then Vice President for Sales and Operations in Northern and Central Europe.
6 O Wright, ‘Google: MPs confront search giant over “devious” attempt to avoid paying UK
tax,’ Independent (17 May 2013) www.independent.co.uk/news/uk/politics/hmrc-are-being-

bamboozled-by-google-mps-confront-search-giant-over-devious-attempt-to-avoid-paying-8618695.
html (accessed 8 August 2020).
4 Capitalism’s Compliance Crisis
She went on to say, referring to Google’s unofficial motto, that ‘you are a
company that says you “do no evil.” Well I think that you do do evil in that you
use smoke and mirrors to avoid paying tax.’7
In the face of such widespread criticism, the company was unyielding. Both
Brittin and Schmidt were unequivocal in their positions that the structures in
question were implemented entirely in accordance with the strict letter of the
law and therefore beyond censure. Put another way, if the law allowed for the use
of ‘smoke and mirrors’ then the company was entitled to use them. Indeed, not
only were these structures legally permissible, Schmidt suggested (alluding to
the shareholder wealth maximising paradigm that underpins much of company
law) that ‘there is probably some law against’8 the company failing to adopt a
strategy that reduced their tax liability as much as possible.
Whilst Schmidt’s defence of creative compliance might be intuitively chal-
lenging, particularly when Google’s own code of conduct encouraged its
employees to comply with the code in ‘both its spirit and letter’,9 it does help
to explain why the question of creative compliance has proven to be so difficult
to resolve. Google was not the first company to adopt these compliance strate-
gies and nor will it be the last. Indeed, Google’s tax structures came to light
alongside those of Amazon and Starbucks and, as we will see in Chapter 2,
the creative compliance crisis was foreshadowed in 1998 (somewhat propheti-
cally three years before Enron’s collapse). Rather, what the exchanges between
Google and the PAC demonstrate is how deeply held the beliefs that define and
legitimise our compliance behaviour are. To the PAC, these structures were met
with clear disdain. However, for Schmidt (and others before him) aggressive tax
structures were conceived and rationalised as something to be proud of. These
structures did not reflect a breach of a corporation’s civic duty and nor were they
actions that undermined trust in the corporate community. Rather, they were
indicators of capitalistic ingenuity that furthered the corporate objective.
But was Schmidt right? To many, his view that aggressive tax structures
are archetypal capitalistic behaviour was astute. The free market economy is
often characterised as mandating profit maximising behaviour to the exclusion
of broader notions of equity and fairness. As Milton Friedman’s often cited
New York Times article claimed, the ‘social responsibility of business is to
increase its profits’.10 But does capitalism really mandate compliance decisions
7 ibid – note that the motto of ‘don’t be evil’ enshrined in the company’s code of conduct was
amended in or about early 2018 as part of the Alphabet reorganisation to ‘do the right thing.’ Of
note is that Google’s own code of conduct asks that employees comply with the code ‘both its spirit
and letter’. The ‘don’t be evil’ version of the code of conduct is available at https://web.archive.
org/web/20180421105327/https://abc.xyz/investor/other/google-code-of-conduct.html (accessed
26 February 2020).
8 N Kumar and O Wright, ‘Google boss: I’m very proud of our tax avoidance scheme,’ Independent
(13 December 2012) www.independent.co.uk/news/uk/home-news/google-boss-im-very-proud-of-

our-tax-avoidance-scheme-8411974.html (accessed 8 August 2020).
9 Google code of conduct (n 7).
10 M Friedman, ‘The Social Responsibility of Business is to Increase its Profits,’ New York Times
Magazine (13 September 1970), 1.

Why Narrative Matters 5
that are so egregious to so many? If, for all its flaws, a free market economy ‘faces
no serious contender as an approach to organizing large-scale economies’11
does it advocate behaviour that is truly as terrible as popular opinion would
have us believe? Alternatively, as this book suggests, does the commonly held
understanding of ‘capitalism’ espoused by Eric Schmidt (and shared by many)
reflect a fundamental misconception of the principles of our market economy?
A misconception that helps to explain the frequent conscription of Friedman’s
claim which, if read in full, actually makes clear that the pursuit of profits must
be done ‘while conforming to the basic rules of the society, both those embodied
in law and those embodied in ethical custom’.12 Is there in fact not only a place,
but a need, for responsible compliance within a capitalist market economy?
I. WHY NARRATIVE MATTERS
An immediate, and entirely valid, question is whether posturing as to the norms

of the market and wider corporate framework really matters. Does it make a
difference that Eric Schmidt believed Google’s tax strategy aligned with his
perception of market ideology? Moreover, no one is suggesting that Google
executives undertook a Hayekian analysis of classical liberal principles before
deciding to implement a structure that allegedly manufactured losses across the
group. So why is this understanding of market norms (broadly defined) impor-
tant and, if creative compliance is so offensive to public policy, why can’t we
simply mandate that corporations comply with parliamentary intent?
Narrative matters as compliance is not a term of art but a complex and
oftentimes multifaceted social construct.13 That is, whilst the obligation to
comply with the law is a personal one, our interpretation of the scope of that
obligation is nonetheless shaped by the political, social and economic environ-
ments that we operate within.14 Over time, a set of common beliefs as to what is
right or wrong, legitimate or otherwise, are shared and reinforced across those
environments in such a way that what started as a subjective interpretation
becomes embedded and perceived, within those groups, as an objective truth.15
11 EA Posner and RG Weyl, Radical Markets, Uprooting Capitalism and Democracy for a Just
Society (Princeton University Press, 2018), 19.

12 Friedman ‘The Social Responsibility’ (n 10).
13 On which see: C Parker and VL Nielsen, ‘Introduction’ in C Parker and VL Nielsen (eds)
Explaining Compliance Business Responses to Regulation (Edward Elgar, 2011), 6–7.

14 Edelman et al describe compliance as a ‘social and political process that evolves over time’ influ-
enced by the political climate that a subject operates within and their interpretation of the law.
In this regard, a corporation’s interpretation of compliance is subject to both ‘internal and envi-
ronmental normative pressures’. See L Edelman, S Petterson, E Chambliss and H Erlanger, ‘Legal
Ambiguity and the Politics of Compliance: Affirmative Action Officers’ Dilemma,’ (1991) 13(1) Law
and Policy 73, 74. As to the relevance of the socio-political environment, see BM Hutter, ‘Negotiat-
ing Social, Economic and Political Environments: Compliance with Regulation within and beyond
the State,’ in Parker and Nielsen Explaining Compliance (n 13) 305.
15 On this social constructionism more generally, see PL Berger and T Luckmann, The Social
Construction of Reality, A Treatise in the Sociology of Knowledge, (Anchor Books, 1966).

Truths that influence our behaviour in often subtle and subconscious ways.
Of course, different communities share different histories and the path depend-
ency of ‘compliance’ in one environment can be very different to that of another,
rendering the definition of ‘compliance’ a highly contextual one. As a conse-
quence, we can arrive at a situation where two people, sitting in a room together,
can conclude with an equal and absolute conviction that a given legal structure
is either evil or ingenious.
For civil society, this means that we do not necessarily have a commonly
agreed upon definition of the compliance standards that we expect from our
corporate citizens. In general terms there is broad, albeit not absolute, consen-
sus that corporations should at least comply with the strict letter of the law.16
In contrast, where a difference of opinion (or, as a minimum, greater uncer-
tainty) arises is when we look to constrain creative compliance. This divergence
is not surprising. By its very nature, creative compliance is technically lawful
behaviour that raises the seemingly paradoxical problem of seeking to prohibit
‘legal’ compliance.17 Nevertheless, the response to the 2012 scandals demon-
strated that, for large parts of the global community, creative compliance was
intuitively an illegitimate course of action to pursue (Chapters 5 and 6 offer an
explanation for this perspective and, in so doing, a normative justification for
reform). However, without changing the norms of the corporate environment,
creative compliance risks continuing to be, in the minds of corporates at least, a
legitimate (and for reasons discussed in Chapters 3 and 4, legitimised) course of
conduct. One that remains resolutely resistant to reform.
Against this, we start to see that the power of environmental norms is that
they have three important implications for our understanding of, and response
to, creative compliance (each of which are considered in more detail throughout
the book). First, norms derived from the dominant political philosophy of a
group directly inform the perceived legitimacy of the authority of the state (or
others) to constrain individual (including corporate) action. As we have already
seen, for the corporate community this is a belief that tends to be heavily influ-
enced by a liberal market ideology, which is commonly interpreted to promote
a deregulatory approach to market order. The significance of this, as Chapter 4
explores, is that it is the perceived legitimacy (or otherwise) of regulatory inter-
vention (and the corresponding right of enforcement authorities to exercise
coercive control) that is a fundamental determinant of compliance behaviour.
16 This book accepts the proposition that there is an obligation to obey the law (itself a significant
normative enquiry that is outside of the scope of this work) and is instead concerned with the ques-
tion as to the extent of that obligation. The literature concerning legal obedience more generally is
vast. For arguments against a general obligation see J Raz, The Authority of Law 2nd edn (Oxford
University Press, 2009), 233; and MBE Smith, ‘Is There a Prima Facie Obligation to Obey the Law?’
(1972–3) 82 Yale Law Journal 950. For literature in support see J Rawls, ‘Legal Obligation and the
Duty of Fair Play,’ in S Hook (ed), Law and Philosophy (New York University Press, 1968), 3.
17 See ch 6 for an argument as to why spirited compliance is in fact a meta-legal principle of society.
Why Narrative Matters 7
Second, by recognising compliance as a social construct that is shaped

by environmental norms (rather than an absolute standard), we can start to
understand the limitations of reform efforts to date. Traditionally, compliance
scandals are met with a targeted regulatory response. Following Enron and the
related accounting scandals in 2001, the US introduced the Sarbanes-Oxley
Act 2002, whilst the UK responded to the PAC tax inquiry with the General
Anti-Abuse Rule (‘GAAR’). However, as history has demonstrated, the problem
of creative compliance persists and it has become increasingly clear that the
ongoing challenge is not the lack of regulation, but rather its effectiveness.18
The reasons for this emerge when we explore the causes of creative compliance,
which are not the absence of regulation but how corporations interpret their
obligation towards that regulation.19 Understood in this way, the intractability
of the issue becomes apparent as it is almost a contradiction in terms to discuss
regulating what is, in effect, meta-regulatory behaviour. Rather, what we need
to be addressing is how corporations define their legal obligations, including
when faced with the discretion and gaps that will inevitably be left by any form
of regulatory design. That is, how they define what ‘compliance’ means both in
the presence and absence of bright line rules.
This brings us to the final reason why understanding the interplay between
narrative (including the norms that it embodies) and compliance is so important.
It provides the foundation that allows us to appreciate the extra-legal mechanisms
that constrain human behaviour and help us to understand (in part) why these do
18 Chapter 2 considers the limited success (and unintended consequences) of earlier regulatory
intervention, including the Sarbanes-Oxley Act 2002. UK tax legislation is a pertinent example of
the development of highly complex, piecemeal and substantial tax codes developed in response to
each new avoidance scheme, from manufactured dividends to transfer pricing. This limited success
in controlling such behaviour extends to common law decisions such as W. T. Ramsay Ltd v Inland
Revenue Commissioners, Eilbeck (Inspector of Taxes) v Rawling [1982] AC 300 and Inland Revenue
Commissioners v Burmah Oil Co. Ltd (1982) SC (HL) 114 (together known as the ‘Ramsay prin-
ciple’). The scope of the Ramsay principle is considered in ch 2. However, at this juncture it is
pertinent to note that even after this judicial attempt to curtail abusive tax structures, aggressive
(and, arguably, artificial) tax planning continued. The rejection of tax avoidance as an end to a
transaction in itself is also reflected in American jurisprudence (see Helvering v Gregory 293 U.S. 465
(1935), concerning the dividend in specie of corporate assets being redefined as a ‘reorganisation’).
As with the Ramsay principle, this decision did not nevertheless stop aggressive tax structuring in
the US.
19 This is particularly the case with the use of new governance techniques, which necessarily
impose ambiguous obligations. For example, an obligation to avoid ‘abusive’ structures (s 206(1),
Finance Act 2013). Whilst unavoidable (as by its very nature creative compliance ‘thrives’ on bright
line, command and control style, rules) this ambiguity can lead to organisations implementing
‘symbolic structures’ that do not meaningfully address the regulation’s mischief. As such, broader
cultural change is needed to redefine compliance rather than seeking to introduce specific
regulation to address individual transgressions. As to the relationship between creative compli-
ance and command and control style legislation see D McBarnet, ‘Financial Engineering or Legal
Engineering? Legal Work, Legal Integrity and the Banking Crisis,’ in I MacNeil and J O’Brien (eds)
The Future of Financial Regulation (Hart Publishing, 2010), 79; as to the relationship between ambi-
guity, compliance and symbolic structures see L Edelman, ‘Legal Ambiguity and Symbolic Structures:
Organizational Mediation of Civil Rights Law,’ (1992) 97(6) American Journal of Sociology 1531.
not always apply in the same way in a corporate setting. Personal ethics, together
with feelings of judgment and shame often coalesce to constrain individual deci-
sion making. For example, as a general rule individuals refrain from violent acts
not because it is illegal but because we consider it wrong to do so. We maintain
the appearance of our properties (at personal expense) in part because of the
judgment of others. In contrast, corporations engage in aggressive tax structur-
ing because they can do so not just with legal, but also, social ‘impunity’.20 Yet,
this cannot be explained simply by reference to the fact that the corporation has
‘no soul to damn’21 and is therefore immune to the pressure of social sanctions.
As artificial legal entities, corporations are necessarily governed by human actors
raising the question (explored in Chapters 4 and 7) as to why the personal ethics
of the individuals acting on a corporation’s behalf do not operate to supersede
those attributed to the corporation? This reflects a final, but critical, theme of
this book. Namely, how artificial rules and structures (such as the corporation)
can have a surprisingly powerful impact on the seemingly autonomous actions
of individuals.
Our reflections on this final point have fundamental and far reaching conse-
quences for our current understanding of corporate law and, indeed, our
expectations of it. If figuratively stepping into the corporate environment has
the potential to reshape our decision-making framework as individuals, to risk
engendering a way of thinking (or, at least, acting) that does not align with our
own moral compass, then what consequences should flow from this? To what
extent should corporations (and corporate law) be responsible for the impact
that the architecture of the firm can have on individual choice?
II. THE CONSEQUENCES OF CREATIVITY: WHAT HARM IS IT REALLY?
A second, and equally valid, question is whether and to what extent (if at all), we
should be concerned with constraining technically legal behaviour. Returning to
our earlier example, if the law permits the use of complex tax structures why
are they the subject of such consternation (it being quite a separate question,
considered in Chapter 6, as to whether it is legitimate or even possible to restrain
technically legal behaviour).
From a financial perspective, creative compliance clearly has significant
economic ramifications. It reduces the availability of public funds, either shift-
ing the burden onto third parties or simply restricting a jurisdiction’s ability to
provide public services (including, somewhat ironically, the enforcement of tax
transgressions). In the year that the PAC investigated the tax scandals of Google,
Starbucks and Amazon, the UK tax gap, that is the difference between the tax
20 McBarnet,‘After Enron’ (n 4), 1091.

21 J
Coffee, ‘“No Soul to Damn: no Body to Kick”: An Unscandalized Inquiry into the Problem of
Corporate Punishment,” (1980) 79 Michigan Law Review 386.
The Consequences of Creativity: What Harm is it Really? 9
due and the tax collected, was estimated at £34 billion.22 Within that sum,
£7.6 billion was attributable to creative compliance.23 To put that figure into
context, UCLH (a 72,500 square metre state of the art hospital in the centre
of London) cost £422 million to construct, placing the fiscal impact of creative
compliance at (albeit somewhat crudely) the equivalent to building 15 hospitals
a year.24
However, the impact of creative compliance extends beyond the purely
economic, undermining public trust in important social institutions, including
corporations themselves. As we see throughout this book, corporate compli-
ance is often undertaken by large, economically significant, organisations. It
is these entities (in contrast to natural or smaller corporate citizens) that have
the requisite resources and legal architecture to obtain and implement the
highly technical structures that characterise creative compliance, increasing
the economic divide between corporate and individual citizens. In doing so it
furthers the already significant public scepticism towards not only the corporate
community and market economy (the latter commonly depicted by caricatures
of ‘fat cats’ and allegations of ‘crony capitalism’) but also in a legal system that
is seen to allow this practice to proceed without sanction.25 That is, a practice
that allows corporations to implement technically legal structures that, in some
cases, ‘accomplish the same ends as criminal action’.26
Aligned with this deepening mistrust is a more fundamental concern about
the behaviour that should be reasonably expected from corporate citizens.
In particular, the extent to which spirited compliance is a legitimate compo-
nent of the social contract between citizen and state. Whilst Chapter 6 explores
the question as to whether there is a meta-legal principle that supports calls
for corporate spirited compliance, the point here is a more fundamental one.
Namely, the expectations we have of citizens who avail themselves of the benefits
of society and the harm that it causes when they fail to adhere to their side of
the bargain. Claims that human citizens consent to obey the law as part of a
social contract are subject to persuasive criticism. Can it truly be said that a
human citizen ‘consents’ to the rules of a jurisdiction? However, this critique
loses force when looking at corporate actors, for whom incorporation is very
clearly a conscious and ongoing decision. Not only that, but the jurisdiction of
incorporation is similarly quite deliberate, as we see from the use of inversions
in Chapter 2 or the ‘race to the bottom’ debate characterising the development
22 HM Revenue & Customs, ‘Measuring Tax Gaps 2014 Edition: Tax Gap Estimates for 2012–13,’
16 October 2014.
23 This figure is comprised of the tax gap attributed to ‘tax avoidance,’ which stood at £3.1 billion;
and ‘legal interpretation,’ which stood at £4.5 billion. See HM Revenue & Customs (n 22), 4.
24 Figures taken from: Hospital Management, University College Hospital London (undated)
www.hospitalmanagement.net/projects/uclh/ (accessed 8 August 2020).

25 M Wenzel, ‘Misperceptions of social norms about tax compliance: From theory to intervention,’
(2005) 26 Journal of Economic Psychology 862, 863.

26 McBarnet, ‘After Enron’ (n 4), 1092.
of corporate law more generally. Understood in this way, it is much harder to

argue that corporations do not, on incorporation, agree to be bound by the laws,
including the rule of law, that apply in their jurisdiction of choice.
III. RECONTEXTUALISING COMPLIANCE: FROM SUBJECT TO SYSTEM
Traditionally, creative compliance is tackled as a ‘corporate’ problem or, as a

sub-set of that generalisation, as a ‘tax’ or ‘accounting’ problem. The difficulty
with this subject-centred approach is that it gives rise to both polarised and
largely unassailable perspectives. Arguments for spirited compliance based,
broadly speaking, on the position of corporations as significant economic
actors (with responsibilities to wider stakeholders) are readily met with the
rebuttal that corporations are private actors that, like their non-corporate
counterparts, do not have a responsibility to act beyond the strict requirements
of the law.
Similarly, if we view the challenge as simply a ‘tax’ or ‘accounting’ problem,
the response, as we have seen, has been to introduce more tax or accounting
regulation. Whilst it is, ostensibly, entirely logical that we rely on regulation to
close legislative loopholes, this strategy has limited scope for success. The prob-
lem, as repeated corporate scandals demonstrate, is that we will never be able to
close all the regulatory gaps or to remove all legislative uncertainty. Neverthe-
less, repeated efforts to do so have left us with an ever-growing statute book of
piecemeal and complex regulation, which can actually serve to facilitate further
creative compliance providing (as we see in Chapter 2) a roadmap of bright line
rules that can facilitate, rather than frustrate, technical compliance.
To address these inevitable challenges, this book reframes the issue by
approaching the underlying question of creative compliance not from the
starting point of the corporation as a powerful economic actor with atten-
dant obligations, but by considering the functional role of compliance itself.27
Compliance, like many legal concepts, is not a word in search of a dictionary
definition but one that requires meaning derived from the context in which it is
used.28 To define ‘compliance’ in a literal sense is easy, to understand a corpora-
tion’s obligations in respect thereof is a more complicated enquiry. Therefore,
to answer this substantive question of definition, the book moves away from
the starting point of the corporation as a legal subject, towards the functional
role of compliance within the broader legal and market system. In doing so, it
27 The way a question is asked/interpreted is critical. For example, ‘can I smoke whilst I pray / can
I pray whilst I smoke’, L Katz, Ill-Gotten Gains Evasion, Blackmail, Fraud and Kindred Puzzles of
the Law, (University of Chicago Press, 1987), 106. Indeed, characterisation and categorisation are
critical to properly understanding an issue, its moral standing and the consequences thereof.
28 On which see HLA Hart, Essays in Jurisprudence and Philosophy (Clarendon Paperbacks,
1983), 21.
Scope of the Book 11
focuses on the role that spirited compliance (and the trust that it generates) plays
in the operation of the social orders that are essential to civil society, examining
the market order as a paradigm case.
By understanding the role of compliance in this way, namely by looking at the
instrumental role of compliance and its interplay with existing social systems,
the book is able to offer a conceptual framework in which to examine some of
the more challenging questions that the creative compliance debate gives rise to.
In particular, it enables us to answer concerns as to equality (between corpo-
rate and natural citizens), whilst establishing the ex ante legitimacy of demands
that corporations adopt spirited compliance strategies, even if this does not
maximise short-term profit. One oblique consequence of this systems-based
analysis is that it reduces the reversion to, and reliance on, traditional assump-
tions and potentially false dichotomies that can divide more general corporate
responsibility debates (for example between contractarian and pluralist theo-
ries of the firm). Instead, by looking first to the function of compliance, rather
than the economic influence of the corporation, we can identify an analytical
architecture that helps us to navigate (rather than simply reject) these oftentimes
intractable positions.
This reframing of the question of compliance enables us to not only identify
the causes of creative compliance but, as a consequence, structure alternative
avenues to reform. By recognising compliance as one component of a broader
social system, we are able to explore the issue beyond the point at which the
decision to creatively comply was made. Rather, we can ask what came before?
What caused a director or manager to agree to the structure in question? Why
were they willing to make that decision, particularly if it does not align with
the norms that govern their personal frame of reference? What is it about the
corporate environment, including the corporate architecture itself, that might
segregate corporate actions from a person’s individual values? Does this corpo-
rate decision-making cause an escalation in personal and organisational risk
profiles? Is it desirable or possible to hold some citizens to a different stand-
ard of account than others? It is these questions, and more, that are considered
throughout the book and that make the question of corporate compliance such
a rich and interesting one to explore.
IV. SCOPE OF THE BOOK
In broad terms, this book is concerned with understanding whether there is a

normative case for spirited (or responsible) compliance and, if so, what barriers
exist (legal, normative, cognitive and political) that are preventing corporations
from adopting that standard. It is once we establish this understanding that we
can fully identify how to implement reform and how to ensure that corporations
see regulation not as a tool to exploit but as the requisite ‘rules of the game’ to
adhere to, both in letter and in spirit.
To consider these questions, the book looks primarily at the paradigm case
of creative compliance with tax regulation and the regulatory response thereto.
However, it should be made clear from the outset that the findings of this work
are not limited to this field. A corporation’s compliance strategy has a significant
impact on both its culture and the individuals that act on its behalf (discussed
in Chapter 7), providing insights into broader questions of behavioural change
within organisations. It is an issue that goes to the essence of a corporation’s
relationship with, and obligations to, civil society (as examined in Chapter 6),
whilst the normative basis for reform put forward by this book is predicated on
the broad concepts of integrity, trust, equality and social order, values that are,
of course, relevant to all areas of practice. Rather, the focus (where necessary)
on tax arises, as it is a useful case study for several reasons.
First, this is a recent area of regulatory reform that demonstrates how
governments are attempting to address the problem of creative compliance. This
facilitates an analysis of how, whilst welcome, even these sophisticated regu-
latory responses are still subject to important limitations unless accompanied
by wider normative change. Second, it is an area that engages with the often-
cited claim that the financial gains derived from aggressive tax structures align
with a director’s duty to their shareholders (the suggestion being that spirited
compliance does not). Therefore, it enables an analysis of the interplay between
compliance and our understanding of the perennial question of the scope of a
director’s duty under section 172 of the Companies Act 2006. Finally, the use
of tax as a case study helps to distil the functional role of compliance (and the
normative value of spirited compliance) with a subject matter that is not viewed,
ethically, in universally accepted terms (allowing, to a degree, greater clarity of
analysis). This is in contrast to, for example, bribery where most people intui-
tively feel that to ‘bribe,’ even when technically permissible,29 is a moral wrong
that can legitimately be constrained, potentially obscuring an objective analysis
of corporate compliance standards more generally.
Two final points on scope are necessary at this juncture. First, the research
is concerned with the compliance practices of public limited companies. As
Chapters 2 and 7 explain in more detail, corporations (both public and private)
are uniquely positioned to be able to adopt the tax structures that are the focus
of this book. However, unlike (most) private and closely held organisations, the
public company is more likely to be characterised by the economic (as well as
legal) separation of ownership and control. As Chapter 7 explores, it is this
separation that helps to support a decision to creatively comply due to, inter
alia, the lack of personal responsibility within an organisation for the conse-
quences of creative compliance. It is this complete emancipation that also
serves to minimise the normative sanctions (introduced in Chapter 3) that may
29 For example, certain facilitation payments where the conduct is governed by the Foreign Corrupt
Practices Act 1977 (note that such a payment would be unlawful under the more stringent Bribery
Act 2010).
Structure of the Book 13
therwise apply in response to the implementation of abusive tax structures.30

o
In light of this focus, references to the ‘corporation’ throughout this book are
references to public companies.
Second, it should be made clear from the outset that the problem of creative
compliance is not an exclusively corporate concern (notionally individuals can
and arguably do creatively comply). However, it is a manifestly more complicated
enquiry within the corporate arena and there are a number of factors inherent
within the corporate form that exacerbate (and facilitate) both the practice of
creative compliance and the ability to rationalise it as a legitimate course of
conduct. For the corporate citizen, compliance strategies and standards sit at the
apex of a number of conflicting theoretical positions and ideologies, including
political philosophy, corporate theory and social psychology. Navigating these
conceptual concerns is made more challenging as compliance strategies engage
multiple actors, operating within multiple systems or environments. For exam-
ple, the question of whether to implement a tax avoidance scheme concerns the
norms (and, where applicable, moral values) of each of the market, the corpo-
ration, the applicable legal framework and the individual acting on behalf of
the corporation. At any given time, these norms may conflict, reinforce or, as a
minimum, influence each other, mandating an understanding of each of these
spheres of operation to effectively understand and address the challenges that
arise when seeking to reform corporate compliance practices.
V. STRUCTURE OF THE BOOK
In making the claim that corporations should adopt a responsible (or spirited)
standard of compliance, the book has three aims. First, to establish the norma-
tive basis for spirited compliance and thereby provide the ex ante legitimacy
that is crucial to a sustainable change in corporate behaviour. Second, to under-
stand the impact that the existing corporate law framework has on compliance
decision-making within the company and the barriers that this might present to
reform. Finally, to offer effective solutions to the problems that the book identi-
fies. To achieve these objectives, the book is structured as follows.
30 There are, of course, some exceptions to this claim. For example, some listed corporations retain
an entrepreneurial, rather than managerial, model. In these organisations the company is (or was)
clearly identified with an individual. For example, Apple and Steve Jobs. However, even in these
corporations the threat of personal reputational damage only arises once a breach has occurred and,
as discussed in ch 6, one problem with creative compliance is the difficulty with detection. Moreover,
even after an allegation has been made, such individuals can still rely on the corporate norms that are
discussed in this book to seek to justify (to themselves if not others) their behaviour. For example, Sports
Direct International plc’s major shareholder Mike Ashley’s claim that he is ‘not Father Christmas’.
See: Editorial, ‘The Guardian view on Mike Ashley: the unacceptable face of modern capitalism,’ The
Guardian (7 June 2006) available at www.theguardian.com/commentisfree/2016/jun/07/the-guardian-
view-on-mike-ashley-unacceptable-face-of-modern-capitalism (accessed 8 August 2020).
To help provide context to and a practical grounding for the rest of the book,
Chapter 2 examines how creative compliance manifests in practice with a focus
on the proliferation of aggressive tax planning. It explores the development of
the relevant common law, which shows the early emergence of a corporate norm
of technical compliance. The chapter returns to the 2012 tax scandals to under-
stand the specific structures in more detail, providing the foundation to later
parts of the book that consider the unique ability of corporations to comply
with the law in this way. In concluding, the chapter examines the structure of
the GAAR and suggests that, in line with historic attempts to change corporate
compliance behaviour, it is subject to both structural and situational difficulties
that are highly likely to impede meaningful behavioural change in accordance
with its objectives.
Having explored the practice of creative compliance in Chapter 2, Chapter 3
considers the process by which corporations define compliance and examines
compliance as a social construct. That is, in contrast to objectively observable
and verifiable facts, compliance as a concept derives its meaning from society and
those who engage with it. It is by understanding this process of construction that
we can start to see the pivotal role of social (or environmental) norms in develop-
ing and ascribing meaning to a concept. Chapter 3 explores both the function of
norms in shaping social meaning and how, once developed, a norm can rapidly
be accepted and institutionalised within a group. As this chapter explains, the
homogeneity of the profit-maximising norm that traditionally pervades all
aspects of corporate regulation, governance and theory adopts a position of
authority and legitimacy (premised on, inter alia, the expressive function of law).
As a consequence, it is not only the norm per se that is legitimised but those
acts, omissions and regulatory provisions that support it. Conversely, this wealth
maximising norm operates to undermine the legitimacy of reform proposals,
such as the GAAR, that adopt a contrary view. In looking at this instrumen-
tal impact of norms, a fundamental and highly challenging question necessarily
ensues. If social norms (which are outside of our control) are so impactful on our
behaviour, what does this mean about our genuine freedom to act in a particular
way? Moreover, what does this mean for personal responsibility?
Whilst critical, how corporations define compliance (and the factors that
influence this) is only the first step in understanding the current compliance
crisis. It is also necessary to consider what motivates a person to comply with
the law (or otherwise) in accordance with a corporation’s potentially narrow
construction of compliance, even when this conflicts with their personal norms.
This interplay between definition and action does, of course, have profound
consequences. Whilst we can all define ‘theft’ one hopes this does not result in
positive action towards it raising the question as to why corporate definitions of
compliance have proven to be so influential on individual action. In exploring
the question of motivation, Chapter 4 introduces an important theme of the
book, namely the relationship between legitimacy and compliance. In doing so,
it introduces what I term the ‘compliance degeneration cycle’. This cycle draws
Structure of the Book 15
on Tom Tyler’s work to demonstrate how a manifest belief in the legitimacy

of creative compliance (and, conversely, the illegitimacy of calls for spirited
compliance) justifies the initial decision to adopt a narrow interpretation of
compliance. Once a corporation has adopted this creative approach to compli-
ance, this means that the regulation in question no longer applies equally to all
legal subjects (as the ability to creatively comply is dependent upon a number of
factors ranging from a subject’s risk profile, financial and legal resources). This
inequality of application further reduces the legitimacy of regulation, conversely
increasing the likelihood of creative compliance (due to the nexus between legit-
imacy and compliance). Thus, for reasons explored in more detail in the chapter,
the act of creative compliance itself contributes to a self-perpetuating cycle of
degenerative compliance behaviour, which permeates and perpetuates across the
corporate sector.
Chapters 1 to 4 analyse how creative compliance manifests in practice (and
some of the consequences of this). Chapter 5 is the first of two chapters that
provide the normative justification for spirited compliance. It explores the clas-
sical liberal ideology that the market economy is premised on and challenges the
misconception that classical liberal thinking tacitly, if not expressly, supports crea-
tive compliance. Drawing on the work of Friedrich Hayek, the chapter examines
the argument that society depends upon the development of ‘spontaneous’ (in
contrast to planned) orders as the only mechanisms that are capable of ordering
complex social systems. In particular, it looks at the market as a paradigm case of
a spontaneous order and demonstrates the symbiotic relationship between market
order and spirited compliance. By analysing the function of social systems in this
way, the chapter introduces the critical importance of the maintenance of the rule
of law and, most crucially, equality before the law if such order is to be achieved
(and how this order is fundamentally undermined by creative compliance).
The principle of the rule of law and, in particular, equality before the law
is critical to the book. However, it also reflects two of its biggest challenges.
First, how can we legitimately sanction behaviour that whilst undesirable is
nevertheless legal? Second, if we reject the legitimacy of creative compliance on
the basis that, inter alia, it undermines the principle of equality before the law,
how can we then argue that corporations should be held to a higher (unequal)
standard of compliance? Chapter 6 responds to this issue by first exploring what
we mean by ‘equality before the law’ and demonstrating how creative compli-
ance undermines this principle. It explores the Hayekian notion of the rule of
law as a meta-legal principle and explains (by reference to modern thinking on
‘cheating’) why it is the breach of this meta-legal principle that provides justifi-
cation for controlling apparently lawful behaviour. The chapter then examines
arguments that support a claim that corporations, as a legal subject, have an
obligation to maintain the rule of law. It concludes by examining the role of
legal privilege as the only justification for derogating from the strict application
of equality before the law (by holding corporations to a different compliance
standard than non-corporate citizens).
One challenge to the claim that corporations are driven by a regulatory

imbued and homogenous norm of profit maximisation, which leads to ‘unethi-
cal’ compliance decisions, is the fact that corporations necessarily act through
individuals who are constrained by notions of right and wrong. Chapter 7
responds to this charge by exploring how the structural characteristics of the
firm create a powerful psychological impact on the decision making of those
within it (in doing so it provides important insight into the challenges of
instrumentalising behavioural change in corporations). Within the corpora-
tion, decision-making is distributed across a hierarchy of employees resting
ultimately with the board of directors. In this regard, the corporation is prem-
ised on an edifice of fiduciary obligations towards others. Internally, these
obligations are built on a command structure: junior employees look to senior
management, senior management to directors and directors to sharehold-
ers. Thus, an internal ‘fiduciary ladder’ exists which enables each stratum of
employees to justify outsourcing responsibility for the ethics of their actions
(legally and, as we shall see, psychologically) to the rung above it. However, the
reality of the modern corporation is that shareholders are now supplanted by a
faceless ‘market’, leading to a system of ownerless capitalism and, as we shall
see, ownerless responsibility.
The fiduciary ladder helps to demonstrate both the relative lack of an iden-
tifiable human presence within a firm to attribute moral responsibility to and
how the homogenised norm of shareholder wealth maximisation (considered
in Chapter 3) is accepted as a proxy for shareholder interests. By recognising
the impact of the corporate structure in this way, we can better understand how
corporate compliance decisions are seemingly immune to non-legal behavioural
constraints (such as personal ethics, religious views or a fear of personal repu-
tational damage) that would otherwise operate to restrict individual behaviour.
We can also start to see how the operation of the fiduciary ladder insulates
corporate decision makers from public (and private) ethical scrutiny. It is this
reputational impunity that helps to support a director’s decision to pursue
pure profit maximising objectives even where these transcend what is typically
regarded as ethical or responsible conduct.
In conclusion, Chapter 8 draws together the earlier discussions of the book
to reflect on how, if we return to first principles, we can see the instrumental
importance that adopting a more responsible approach to compliance has for
society. How, far from undermining the market order, it is fundamental to its
integrity (used in this context to mean completeness) and sustainability. In doing
so, the chapter also takes the opportunity to return to the question of freedom
and responsibility, drawing on some of the more potentially sobering aspects of
the previous chapters. Namely, our understanding of how the rules of society
(both those enshrined in law and in the norms of a citizen’s social environment)
are powerful drivers of behaviour. In this way, it considers to what extent free-
dom, and how we define the choices that underpin it, shape our expectations of
responsibility. That is, both an individual’s responsibility for their own conduct
but also that of the state to manage (or mitigate) the unforeseen circumstances
Conclusion 17
arising from the laws (broadly defined) that govern society. Put another way,
to what extent does (or should) responsibility vest in the player or the rules of
the game?
VI. CONCLUSION
The problem of corporate compliance is profound and pressing. Its complexity

necessitates a return to first principles to understand the multi-faceted reasons
why some corporations act in this way and why it is a problem that has pervaded
company law for so long. Whilst the focus of this work is on tax, it is important
to recognise that creative compliance is not simply a fiscal concern but goes to
the core of what it means to be a corporate citizen and the expectations that this
carries with it. As we enter into the fourth industrial revolution, and a new age
of corporate power, this is a question that is becoming ever critical. The social,
economic and political power of corporations (and collective organisations
more generally) is expanding to a scale that was unimaginable at the time that
the theories that inform the current compliance debate were developed. Indeed,
the importance of reconceptualising our understanding of corporate compli-
ance has never been so acute.
We should be abundantly clear; this concern is not hypothetical. Six years
after Eric Schmidt declared that he was ‘perplexed’ by the UK tax debate and
that the solution was simply for the UK to ‘change the laws’,31 Mark Zuckerberg
testified before the US Senate in respect of the Cambridge Analytica scandal,
which saw the data of over 87 million Facebook users being mined. Zuckerberg
denied that Facebook sold user data, explaining that advertisers would ‘tell us
who they want to reach, and then we do the placement … [this shows] the ads
to the right people without data ever changing hands’.32 In adopting what was
to became a repeatedly relied upon distinction,33 Facebook he argued was not
selling data but merely targeted advertising. Put another way, Facebook was
complying with the letter of the law, albeit in circumstances that many would
consider to undermine its spirit. As Michal Kosinksi observed in the New York
Times, Facebook’s technical assertion ‘that it is not selling user data is like a
bar[’s] giving away a free martini with every $12 bag of peanuts and then claim-
ing that it’s not selling drinks’.34
31 G Topham, ‘Google’s Eric Schmidt: change British law and we’d pay more tax’ The Guardian
(27 May 2013) www.theguardian.com/technology/2013/may/27/google-eric-schmidt-change-law-tax

(accessed 8 August 2020).
32 ‘Transcript of Mark Zuckerberg’s Senate Hearing,’ The Washington Post (11 April 2018) www.
washingtonpost.com/news/the-switch/wp/2018/04/10/transcript-of-mark-zuckerbergs-senate-
hearing/ (accessed 8 August 2020).
33 See M Kosinski, ‘Congress May Have Fallen for Facebook’s Trap, but You Don’t Have To’
The New York Times (12 December 2018) www.nytimes.com/2018/12/12/opinion/facebook-data-

privacy-advertising.html (accessed 8 August 2020).
34 ibid.
Corporate creative compliance is not simply a problem of regulation, or of

bad people making bad decisions. It is, as this book seeks to show, a systems
failure. Of course, at its most fundamental level an individual makes the

decision to implement a tax structure. However, that individual works in a team,
which answers to a board of directors, who set the strategy for the corpora-
tion, which has shareholders and operates within a market economy all of which
exist within a framework of legal rules and principles. Over time, somewhere
in that system (or, more accurately, multiple overlapping systems) the norm has
been established, accepted, endorsed and internalised that it is legitimate for
corporations to undermine the ‘evident intention of Parliament’35 regardless of
the impact. At a most basic and intuitive level this cannot be right.
However, there is hope. As this book suggests, these norms are not necessarily
accurate and proposals for reform do not need to be seen in direct conflict with
market objectives. Whilst there are few who would argue that current market
sentiment is perfect, this work seeks to demonstrate how market institutions
can in fact support a more responsible approach to compliance. What is needed
is not a new political philosophy or legal ideology. Rather, a return to, and
understanding of, the original principles and values that not only underpin our
current market order but are critical to its success. In rediscovering those tenets,
what emerges is an appreciation for the central role that rules and compliance
play within the system. A recognition that compliance is not an afterthought
but a central cog in the success of the market economy and what is needed is
not more laws, but a reconceptualisation of corporate compliance obligations
towards them.
35 Inland Revenue Commissioners v Willoughby [1997] 1 WLR 1071, 1079.

2
Creative Compliance in Practice
[Rules] can be seized on as an easier option than the diligent pursuit of corporate
governance objectives. It would then not be difficult for lazy or unscrupulous d
irectors –
or shareholders – to arrange matters so that the letter of every governance rule was
complied with but not the substance. It might even be possible for the next disaster to
emerge in a company with, on paper, a 100% record of compliance.1
Hampel Committee on Corporate Governance
C
reative compliance is not a new phenomenon. In January 1998, in
what transpired to be a striking prophecy of the impending Enron
collapse,2 the Hampel Committee on Corporate Governance anticipated
that the next corporate scandal could involve a corporation with a technically
impeccable compliance record.3 As such, it is perhaps surprising that notwith-
standing the devastating impact of Enron’s collapse, and widespread public
consternation, creative compliance has not merely continued as a corporate
practice but, as we saw in Chapter 1, escalated to become (for some at least) a
seemingly accepted component of corporate strategy.4
To understand why there is such a discrepancy between public opinion and
corporate conduct, and to ground the theoretical discussions in this book, it is
helpful to first look to the path dependency of corporate creative compliance.
As noted above, whilst Enron was not the last compliance scandal it was also
not the first, raising the question as to why such a damaging practice contin-
ues to persist. In part, this question can be answered when we see that modern
company law is replete not only with examples of where creative compliance
has been adopted but also where it has been expressly endorsed by the courts,
creating a powerful culture of legitimacy. As we see in Chapter 4, this legitimacy
plays an important and highly influential role in shaping a corporation’s compli-
ance decisions.
1 Committee on Corporate Governance, Final Report (January 1998), para 1.14 (the ‘Hampel
Report’). The Hampel Committee was established in November 1995 to review the implementation
of the Cadbury and Greenbury committees (see: Hampel Report, para 1).
2 Enron filed for Chapter 11 bankruptcy on 2 December 2001.
3 Hampel Report (n 1), para 1.14.
4 On this see the respondents to Doreen McBarnet’s empirical work in this field, who saw the
law as a ‘hurdle’ to overcome, or as something that ‘inconveniently’ got in the way and was to be
‘creatively dealt with’. See D McBarnet, ‘Financial Engineering or Legal Engineering? Legal Work,
Legal Integrity and the Banking Crisis,’ in I MacNeil and J O’Brien (eds), The Future of Financial
Regulation (Hart Publishing, 2010), 69.
20 Creative Compliance in Practice
This chapter begins by exploring the increasingly endemic practice of corpo-

rate compliance and its interpretation by the courts. Thereafter, Section II looks
at the paradigm case of creative tax compliance, as it is here that we can see in
stark terms how corporations utilise their legal status (in particular their ability
to incorporate multiple legal personalities within a single group) to implement
artificial intra-group structures that, inter alia, both reduce a corporation’s
tax base and relocate it to a low tax jurisdiction.5 In doing so, this section also
considers the development of judicial thinking as it moved towards a purpo-
sive approach to interpreting tax statutes. Or, more accurately, as the courts
acknowledged that the interpretation of tax statutes had, traditionally, been
something of a historical anomaly in not fully recognising the applicability of
purposive interpretation.
The focus on tax structuring acts as a particularly useful case study as it
highlights the often-complex relationship between regulation and compliance.
Section III examines the UK’s traditional approach to tax statutes, which has
resulted in a proliferation of complex and prescriptive rules. Ironically, it is this
network of rules that can be utilised in tax structures, providing a roadmap of
provisions that avoidance schemes can be structured around.6 However, as the
final substantive part of the chapter explains, whilst the UK adopted a differ-
ent approach to regulatory design when implementing the General Anti-Abuse
Rule (‘GAAR’)7 as a response to the 2012 tax scandals, this has yet to achieve
the impact that many would hope for. We continue to see therefore that whilst
regulation may certainly be one important component of a holistic response
to creative compliance (in part due to the expressive function of law discussed
in Chapter 3), in isolation it is unlikely to have the behavioural impact that is
needed.
I. THE RISE AND RISE OF CREATIVE COMPLIANCE
Whilst creative compliance is now synonymous with the highly complex legal
structures considered in Section II, it is in fact a practice that has permeated the
development of modern company law. As is well-known to corporate lawyers,
5 Discussed further in Section II.B.

6 Organisation for Economic Co-operation and Development, ‘Reducing the Risk of Policy
Failure: Challenges for Regulatory Compliance,’ (2000), 17.
7 The GAAR was introduced pursuant to Pt 5, Finance Act 2013, whilst its procedural require-
ments are set out in Sch 43, Finance Act 2013. The Aaronson Report, which sets out the findings of
the study group set up to consider the introduction of a GAAR in the UK, is instructive as to the
benefits and potential concerns of implementing a GAAR. See G Aaronson QC, ‘GAAR Study, A
Study to Consider Whether a General Anti-Avoidance Rule Should be Introduced into the UK Tax
System,’ 11 November 2011 (the ‘Aaronson Report’). Of note is that prior to the recent tax scandals
referred to in Section II, the UK had previously resisted GAAR. On this see J Freedman, ‘General
Anti-Avoidance Rules (GAARs) – a Key Element of Tax Systems in the Post-BEPS Tax World?’
(2016) University of Oxford Legal Research Paper Series 1, 7.
The Rise and Rise of Creative Compliance 21
UK company law is itself characterised by a decision that legitimised a literal

approach to compliance, providing an instructive foundation from which corpo-
rate compliance norms could develop.8
The seminal decision of Salomon v Salomon & Co Ltd,9 concerned the use of
six nominee shareholders (in addition to the founder) to satisfy the requirement
of the Companies Act 1862 that a company needed to have seven shareholders
to incorporate.10 The question before the court was whether these sharehold-
ers needed to have a real or substantial interest in the company or whether the
use of nominees (as was the case here) would comply with the Act’s require-
ments. Although the Act was silent on the need for materiality, it was widely
considered that the Act envisaged the presence of shareholders of substance,
reflecting both the development of the corporation from economically signifi-
cant partnerships11 and also broader concerns as to the abuse of the corporate
form.12 Nevertheless, overruling the decisions of the lower courts, the House of
Lords accepted that strict compliance with the Act was sufficient and that the
court could not (and should not) read a materiality requirement into its terms.
In doing so, the court approved a formalistic and, for many, reductive approach
to compliance that would align with economic theories of the firm to be prom-
ulgated over 50 years later.
This early endorsement of technical compliance by the House of Lords was
followed in 1936 by the decision of The Commissioners of Inland Revenue v
His Grace the Duke of Westminster.13 Whilst not a company law case, as will
be seen in Section II below, the Duke of Westminster decision was highly influ-
ential in establishing the normative environment in which corporate compliance
standards were, and continue to be, determined. Here, the House of Lords had
to consider whether to uphold the Duke of Westminster’s claim that he had
paid his gardener a tax-deductible annuity, rather than a salary. In sustaining
this classification, Lord Tomlin observed that ‘every man is entitled if he can
8 As Edelman recognises, compliance is defined by industry norms that become institutionalised
and reflect a citizen’s understanding of ‘legality, morality and rationality’. Judicial decision-making
plays an important role in that construction, both endorsing industry norms and shaping our under-
standing of legality. See LB Edelman and SA Talesh, ‘To Comply or Not to Comply – That isn’t the
Question: How Organizations Construct the Meaning of Compliance,’ in C Parker and VL Nielsen
(eds), Explaining Compliance Business Responses to Regulation (Edward Elgar, 2011), 103.
9 [1897] AC 22.
10 Companies Act 1862, s 6.
11 Outlined in more detail in ch 7.
12 Broderip v Salomon [1895] 2 Ch 323, per Lindley LJ [337] ‘There can be no doubt that in this
case an attempt has been made to use the machinery of the Companies Act, 1862, for a purpose for
which it was never intended … Although in the present case there were, and are, seven members, yet
it is manifest that six of them are members simply in order to enable the seventh himself to carry on
business with limited liability. The object of the whole arrangement is to do the very thing which the
legislature intended not to be done.’ For a more detailed discussion as to the mischief and intentions
of the 1862 Act, see P Ireland, ‘The Rise of the Limited Liability Company,’ (1984) 12 International
Journal of the Sociology of Law 15–17.
13 [1936] AC 1.
[emphasis added] to order his affairs so as the tax attaching under the appropri-
ate Acts is less than it otherwise would be’14 regardless of how ‘unappreciative
the Commissioners of Inland Revenue or his fellow taxpayers may be of his
ingenuity’.15 Indeed Lord Russell, in concurring with Lord Tomlin, explained
that ‘if the Crown … cannot bring the subject within the letter of the law, the
subject is free, however apparently within the spirit of the law the case might
otherwise appear to be’.16
The Duke of Westminster decision is instructive not simply because the
court rejected attempts to constrain creative compliance, a principle that was
not disrupted (and even then only notionally) until the Ramsay decision some
50 years later.17 Rather, it also highlights three critical aspects of the corporate
compliance debate that remain relevant today. First, is the tacit acknowledgment
that not every citizen is able to order his or her affairs to avoid tax (regardless
of the morality or legality of the decision to do so). This inequality of opportu-
nity is particularly acute when comparing corporate and human citizens, but (as
discussed in Chapter 6) also applies when comparing the corporate community
inter se. As shall be seen, such inequality has multiple consequences, not simply
offending the rule of law (on which see Chapter 6) but, as Chapter 4 explores,
it also perpetuates the practice of creative compliance contributing to a cycle of
creative compliance decisions.
Second, Lord Tomlin’s reference to the ‘ingenuity’ of the structure reflects
the view that, on one level at least, creative compliance is something that is to
be revered. To the extent that this observation was not entirely earnest on Lord
Tomlin’s part, it is nevertheless indicative of industry’s current view that crea-
tive compliance is ‘proudly capitalistic’,18 a sentiment that was apparent from
McBarnet’s empirical work in this field. In a testament to the cultural environ-
ment that corporations operate within, creative compliance was not a practice
that McBarnet’s interviewees felt needed to be hidden; rather it was seen as
something ‘clever’19 that should be admired. Finally, and given this perspective,
it is perhaps not surprising that McBarnet’s interviewees, much like Lord Russell
(and indeed more recently Eric Schmidt and Mark Zuckerberg), placed responsi-
bility for controlling technical compliance practices firmly on the regulators: ‘if
they can’t make regulations legal-engineering proof … it is fair game to exploit
that situation. Ideas such as responsibility, the public good, morality, ethics or
14 The Commissioners of Inland Revenue v His Grace the Duke of Westminster [1936] AC 1, 19.
15 ibid.
16 ibid, 25.
17 Discussedin Section II.
18 N Kumar and O Wright, ‘Google boss: I’m very proud of our tax avoidance scheme’ The
Independent (13 December 2012) www.independent.co.uk/news/uk/home-news/google-boss-im-
very-proud-of-our-tax-avoidance-scheme-8411974.html (accessed 8 August 2020).
19 D McBarnet, ‘Compliance, Ethics and Responsibility: Emergent Governance Strategies in the
US and UK,’ in J O’Brien (ed), Private Equity, Corporate Governance and the Dynamics of Capital
Market Regulation (Imperial College Press, 2007), 214.
The Rise and Rise of Creative Compliance 23
integrity do not enter into the equation.’20 It is a trite observation to note that
this level of ‘legal-engineering proof’ regulation is neither possible nor desirable.
Indeed, as we discuss later, it is the very essence of the compliance debate that
there will be inevitable gap-filling left by even the most innovative regulatory
approaches, it is how corporations interpret their obligations within these regu-
latory gaps that is important.
These early decisions encapsulate the attitudes that legitimise more recent
compliance scandals, which use legal devices to enable the form of a transaction
to fall ‘on the right side of the boundary between lawfulness and illegality’.21
However, this technical approach to compliance is not simply a concern of
semantics or theoretical debate. Rather, as modern examples are demonstrating,
corporate creative compliance can have a globally catastrophic impact. Most
notably, it was the accounting scandals of 2001, which resulted in the spectacular
failures of Enron, WorldCom and Parmalat that brought the practice of crea-
tive compliance to public attention (a practice that in many of these cases was a
precursor to, or implemented in parallel with, unlawful activities).
In brief, Enron incorporated a substantial number of special purpose vehi-
cles (‘SPVs’),22 typically limited partnerships, designed to protect Enron’s credit
rating by keeping substantial debts off the Enron group’s balance sheet.23 As
newly incorporated entities, these partnerships had the appearance of being
reliable borrowers. They would acquire debt to finance new business ventures
and utilise Enron stock as collateral for the relevant loan (Enron being rated
as ‘investment grade’24 stock at the time). Importantly for Enron, these SPVs
also, ostensibly, satisfied accounting regulations which stipulated that provided
three per cent of the issued equity in the SPV was owned by a non-Enron entity
then Enron did not need to include the SPV debts on its consolidated financial
reports. By availing itself of these regulations Enron was able to conceal consid-
erable liabilities from the market. However, as we now know, whilst Enron had,
technically, complied with these accounting requirements, the general partners
of the SPVs were largely controlled by Enron officers, primarily its Chief Finan-
cial Officer, Andy Fastow, or members of his family.25
20 McBarnet, ‘Financial Engineering’ (n 4), 80.

21 ibid.
22 As to the scale of Enron’s creative accounting, of note is that for the year ending 31 December 2000
(that immediately proceeding the year in which Enron filed for chapter 11 bankruptcy protection)
its annual 10-k filing listed over 2,000 subsidiaries: www.secinfo.com/dv8Cu.4f895.a.htm#1stPage
23 SL Schwarz, ‘Enron and the Use and Abuse of Special Purpose Entities in Corporate Structures,’
(2002) 70 University of Cincinnati Law Review 1309, 1310.

24 CA Hill, ‘Why did Rating Agencies do Such a Bad Job Rating Subprime Securities?’ (2010) 71
University of Pittsburgh Law Review 1, 14.

25 For a summary of these partnerships see WC Powers, RS Troubh and HS Winokur Jr., Report
of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp
(1 February 2002), 2–5 http://picker.uchicago.edu/Enron/PowersReport(2-2-02).pdf (accessed 9
August 2020).
The repercussions of Enron’s failure (and the associated scandals of that time)
were global and acute. In addition to the collapse of Enron and WorldCom’s
auditor, Arthur Andersen, there was widespread consternation that corpora-
tions could mislead the market in this way. Of particular concern was the fact
that a large part of the deception was ‘perfectly legal’26 and it was against this
wave of corporate failures that we started to see a significant regulatory reac-
tion. In particular, it was in response to the 2001 accounting scandals that the US
introduced the Sarbanes-Oxley Act 2002 (‘SOX’) requiring, inter alia, stringent
internal control disclosures and written confirmation by management as to its
responsibility for such controls.27 The consequences of SOX, both intended and
otherwise, are familiar. The Act attracted considerable industry criticism and
resulted in a number of firms delisting from the New York Stock Exchange.28
Critics of SOX cite, amongst other matters, the substantial compliance costs
that it imposes on firms that are subject to its remit,29 together with the indirect
costs of ‘managing in the shadow of SOX’.30 In contrast, its advocates point to
a reduced cost of capital,31 improved auditing32 and the (perhaps surprising)
appreciation of some management teams at the mandatory strengthening of
their corporation’s internal control environment.33
Notwithstanding the differing views as to the merits of SOX, what is striking
for our purposes, is that following its introduction (even though it was supported
by global condemnation of the behaviour of Enron and its counterparts) the
practice of creative compliance was not materially reduced.34 Rather, despite
these highly publicised failures (and, as shall be seen in the next section, judicial
26 Hearing Before the Committee on Governmental Affairs United States Senate, One
Hundred Seventh Congress Second Sitting, ‘The Fall of Enron: How Could it Have Happened?’
Hearing 107–376 (24 January 2002) per Senator Thomson, 17 www.gpo.gov/fdsys/pkg/CHRG-
107shrg78614/pdf/CHRG-107shrg78614.pdf (accessed 9 August 2020).
27 Sarbanes-Oxley Act 2002, ss 302, 404 and 906.
28 In particular, as a result of the impact of the cost of complying with its onerous internal control
requirements. For commentary as to the relationship between Sarbanes-Oxley 2002 and the decision
to de-list see B Norris and M Fox, ‘Reducing Sarbanes-Oxley Compliance Costs for Smaller Compa-
nies,’ (2008) Journal of International Banking Law and Regulation 28, 32.
29 Outlined in S Bainbridge, The Complete Guide to Sarbanes-Oxley, (Adams Media, 2007), 4–5.
30 These include, managerial distraction, risk-aversion and potential internal inefficiencies in
decision making. On this see H Butler and L Ribstein, The Sarbanes-Oxley Debacle, What We’ve
Learned and How to Fix It (AEI Press, 2006), 43–50.
31 S-AK Stephen and PJ de Jong, ‘The Impact of the Sarbanes-Oxley Act (SOX) on the Cost of
Equity Capital of S&P Firms’ (2012) 13(2) Journal of Business and Economics 102.
32 JC Coates IV, ‘The Goals and Promise of the Sarbanes-Oxley Act,’ (2007) 21(1) Journal of
Economic Perspectives 91, 92.

33 S Wagner and L Dittmar, ‘The Unexpected Benefits of Sarbanes-Oxley,’ (April 2006) Harvard
Business Review 1, 2.
34 For a discussion as to why this rule-based approach might not have been successful see
ML Michael, ‘Business Ethics: The Law of Rules,’ (2006) Corporate Social Responsibility Initiative
Working Paper No 19. Michael’s reasoning includes not only creative compliance but also the
potentially negative impact of ‘external’ motivations such as rules on individual ‘ethical’ behaviour.
Section III considers more broadly, in the context of the UK GAAR, why regulatory responses alone
(regardless of design) are insufficient without wider normative change.
Loopholes in the Law: A Focus on Tax Avoidance 25
attempts to introduce broader compliance standards), we saw an escalation in

creative compliance, particularly with regard to tax avoidance.
II. LOOPHOLES IN THE LAW: A FOCUS ON TAX AVOIDANCE
The paradigm case of creative compliance, particularly in recent times, is tax

avoidance. It is a practice that involves exploiting ‘loopholes in the law’35 to
facilitate the implementation of technically legal transactions that are designed
primarily, if not exclusively, to reduce tax liabilities, oftentimes contrary to
the intention of the relevant legislation.36 Commonly, these structures involve
multiple, pre-determined, steps to manufacture (or create) losses and gains
(sometimes referred to as a ‘composite’ structure). As a result, courts had to
grapple with how to interpret these schemes as, when taken at face value and
looked at in isolation, each step could appear legitimate (whereas if the scheme
was looked at as a whole its intent to undermine the purpose of the legislation
became a lot clearer). In facing this challenge, the role of the courts has been
instrumental in shaping the contours of legitimate tax compliance. Whilst early
decisions expressly endorsed creative compliance, more recent decisions started
to recognise that tax statutes are not, and should not be, immune from purpo-
sive interpretation.
A. Towards a Judicial Anti-Avoidance Doctrine?37
As we saw in Section I, notwithstanding the recognition that many tax avoidance

structures undermine regulatory intent, the orthodoxy of the courts when inter-
preting tax statutes (as enshrined in the Duke of Westminster doctrine) has been
to base their decision on looking solely at ‘what is clearly said. There is no room
for any intendment.’38 These decisions are premised on, and endorse, the prin-
ciple that technical compliance with tax regulation is a legitimate standard to
apply ‘however apparently within the spirit of the law the case might otherwise
appear to be’39 and that citizens ‘incur no legal penalties and, strictly speaking
35 A Seely, Tax Avoidance: a General Anti-Avoidance Rule – Background History (1997–2010)
Commons Briefing Paper Number 2956 (16 January 2020), 3.

36 G Wheatcroft, ‘The Attitude of the Legislature and the Courts to Tax Avoidance,’ (1955) 18(3)
Modern Law Review 209, 209.

37 Tax Law Review Committee, ‘Tax Avoidance,’ November 1997, citing Lord Oliver of Aylmerton
‘Judicial Approaches to Revenue Law,’ in Gammie and Shipwrights (Eds) Striking the Balance: Tax
Administration, Enforcement and Compliance in the 1990s IFS 1996.
38 Cape Brandy Syndicate v I.R.C. [1921] 1 KB 64, at 71 and approved in Canadian Eagle Oil Co.
Ltd v R. [1946] AC 119, per Lord Simon at 140.

39 Partington v Attorney General (1869) LR 4 HL 100, per Lord Cairns at 122. This approach was
subsequently endorsed in I.R.C. v Barclays Bank [1951] AC 421, 439.

no moral censure’40 if they adopt a technical, rather than spirited standard of

compliance. The influence of these decisions was such that the Tax Law Review
Committee observed that it could be claimed that ‘the traditional attitude of the
UK Courts to the interpretation of tax law has in the past created the conditions
that promote tax avoidance arrangements’.41
Following this seeming endorsement of technical compliance, a line of
decisions started to develop in the mid-twentieth century that expressed an
increasing uneasiness with creative compliance. In particular, judicial doctrine
emerged that suggested strict compliance with the letter of tax law (in defeat
of its spirit) should not be regarded as the ‘discharge of the duties of good
citizenship’.42 This criticism of creative compliance was commonly grounded in
notions of manifest unfairness, namely that those who could creatively comply
were conferring a disproportionate burden on their fellow citizens.43 In drawing
upon notions of citizenship in this way, we started to see a judicial recogni-
tion of the relationship between civic responsibility (if not absolute duty) and
compliance.
Nevertheless, for some the shadows of the Duke of Westminster decision
remained and the courts felt effectively bound by a formalistic interpretation
of express statutory wording, in respect of which there was limited discretion.44
So constrained were the courts at this time that Lord Steyn later reflected that
‘the court appeared to be relegated to the role of a spectator concentrating
on the individual moves in a highly skilled game: the courts were mesmerised by
the moves in the game and paid no regard to the strategy of the participants or
the end result’.45 In practice, this meant that provided the technical steps in any
given structure complied with the strict letter of the law the scheme would be
upheld as the courts had become ‘habituated to this narrow view of their role’.46
An important move away from this literalist approach to interpretation (and
therefore a departure from a strict application of the Duke of Westminster deci-
sion) came with the development of the ‘Ramsay principle’ (so-called as it was
derived from, amongst others,47 the House of Lords’ decision in W. T. Ramsay
Ltd v Inland Revenue Commissioners).48 Ramsay represented a move towards
40 Levene v I.R.C. [1928] AC 217, per Lord Sumner at 227.

41 Tax Law Review Committee, Tax Avoidance, November 1997, 2.
42 Latilla v I.R.C. [1943] AC 377, per Lord Simon at 381.
43 See, eg, Lord Howard de Walden v I.R.C. [1942] 1 KB 389, per Lord Greene MR at 397.
44 Wheatcroft ‘The Attitude of the Legislature’ (n 36), 218.
45 Inland Revenue Commissioners v McGuckian [1997] 1 WLR 991, 999.
46 ibid.
47 The principle also reflects the House of Lords decision of the same year in I.R.C. v Burmah Oil
Co Ltd. [1982] SC (HL) 114. It was subsequently extended a few years later by the House of Lords
in Furniss (Inspector of Taxes) v Dawson [1984] AC 474, which held that the Ramsay principle
applied to all transactions with pre-ordained steps that serve no commercial purpose, not simply
those involving self-cancelling steps (which had been one interpretation of Ramsay). Where a series
of transactions fall within this definition then tax should be calculated on the effect of the structure
as a whole.
48 [1982] AC 300.
what Lord Oliver described as the ‘new realism’.49 That is, the willingness of
the court to look at the economic reality (or substance) of a particular transac-
tion (or, as is often the case, series of transactions) and thereafter to adopt a
more purposive rather than literal approach to the interpretation of the relevant
statute.
Ramsay concerned the manufacture by Ramsay of a deductible loss so as to
counteract a genuine chargeable gain that it had realised through the sale of its
freehold farmland. The House of Lords held that the creation of the loss arose
simply as a consequence of a complex ‘capital loss scheme’ that had no commer-
cial justification and the sole purpose of which was to offset the chargeable gain
that had been made following the sale of the farm. Crucially, the House of Lords
accepted that, taken in isolation, each stage of the scheme was genuine and
would have to be accepted under the Duke of Westminster doctrine.50 However,
when considering the scheme as a whole, a deductible loss did not arise. Looked
at in this way (that is, in aggregate) the scheme was, in fact, a financial nullity
with neither a gain nor a loss arising. In effect, the Lords held that when consid-
ering an otherwise lawful transaction, with individual pre-determined steps that
were intended to be carried out as a whole, they were not obliged to consider
each step individually but could look at the transaction in its consolidated form.
In moving away from a purely literal interpretation, Lord Wilberforce noted that
when applying the relevant Act its purpose ‘may, indeed should, be regarded’.51
The Ramsay decision was, undoubtedly, an important step towards constrain-
ing creative compliance. However, when we look at the detail of the judgment
its impact is not quite as substantial as it could have been. Critically, in giving
their judgment the Lords affirmed the principle that a taxpayer is entitled to
‘arrange his affairs so as to reduce his liability to tax … that [the mere fact that]
the motive for a transaction may be to avoid tax does not invalidate it unless a
particular enactment so provides’.52 Moreover, the Lords did not overrule the
Duke of Westminster decision, rather they held that it did not need to be applied
‘in blinkers, isolated from any context to which it properly belongs’.53 In fact,
the Lords expressly stated that Ramsay was not preferring substance to form,
rather that it was acknowledging that if a transaction is part of a series of trans-
actions then it is that series in aggregate, not any one of its individual steps, that
should be considered. In doing so, the Lords did not dispute the legitimacy of
creative compliance per se (the importance of which is considered in Chapter 4).
49 Lord Oliver of Aylmerton, ‘Judicial Approaches to Revenue Law,’ in Gammie and Shipwrights
(eds) Striking the Balance: Tax Administration, Enforcement and Compliance in the 1990s IFS
(1996) 173, 179.
50 [1982] AC 300, at 325, 337–340.
51 ibid, 323C-D.
52 ibid, 323.
53 ibid. In this way, the ‘Ramsay principle subsisted alongside, and did not overrule, the Duke of
Westminster principle,’ see J Freedman, ‘Defining Taxpayer Responsibility: in Support of a General

Anti Avoidance Principle,’ (2004) 4 British Tax Review 332, 350.
Instead, Ramsay made clear that earlier decisions such as the Duke of Westmin-
ster should be applied having regard to the reality of the transaction (or series
of transactions) before the court.54 In doing so, Ramsay was nonetheless the
first in an influential line of cases to acknowledge and reflect a move towards a
purposive approach to interpreting tax statutes, ‘giving effect to the intention of
Parliament’.55
Nevertheless, Ramsay was not without its limitations and, as a judicial anti-
avoidance rule, remained subject to crucial challenges. In particular, following
the extension of the principle by the court in Furniss v Dawson56 (from, inter
alia, purely circular schemes to linear ones) there was a concern that the courts
had conferred upon the Revenue a ‘discretionary power to determine, without
any Parliamentary sanction, what transactions should be taxed and what should
be permitted to take place without the imposition of fiscal burden’.57 It was
argued that this approach risked ‘creating, almost arbitrarily, two categories of
tax avoidance; permissible tax avoidance and impermissible tax avoidance’,58
without sufficient clarity as to when a transaction would fall into one category
or the other. The perceived arbitrariness of the approach risked undermining (in
the mind of the taxpayer at least) its legitimacy, which as the following chapter
discusses, is crucial to engendering broad and voluntary compliance behaviour.
In light of these challenges, efforts followed to better define the application
or boundaries of Ramsay. In MacNiven v Westmoreland Investments Ltd59 Lord
Hoffmann explained that the Ramsay construction would apply where the statute
in question refers to a ‘commercial’ concept and here the courts would disregard
steps in a composite transaction that had no commercial purpose (for exam-
ple, if the step in question was inserted purely for tax purposes).60 However, in
providing clarity to the ambiguity of Ramsay, Lord Hoffmann arguably limited
its application when noting that to apply Ramsay the court must first:
construe the statutory language and decide that it refers to a concept which Parlia-
ment intended to be given a commercial meaning capable of transcending the juristic
54 There have, of course, been a number of tax cases following Ramsay. However, scope does not
permit a detailed analysis of these decisions within this book. Rather, it focuses on Ramsay as the
seminal decision that both sought to reduce the type of structures that the GAAR is now targeting,
whilst nevertheless failing to make a meaningful incursion into either the normative standing of tax
avoidance or corporations’ implementation of abusive structures.
55 IRC v McGuckian [1997] 1 WLR 991, 1001.
56 [1984] AC 474. Here, the court went beyond looking at the economic reality of a series of
connected transactions predicated on the intention of the taxpayer, but ultimately imposed a tax
analysis based on a transaction that was very different to that which the taxpayer had intended to
enter into (based on the taxpayer’s motive).
57 Lord Oliver ‘Judicial Approaches to Revenue Law’ (n 49), 185. For a detailed discussion of the
constitutionality of Ramsay see RT Bartlett, ‘The Constitutionality of the Ramsay Principle,’ [1985]
British Tax Review 338.
58 ibid, 186.
59 [2003] 1 AC 311, 48–49.
60 ibid, 48.
individuality of its component parts. But there are many terms in tax legislation
which cannot be construed in this way. They refer to purely legal concepts which have
no broader commercial meaning. In such cases, the Ramsay principle can have no
application.61
In so doing, Lord Hoffmann made clear the limitations of Ramsay and the ‘new
realism’ approach. In particular, that there was not a ‘general’ judicial anti-abuse
rule that applied to all structures. The observation, Lord Hoffmann noted, was
necessary ‘because, in the first flush of victory after … Ramsay … there was a
tendency on the part of the Inland Revenue to treat Lord Brightman’s words
as if they were a broad spectrum antibiotic which killed off all tax avoidance
schemes’.62
In the same year that MacNiven was decided, further clarity (and, for some,
conscription) was provided by the Lords in Barclays Mercantile Business Finance
Ltd v Mawson.63 Whilst the Lords confirmed that in the majority of tax cases
a purposive Ramsay construction would apply, it was noted that Ramsay did
not introduce a new doctrine for tax cases, rather it ‘rescued tax law from being
“some island of literal” interpretation and brought it within generally applica-
ble principles’.64 Rather, and reflecting the artificiality of many structures, the
tendency up until that point to view Ramsay as developing a new jurisprudence
was the product of two features of tax law. That is, the interaction between
economic activities and the ‘real world’ and the ‘good deal of intellectual effort
[that] is devoted to structuring transactions in a form which will have the same
or nearly the same economic effect as a taxable transaction but which it is hoped
will fall outside the terms of the taxing statute’.65 In Barclays Mercantile the
Lords felt that, following Ramsay, cases had gone ‘too far’ in giving ‘rise to a
view that, in the application of any taxing statute, transactions or elements of
transactions which had no commercial purpose were to be disregarded’.66 The
impact of Barclays Mercantile was significant, with one commentator malign-
ing that since the ‘fateful’ decision ‘a much wider range of entirely artificial tax
planning “solutions” has been pushed aggressively to taxpayers’.67
The confirmation that a purposive approach to construction applies to the
tax sector is to be welcomed.68 However, it is instructive as to the culture of
the sector, and the construction of compliance, that Ramsay was seen for so
long to be the advent of a new and special jurisprudence. It is not therefore
surprising that, despite clarification (and for many circumscription) of Ramsay
61 ibid, 49.
62 ibid.
63 [2005]1 AC 684.
64 ibid,33.
65 ibid, 34.
66 ibid, 36
67 M Truman, ‘How Far Would You Go?’ Taxation 3 July 2012.
68 The Barclays Mercantile approach was affirmed in RFC 2012 Plc (in liquidation) v Advocate
General for Scotland [2017] UKSC 45.

by the Lords, challenges with this purely judicial approach remained. This was
recognised by Graham Aaronson QC (who was commissioned to consider the
adoption of a GAAR in the UK) when he shared his concern at ‘the lengths to
which judges will go to stretch the purposive interpretation of tax statutes in
order to defeat what they see as tax avoidance schemes … this is leading to a
distortion of true purposive interpretation’.69
In practice, and in addition to these legitimacy concerns, even a move
towards a more purposive approach was unable to stop the implementation of
highly technical creative tax structures that ‘focus on prescriptive tax rules which
are not susceptible to contextual interpretation’.70 The challenge that persisted
is that without a greater, intrinsic (or normative), motivation for responsible
compliance the ‘substantial demand from clients for tax avoidance schemes’71
remained.
B. The 2012 Tax Scandals
Against this backdrop it is perhaps not surprising that we return to the 2012 tax
scandals, which were the subject of the PAC inquiry discussed in Chapter 1 and
that were the catalyst for regulatory reform.72 It is instructive to look at some
of the detail of these structures, which highlight not only the artificiality of the
arrangements (helping to explain the public outcry towards them) but also how
corporate groups utilise the privilege of incorporation to reduce their tax liabil-
ity in this way. Indeed, these structures go a significant way to demonstrating the
ongoing practice of what Lord Hodge described as the ‘immense intellectual
firepower, which has been expended by tax advisers on the development and
marketing of sophisticated avoidance schemes comprising a contrived series of
transactions which have no purpose other than to save tax’.73
At the time of the 2012 scandals, public attention focussed on the use of two
structures. First, the use of ‘inversions’ and, secondly, the colloquially entitled
‘Double Irish,’ which often also incorporated a ‘Dutch Sandwich.’ An inver-
sion typically involves the acquisition of a new parent company by an existing
69 P Stainforth ‘Interview: Aaronson on the progress of

the GAAR study,’ Tax Journal 15 July 2011.
70 Graham Aaronson QC, ‘GAAR Study, A Study to Consider Whether a General Anti-Avoidance
Rule Should be Introduced into the UK Tax System,’ 11 November 2011, para 3.20.
71 M Truman, ‘So long,’ Taxation 3 March 2015, 3.
72 Including the General Anti-Abuse Rule discussed in Section III of this chapter. The Google,
Amazon and Starbucks structures were the subject of media attention although it should be made
clear that these structures have been utilised for many years. For a summary of such activity see
J Voget, ‘Relocation of Headquarters and International Taxation,’ (2011) 95 Journal of Public
Economics 1067. The reform activities included the General Anti-Abuse Rule discussed in Section III
of this chapter.
73 Lord Hodge, ‘The RFC case, tax avoidance schemes and statutory interpretation: offside
goals, yellow cards and own goals,’ Edinburgh Tax Network Annual Lecture Parliament House, 14
December 2017, 2.
c orporate group. Crucially, this new entity is situated in a tax haven74 or other
such lower tax jurisdiction, whilst the former parent company (now a subsidiary
of the new parent) remains in its original jurisdiction of operation, for example
the US. Following the inversion, the group seeks to ‘shift’ as much of its profits
to the lower tax territory, regardless of where the activity giving rise to the profit
actually occurred. The consequence of the inversion is that the group’s opera-
tions continue largely as before (often with the management team remaining
in situ) but the taxable gains (if any) are relocated to a low-tax jurisdiction,
effectively reducing the tax base in the jurisdiction in which the gain was argu-
ably made.
The so-called Double Irish scheme involved the implementation of a
complex and artificial75 corporate structure that utilised both the low tax rate
in Ireland together with the fact that (at the time) Irish tax law stipulated that
a corporation is resident for tax purposes in the jurisdiction that it is ‘managed
and controlled’, not where it is incorporated.76 In brief,77 the scheme operated
as follows. Two companies were incorporated in Ireland, although one was
managed and controlled (and therefore taxed, if at all) in a tax haven. This
offshore entity held the legal title to the groups’ intellectual property rights that
it then licensed (for meaningful consideration) to the second company, which was
tax resident in Ireland. The taxable income that the Irish resident entity gener-
ated from the use of the intellectual property was reduced by the tax-deductible
consideration that it paid to the offshore entity, with any remaining profit being
taxed at the lower rate of Irish corporation tax (lower in comparison to that
levied in its ‘true’ jurisdiction of operation). The fiscal impact of the Double
Irish scheme could then be further increased (namely, tax further reduced) by the
insertion of a ‘Dutch Sandwich.’ That is, the group could incorporate a Dutch
entity that was used to take advantage of Ireland’s Double Taxation Treaty with
the Netherlands, meaning that the Irish company did not pay tax on payments
made to its Dutch counterpart.78 As such, when the tax resident Irish company
generated a profit, it paid this by way of a royalty, supported by the requisite
74 The OECD sets out four characteristics of a tax haven: (i) low or nominal taxes; (ii) a lack of
transparency; (iii) the existence of laws or practices that hinder the exchange of information with
other jurisdictions for tax purposes; and (iv) the absence of a requirement for activity to be substantial
in that jurisdiction. See OECD, ‘Tax Haven Criteria’ https://web.archive.org/web/20120512074208/
http://www.oecd.org/document/63/0,3343,en_2649_37427_30575447_1_1_1_37427,00.html
75 Artificial in the sense that the primary objective of the structure was arguably tax avoidance,
rather than a genuine commercial purpose.

76 In response to international pressure, and with effect from 1 January 2015 (subject to a transi-
tion period for existing corporations until 2020), Ireland’s Finance Act 2014 has now introduced
reform that requires all Irish incorporated companies to be tax resident in Ireland.
77 For a more detailed analysis of the mechanics of the ‘Double Irish Dutch Sandwich’ structure,
see A Quiquerez, ‘Intellectual Property Holding Companies: an International Perspective,’ (2013) 4

Intellectual Property Quarterly 303, 331–337.
78 Double tax treaties are designed to avoid an international transaction being taxed in every juris-
diction that it engages with.

legal and ownership structure, to a Dutch company within the organisation.

This Dutch shell company then relied upon favourable Dutch tax laws to pass
on the royalty to the ‘offshore’ Irish company, where it paid little or no tax on
the funds transferred.79
Both the use of inversions and the Double Irish Dutch Sandwich involved tech-
nically compliant, and legally effective, transactions. Nevertheless, the perceived
manifest unfairness of large corporations being able to so clearly undermine the
intention (or spirit) of the legislation in this way resulted in widespread public
and parliamentary censure. By implementing these artificial structures, large
corporate groups were able to gain the benefit of the resources, know-how and
institutions of a particular jurisdiction whilst avoiding the concomitant ‘moral’
obligation to pay taxes to that jurisdiction.
The tax avoidance structures that were the subject of the PAC inquiry do, of
course, have a considerable fiscal impact. In the year of the PAC investigation the
UK tax-gap, that is the difference between the tax ‘due’ and that collected, was
estimated at £3.1 billion for tax ‘avoidance’ structures and £4.5 billion attributa-
ble to ‘legal interpretation’.80 However, the indirect and non-fiscal consequences
of creative compliance are also critical. The scandals were another reason (if
any were needed) to increase public distrust in large corporates. They fuelled
the sense that a capitalist market economy was inherently unfair, serving only
to increase financial and regulatory inequality whilst undermining the integrity
of the system as a whole.81 Moreover, the scandals demonstrated in stark and
uncompromising terms that the modern corporation understood its compliance
obligations to be ones of mere legality, nothing more, regardless of the broader
consequences. Indeed, as we saw in Chapter 1, Eric Schmidt was clear that
‘what we are doing is legal’,82 and that he was ‘very proud’83 of the company’s
approach, whilst claiming a likely fiduciary responsibility to shareholders to act
in this way.84
79 An analysis of the financial and policy repercussions of these structures, drawing specifically
on those adopted by Google, Amazon and Starbucks, is set out in Part 1 of the Public Accounts
Committee – Nineteenth Report, ‘HM Revenue and Customs: Annual Report and Accounts,’
3 December 2012 www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/716/71602.htm
(accessed 9 August 2020). Note in para 10 of Pt 1 that Google maintained that ‘it minimised tax
within the letter of the law’.
80 See HM Revenue & Customs, ‘Measuring Tax Gaps 2014 Edition: Tax Gap Estimates
for 2012–13,’ 16 October 2014.

81 KA Clausing, The Effect of Profit Shifting on the Corporate Tax Base in the United States and
Beyond (June 17, 2016). Available at SSRN: https://ssrn.com/abstract=2685442.

82 G Topham, ‘Google’s Eric Schmidt: change British Law and we’d pay more tax,’ The Guardian
(27 May 2013) www.theguardian.com/technology/2013/may/27/google-eric-schmidt-change-law-tax

83 ‘Google’s Tax Avoidance is Called Capitalism, Says Chairman Eric Schmidt,’ The Telegraph
(12 December 2012) www.telegraph.co.uk/technology/google/9739039/Googles-tax-avoidance-is-

called-capitalism-says-chairman-Eric-Schmidt.html (accessed 9 August 2020).
84 A perspective that is disputed in ch 7.
The (Current) Limitations of Legislation 33
III. THE (CURRENT) LIMITATIONS OF LEGISLATION
In response to the widespread condemnation of the 2012 tax avoidance struc-

tures, and in an effort to bolster the legislative gaps that remained despite judicial
moves towards an anti-avoidance doctrine, the UK introduced the GAAR. A
GAAR had long been discussed in the UK but it was the 2012 scandals that
proved to be the catalyst for adoption, with the rule coming into force on 17
July 2013.85
Perhaps explaining part of the reason for the delay, the GAAR was a signifi-
cant move away from the UK’s traditional policy towards tax avoidance, which
historically introduced targeted legislation to close down specific, undesirable,
structures. The rationale for this approach is understandable. Tax avoidance is a
highly contentious area and, as we have seen, is typically considered in a literal
and formalistic way. Against this context it is not surprising that the govern-
ment prioritised legal certainty over broader concerns of equity. However, the
shortcomings of this legislative approach are similarly clear. Given that creative
compliance is a practice that ‘thrives [upon] bright line rules’86 the consequence
of this regulatory strategy become immediately apparent. What emerged was
a cycle of behaviour whereby creative tax structures would be closed down
by a detailed regulatory response, only for a new scheme to be adopted once
specialists had designed a structure to circumvent the latest set of reforms.
These new schemes would then be met with further regulation, which would
again be responded to with the development of new structures, and so the cycle
continued.
In an effort to avoid this, by now familiar, regulatory cycle, the GAAR was
designed to have a general and preventative effect, namely to discourage the
adoption of ‘abusive tax arrangements’ by counteracting (effectively nullify-
ing) the tax benefit that they would otherwise confer.87 That is, the repercussion
of breaching the GAAR as originally implemented was simply to remove the
artificial tax gain that the structure sought to achieve; it did not include a puni-
tive element. More recently, in recognition of the limitation of this approach
(discussed further below), a punitive element has now been introduced.88
However, for the reasons discussed in Chapter 4, without broader change the
GAAR penalty is, on its own, unlikely to motivate a more responsible concep-
tion of compliance.
The GAAR defines a ‘tax arrangement’ as an arrangement in respect of which
it would be ‘reasonable to conclude that the obtaining of a tax advantage was
the main purpose, or one of the main purposes’ of the structure concerned.89
85 The Inland Revenue published a GAAR consultation in 1998. See Inland Revenue Press
Notice 127/98, 5 October 1998.

86 McBarnet ‘Financial Engineering or Legal Engineering?’ (n 4), 79.
87 Finance Act 2013, s 206.
88 Equal to 60% of the tax due. Finance Act 2016, s 158.
89 Finance Act 2013, s 207(1).
Such an arrangement is ‘abusive’ if it ‘cannot reasonably be regarded as a

reasonable course of action’90 (the so-called ‘double reasonableness’ test) having
regard to, inter alia, the underlying policy objectives of the relevant regulatory
provision.91 Thus, the GAAR seeks to change traditional standards of compli-
ance, as enshrined in the Duke of Westminster decision, by replacing them with
a broader, more spirited construction that prohibits both illegal and abusive
structures.
Given that the usual time period for understanding the impact of tax legisla-
tion can be as long as ten years,92 the GAAR is still in its relative infancy (the first
ruling of the GAAR Panel was given in 2017 with its second in 2019).93 As such,
we are not fully able to assess how it will fare in reaching its objectives. However,
several indicators suggest an element of scepticism. Historically, single-issue
regulation (such as SOX), passed without substantial change to the wider
context that corporations operate within have had a limited impact on changing
corporate behaviour regarding the complex issue of corporate compliance.94 As
Chapter 1 explained (and Chapter 3 explores in more detail), compliance is a
social construct, informed by a range of environmental factors (industry, market
and cultural norms for example), and is rarely motivated by a targeted legislative
requirement.95 The consequence of this is that if we do not address the norms
that define ‘compliance’, a discrete regulatory intervention such as the GAAR is
unlikely to achieve meaningful change. Indeed, the somewhat paradoxical impli-
cations of failing to amend a corporation’s intrinsic definition of ‘compliance’
is clear. Without wider conceptual reform, the GAAR is itself susceptible to the
technical compliance practices it is trying to prevent.
The relatively small number of Panel rulings (to date only 15 opinions have
been published)96 and the perceived need to introduce the GAAR penalty suggest
that this scepticism of the GAAR’s impact is well-founded. However, whilst this
scepticism is borne, in part, from previous experience this is not the only basis
for cynicism. Rather, when looking at the structure of the GAAR itself we see
three potential, although arguably unavoidable, limitations to its success.97
First, notwithstanding the apparent breadth of the GAAR’s application to
‘abusive tax arrangements’, on closer analysis it does not necessarily apply to
90 ibid,s 207(2).
91 ibid,s 207(2)(a).
92 See H Self, ‘Do we Still need a GAAR?’ Tax Journal 2 September 2016.
93 A Seely, Tax Avoidance: A General Anti-Abuse Rule, Commons Briefing Paper (Number 6265)
4 February 2020, 48.

94 Notwithstanding the significant provisions introduced by SOX, subsequent corporate scandals
(such as those outlined in this chapter) indicate that it failed to achieve the wholesale behavioural
change that was necessary to curtail such corporate practices moving forward.
95 L Edelman, S Petterson, E Chambliss and H Erlanger, ‘Legal Ambiguity and the Politics of
Compliance: Affirmative Action Officers’ Dilemma,’ (1991) 13(1) Law and Policy 73, 74.
96 GAAR Panel opinions are published online: www.gov.uk/government/collections/tax-avoidance-
general-anti-abuse-rule-gaar#gaar-advisory-panel-opinions.
97 For a wider discussion as to the challenges of anti-abuse rules see D Weisbach, ‘Ten Truths
About Tax Shelters,’ (2002) 55(2) Tax Law Review 215, 247–251.
the intra-group, international schemes that gave rise to its introduction. In its
original guidance on the GAAR, HMRC acknowledged that the mere fact that
a transaction benefits from a double tax treaty does not mean it constitutes
‘abusive’ conduct. To fall within the remit of the GAAR, the transaction would
need to exploit particular provisions of the tax treaty, or its interaction with UK
tax law, in a way that ‘could not have been intended’98 by the UK and its coun-
terparty. This is a seemingly reasonable approach to adopt on the face of the
regulation. However, it will be recalled that this is the very type of activity that
the Double Irish Dutch Sandwich structure engaged, such that the HMRC’s own
guidance on the GAAR acknowledged, perhaps surprisingly, that ‘many cases
of the sort which generated a great deal of media and Parliamentary debate
in the months leading up to the enactment of the GAAR cannot be dealt with
by the GAAR’.99 This, combined with the double-reasonableness test, which is
expressly stated to act as a taxpayer safeguard, is likely to operate to reduce the
number of large corporate structures that are caught by the GAAR. The limited
scope of the rule therefore goes some way to explaining the lack of enforcement
action to date,100 reflected in the description by the then Shadow Exchequer
Secretary that the GAAR was ‘disappointingly narrow’.101
This limitation, arguably the product of trying to balance (and some have
suggested favour)102 taxpayer certainty with broader efforts to mitigate abuse,
gives rise to the second difficulty inherent within the text of the rule. That is, the
GAAR fails to make a sufficiently unequivocal admonishment of creative tax
structures. As shall be seen in Chapter 3, attempts to reconceptualise corporate
compliance standards are operating against powerful norms that support (and
legitimise) narrow compliance definitions. One important element in changing
this perception (although by no means the only one) is harnessing the expres-
sive (or symbolic) function of law to make a clear statement as to the normative
wrong of creative compliance.103 The introduction of a punitive element will
go some way to strengthen the expressive function of the GAAR. However, the
penalty of 60 per cent was less than the 100 per cent argued for by the opposition
98 HM Revenue & Customs, General Anti Abuse Rule (GAAR) Guidance – Part D (30 January 2015),
para D12: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_

data/file/602421/HMRC_GAAR_Guidance_Part_D_-_with_effect_from_30_January_2015.pdf
99 HM Revenue & Customs, General Anti Abuse Rule (GAAR) Guidance (30 January 2015),
(‘GAAR Guidance’) para B5.2: https://assets.publishing.service.gov.uk/government/uploads/system/

uploads/attachment_data/file/602420/HMRC_GAAR_Guidance_Parts_A_B_and_C_-_with_
effect_from_30_January_2015.pdf (accessed 9 August 2020).
100 As to the intentions of the double reasonableness test, see GAAR Guidance (n 99), paras B12
and C5.10.3.
101 Catherine McKinnell, HC Deb 13 September 2012, c 525.
102 Jolyon Maugham QC, ‘Tax Avoidance – Game Over?’ ICAEW Hardman Lecture, ICAEW Tac
Faculty 12 November 2014.

103 On the expressive function of law more generally see C Sunstein, ‘On the Expressive Function
of Law,’ (1996) 144 University of Pennsylvania Law Review 2021.

party, and will need to be balanced against the perceived risk of prosecution.104
At this stage, even with the additional penalty, there is little to suggest that the
GAAR will change the current perception of tax compliance as a mere cost-
benefit analysis.
If the GAAR had adopted a more robust prohibition on corporate struc-
tures this would have gone further in changing the social meaning of acceptable
compliance and therefore the standing against which abusive structures would
be judged.105 One relatively recent example of the success of such an approach is
the UK Bribery Act 2010. The Bribery Act 2010 received significant (and global)
early success in changing corporate attitudes to anti-corruption initiatives by
adopting a zero tolerance approach to bribery (combined with significant penal-
ties for breach).106 It is clear that bribery is, normatively, viewed as a different
category of behaviour to tax avoidance, which it could be argued explains the
widespread engagement with the Bribery Act 2010. However, it must be noted
that bribery has always been illegal in the UK and thankfully never considered
to be ‘ethical’ conduct (even before the 2010 Act).107 Nevertheless, the Brib-
ery Act 2010 had a significant impact on corporate practice and, in particular,
supply chain management (thereby extending its reach considerably). In this way,
it appears that the unequivocal stance of the Bribery Act, its breadth of applica-
tion and consequences for breach (all of which are lacking from or, at best, not
as significant within, the GAAR) generated a swift and significant behavioural
response.108 In contrast to the Bribery Act, the GAAR has failed to instil, in the
104 In August 2016 the government released a consultation seeking to impose a significant punitive
sanction on professionals that advise upon such abusive tax structures, see HM Revenue & Customs,
Strengthening Tax Avoidance Sanctions and Deterrents: A Discussion Document, Consultation
Document (17 August 2016), paras 2.15 and 2.16. This is a welcome development that should limit
certain incidents of aggressive tax planning.
105 Sunstein, ‘Expressive Function’ (n 103), 2022. Note that in this context, the existence of a puni-
tive sanction is valuable in harnessing the expressive function of the regulation. As discussed in ch 4,
the mere existence of a severe punishment is not in itself sufficient to engender material changes to
compliance behaviour.
106 Bribery Act 2010, ss 7 and 11. When considering the Bribery Act 2010 it is prudent to note
the importance of enforcement decisions when examining the expressive function of law. The early
success of the Bribery Act 2010 is starting to be potentially undermined by the relative lack of
enforcement decisions taken to date and the introduction of Deferred Prosecution Agreements
(pursuant to Sch 17, Crime and Courts Act 2013). For a more detailed discussion of the Bribery
Act 2010 see A Donovan, ‘Systems and Controls in Anti-Bribery and Corruption’ in HY Chiu and M
McKee (eds), The Legal Framework for Corporate Governance in Banks and Financial Institutions
in the UK (Edward Elgar Publishing Limited, 2014).
107 Anti-corruption legislation included: the Sale of Offices Act 1551; the Sale of Offices Act 1809;
the Public Bodies Corrupt Practices Act 1889; the Prevention of Corruption Act 1906; the Preven-
tion of Corruption Act 1916; Honours (Prevention of Abuses) Act 1925; Licensing Act 1964, s 178;
Criminal Law Act 1967, s 5; Local Government Act 1972, s 117(2); Customs and Excise Management
Act 1979, s 15; Representation of the People Act 1983, ss 107, 109 and 111–115; and, more recently,
the Anti-Terrorism, Crime and Security Act 2001 (ss 108–110).
108 The importance of a significant sanction to this book is its impact on the normative perception
of breach. However, the GAAR’s initial lack of punitive sanction (and then relatively low penalty)
means that it is also unlikely to be effective in the current normative environment, which views
mind of corporations at least, the view that tax avoidance is a normative wrong
that should be prevented.
The final structural challenge with meeting the GAAR’s objective is the peren-
nial problem of regulatory design. In this regard, the GAAR eschews ‘command
and control’109 style regulation and instead adopts a ‘New Governance’110
technique of principles-based regulation. That is, it prohibits ‘abusive arrange-
ments’ rather than engaging in a prescriptive rules-based approach.111 The use
of this regulatory technique is not surprising. Principles-based regulation aligns
with the rhetoric of the current compliance debate and, in particular, the need
for more responsible corporate behaviour.112 More than this, it is the optimum
regulatory design to ‘minimize the scope for creative compliance’,113 which as
we saw in Chapter 1 is a practice that manipulates bright line rules to under-
mine the spirit of regulation (Enron’s use of the 3 per cent rule being a case in
point).114
However, whilst principles-based regulation may be the correct regula-
tory design to adopt,115 there nevertheless remains a significant and, perhaps
unavoidable, challenge to the efficacy of this design strategy in the long term.
compliance as a mere pricing exercise. On which see C Williams, ‘Corporate Compliance with the
Law in the Era of Efficiency,’ (1997) 76 North Carolina Law Review 1265, 1286–1287.
109 Command and control style regulation being the use of ‘detailed rules backed by criminal sanc-
tions overseen by a government agency’. See J Black, ‘Paradoxes and Failures: “New Governance”
Techniques and the Financial Crisis’ (2012) 75 Modern Law Review 1037, 1041.
110 There is no single agreed definition of ‘new-governance’. However, it is generally accepted that
it embraces regulatory design that has moved away from traditional command and control style
regulation to a more nuanced approach that often engages both private and public actors to achieve
regulatory objectives, see R Weber, ‘New Governance, Financial Regulation, and Challenges to
Legitimacy: The Example of the Internal Models Approach to Capital Adequacy Regulation’ (2010)
62 Administrative Law Review 783, 836. In this way it seeks to ‘offer a third way vision between
unregulated markets and top-down government controls’, see O Lobel, ‘New Governance as Regula-
tory Governance,’ (2012) San Diego Legal Studies Paper No 12-101, 3. Examples of new governance
techniques include principles-based regulation and meta-regulation (where regulators require corpo-
rations to develop their own systems for compliance). On this see Black, ‘Paradoxes and Failures’
(n 109).
111 Kaplow explains the distinction between a rule and a principle (or standard) as follows: ‘a rule
may entail an advance determination of what is permissible, leaving only factual issues for the adju-
dicator … A standard may entail leaving both specification of what conduct is permissible and
factual issues for the adjudicator.’ See L Kaplow, ‘Rules Versus Standards: an Economic Analysis’
(1992) 42(3) Duke Law Journal 557, 560. In offering this definition, Kaplow provides the example of
the difference between a rule that requires a driver to keep within a speed limit of 55 miles per hour
and a principle that prohibits ‘excessive’ speed.
112 For a broader discussion of the rhetoric of principles-based regulation see J Black, ‘Forms and
Paradoxes of Principles Based Regulation,’ (2008) 3(4) Capital Markets Law Journal 425, 430–432.
113 ibid, 438.
114 Lord Justice Diplock observed that not only are tax transactions that come before the courts
not envisaged by the relevant regulation but that they were indeed ‘devised as a result of it’, see Lord
Justice Diplock, ‘The Courts as Legislators,’ Presidential Address to the Holdsworth Club, Univer-
sity of Birmingham 1965, 6 www.kessler.co.uk/wp-content/uploads/2012/05/CourtsAsLegistlators.
pdf (accessed 9 August 2020).
115 Although note that it is unlikely that a regulatory system will rely upon a single approach to
design. See CL Ford, ‘New Governance, Compliance and Principles-Based Securities Regulation,’
(2008) 45(1) American Business Law Journal 1, 8.
Pending judicial or other relevant determination, principles-based regula-

tion can be seen (by those subject to it) to lack legitimacy on the basis of its
uncertainty.116 In due course, this certainty is achieved as the broad principles are
interpreted either by the courts, advising counsel or enforcement agencies and
it is here that we see the long-term difficulty with this type of regulatory design.
That is, over time the principle eventually becomes narrowed to ‘congeal around
a particular meaning’.117 This gives rise to the paradox of interpretation recog-
nised by Julia Black, namely that broad principles, designed to give flexibility,
are nevertheless capable of detailed interpretation.118 In effect, this congruence
of rules and principles, means that after a while the principle exists only ‘at the
formal level’119 whilst in practice the regulation is effectively comprised of clear
rules that remain susceptible to the creative compliance processes that they were
designed to avoid.120
Against these inevitable regulatory challenges, even when adopting a more
principles-based approach, the importance of trust in the regulatory system,
and the approach to regulatory gap-filling adopted by legal subjects, starts
to emerge. Julia Black observes that a successful principles-based regime is
dependent on a ‘high level of trust between all the participants in the regulatory
regime’.121 Specifically, for principles-based regulation to work ‘firms need to
be concerned to go beyond minimal compliance’122 and that without this trust,
the regulation ‘will never be operationalised’.123 The difficulty facing the GAAR
is that one of the significant consequences of creative compliance (discussed in
Chapter 4) is that it undermines not only the trust between the regulator and
regulatee, but also as between regulatees inter se.
Despite these difficulties, it is important to appreciate that principles-based
regulation has one significant benefit. That is, it facilitates the continued reval-
uation by a corporation of their ‘understanding of compliance’124 making it
susceptible to changing social norms. Harnessed in the right way, this gives the
GAAR the capability to reduce creative compliance practices, provided such
social norms are supportive of spirited compliance. However, to utilise this
potential what is crucial, and reflecting the central claim of this book, is that we
116 Black, ‘Forms and Paradoxes’ (n 112), 426.

117 Ford, ‘New Governance’ (n 115), 9. As to this convergence of rules and principles more generally,
see F Schauer, ‘The Convergence of Rules and Standards,’ (2003) New Zealand Law Review 303.
118 Black ‘Forms and Paradoxes’ (n 112), 446.
119 ibid, 447.
120 Indeed, this could be seen in practice with the response to the Ramsay decision. Initially feared
to prohibit any transaction without a genuine commercial purpose, the ‘big four’ accounting
firms quickly established structures that circumvented and survived the decision’s seemingly broad
application.
121 Black, ‘Forms and Paradoxes’ (n 112), 456.
122 ibid, 427.
123 ibid, 456.
124 Ford, ‘New Governance’ (n 115), 28.
Conclusion 39
establish the requisite norms and supporting framework to encourage a broad

definition of compliance and legitimise efforts to constrain creative compliance.
Thus, whilst Hector Sants (acting in his former capacity as the Chief Executive
Office of the then Financial Services Authority) was arguably being somewhat
facetious when he said that a ‘principles-based approach does not work with
people who have no principles’,125 there is some merit to this observation. We
need to change the frame of reference that corporations both operate, and define
compliance, within for the GAAR to be a success.126 That is, to move ethical
compliance from being rule (or principle) governed to norm governed.127
IV. CONCLUSION
Tax avoidance has proven to be a seemingly intractable problem to resolve. Even

against the backdrop of increasingly purposive approaches to legislative inter-
pretation and the introduction of a general anti-abuse rule, corporations persist
with artificial, yet lucrative, creative compliance practices.
The continued focus on the symptoms of creative compliance, rather than
its cause, has meant that we have yet to meaningfully curtail the fundamental
challenge of how compliance is defined and understood by legal subjects. The
problem of creative compliance is, in part, one of legislative gap-filling. These
gaps will always remain, whether regulations are complex and targeted (like
the UK’s early responses to tax avoidance) or adopt a broader approach like the
GAAR. As we continue to see, corporations are proving resistant to even the most
sophisticated of regulatory designs, meaning that these gaps (and indeed express
statutory language) are defined in reductive and profit maximising terms. The
challenge we face is not necessarily more regulation, but a better understand-
ing of the root cause of why, and therefore how best to address, the reductive
approach to compliance that seemingly pervades the corporate community. As
has been noted elsewhere, ‘the existence of widespread tax avoidance is evidence
that the system, not the taxpayer, stands in need of reform’.128
To undertake this holistic review, we need to return to the root cause of the
problem. That is, why do corporations have such latitude to interpret compli-
ance in the way that they do and what does that process of construction tell us
about the current crisis? The next chapter answers these questions by exploring
125 A Townshend, ‘Hector Sants says bankers should be “very frightened” of the FSA’ The
Telegraph 12 March 2009 www.telegraph.co.uk/finance/newsbysector/banksandfinance/4978496/

Hector-Sants-says-bankers-should-be-very-frightened-of-the-FSA.html (accessed 9 August 2020).
126 Edelman, ‘To Comply or Not to Comply’ (n 8), 105.
127 Michael, ‘Business Ethics’ (n 34), 8.
128 Malcolm Gammie QC, The Draft Finance Bill 2013: Oral and Written Evidence, 13 March 2013,
114 citing the Royal Commission on the Taxation of Profits and Income Final Report, Cmd 9474
June 1955.
compliance as a social construct, how this has enabled such a reductive defi-
nition to emerge and the process by which this definition can rapidly become
institutionalised across the corporate community. In doing so, this enquiry
provides a foundation for the rest of the book, distilling those elements of the
corporate environment that require further analysis if we are to fully understand
the reasons for the compliance crisis and why it has proven to be such an intrac-
table problem to resolve.
3
Constructing Compliance:
Freedom to Choose?
There can be a serious obstacle to freedom in the fact that individual choices are a
function of social norms, social meanings and social roles, which individual agents
may deplore, and over which individual agents have little or no control.1
Cass Sunstein
T
he 2012 tax scandals (and associated efforts at reform) revealed a pressing
need to return to first principles, none more so than to the very definition
of compliance itself. The debates surrounding the PAC investigation, as
well as the PAC exchanges themselves, exposed a striking discrepancy between
expectations of what ‘compliance with the law’ actually meant (or should mean),
with opinions divided as to whether the tax structures in question were ‘evil’ or
‘ingenious’. Yet, how has such a seemingly straightforward concept as legal com-
pliance proven not only to be this illusory but capable of such widely different, yet
equally entrenched, points of view? Moreover, what does the process of defining
compliance tell us about the current crisis and possible avenues for reform?
Ostensibly, we can attribute this discrepancy in definition to the apparent
freedom that individuals have to interpret what compliance might mean in any
given situation. The concept of compliance is, after all, an ambiguous one. There
is no general rule to refer to that specifies whether to ‘comply’ with the law
requires compliance with its letter or its spirit.2 However, whilst there is indeed
a relative latitude for interpretation, if we explore the process of construction
in more detail, we see that a number of important (and challenging) questions
emerge as to the extent to which an individual can truly be described as free to
choose the definition (and standard) of compliance that they adopt in a corpo-
rate environment. In particular, and as this chapter explores, we see the powerful
and pervasive impact that social (including corporate) norms play in shaping a
person’s definition of compliance, raising complex questions as to individual
freedom and accountability. The answers to these questions then raise similarly
challenging questions as to the regulatory responsibility, if any, for mitigating
these norm-driven behaviours and concerns.3
1 CR Sunstein, ‘Social Norms and Social Roles’ (1996) 96(4) Columbia Law Review 903, 910.
2 Chapter 6 suggests that the rule of law provides a framework for answering this question.
3 See Sunstein, ‘Social norms,’ (n 1) 907 and discussion at footnote 11.
42 Constructing Compliance: Freedom to Choose?
This chapter begins by exploring the nature of compliance as a social

construct. Whilst there are many facets to social constructionism, Section
I focuses on the process by which a person defines and gives meaning to a
concept such as compliance.4 In doing so, it shows how a particular construc-
tion of a term can rapidly become legitimised (the importance of which is
considered further in Chapter 4), habitualised and ultimately institutionalised
within a particular community. Whilst understanding the impact of norms in
this way highlights the scale of the challenge in reforming deeply held, and
often entrenched, views it is nonetheless reassuring. It shows how the current
construction of compliance, which is undertaken through a profit maximis-
ing and reductive lens, is not an inevitable state of affairs but is, if given due
reflection, capable of reconstruction. Against this overview, Section II then
explores the nature of norms and the depth of their influence in more detail. The
word ‘norm’ is an often used, but not always defined, term and there is a risk
that its increasingly colloquial usage belies the critical and instrumental role that
norms play in society. As such, Section II considers the definition of social norms
(both descriptive and injunctive) and their function in shaping not only a citizen’s
definition of compliance but, crucially, how they also ascribe meaning to it.
Building on this general discussion, Section III examines the nature of corpo-
rate norms more specifically. It explores how shareholder wealth maximisation
has emerged as a dominant norm within the corporate environment, the legiti-
macy of which is perceived to be reinforced by the legal system itself, imbuing it
with a particularly symbolic (or expressive) force.5 The salience of this norm has
an acute behavioural impact (considered in this chapter and the next), operating
as both a descriptive and injunctive norm making it exceptionally difficult to
challenge. It is for this reason that, as we have seen with reform efforts such as
the GAAR, norm divergence (and therefore normative and social change) has, to
date, proven to be extremely difficult and rare.
Concluding the substantive parts of the chapter, Section IV draws the discus-
sion of the function of norms together and returns to the question of freedom,
itself a central theme of this book. It explores the powerful impact of norms
on individual choice and behaviour, raising the question as to what extent can
an individual be said to truly ‘choose’ a particular construction of compli-
ance? Drawing on Cass Sunstein’s work, this section introduces the conceptual
foundations for the empirical studies considered in the next chapter, explaining
how norms underpin individuals’ seemingly economically irrational decisions.
In closing, Section IV considers how we might seek to change social norms as a
mechanism for reforming how constructs such as compliance are defined.6
4 I Hacking, The Social Construction of What? (Cambridge University Press, 1999).1–3. On social
constructionism more generally, see PL Berger and T Luckmann, The Social Construction of Reality,
A Treatise in the Sociology of Knowledge (Anchor Books, 1966).
5 As to the expressive function of law, see Sunstein’s seminal work: CR Sunstein, ‘On the
Expressive Function of Law,’ (1996) 144 University of Pennsylvania Law Review 2021.
6 Sunstein, ‘Social norms’ (n 1), 930.
The Social Construction of (Creative) Compliance 43
I. THE SOCIAL CONSTRUCTION OF (CREATIVE) COMPLIANCE
How we interpret a concept such as compliance can have profound conse-

quences. It influences how we behave, how we judge the actions of others and
how we define our responsibilities to society and its institutions. Understanding
this process of construction is not therefore an exercise in mere semantics but a
critical step in reflecting upon the causes of the compliance crisis and informing
our views as to the relative responsibilities for it. In particular, if (as this chapter
suggests) our construction of compliance is, at least in part, the product of influ-
ences that are beyond our control, what are the implications of this for personal
liability and regulatory policy?
To build the foundations for this analysis, the following sections explore the
process of ‘social constructionism’.7 That is, the way in which society ascribes
meaning to concepts such as money, law and, as a corollary, compliance with
those laws. In doing so, we start to see the instrumental role that social norms
play in shaping our definition of compliance and, as a consequence, why creative
compliance has proven to be such a seeminlgy intractable problem to resolve.
Nonetheless, and somewhat reassuringly, it is this understanding that also
provides important insights into how we can approach structuring potential
avenues for effective reform.
A. Social Constructionism: Driving Divergent Definitions
Unlike a building or physical object that can be observed, described and

objectively verified, ‘compliance’ is an abstract concept. It does not have an
incontrovertible meaning that simply needs to be discovered, rather it requires
legal subjects to navigate its ambiguity, defining what the legitimate boundaries
of compliance might be in any given situation.8 In this way, compliance is a
social construct, a concept that acquires its meaning from (or, as we shall see, is
given its meaning by) those engaging with it. On the face of it, this exercise in
interpretation seems to afford a legal subject significant freedom to ‘influence
the meaning of compliance to suit [their] own priorities’,9 and, to a degree, this
is true. However, if we explore this process of social construction in more detail,
7 This chapter cannot do justice to the many contours of the social constructionism debate and
the literature on social constructionism is vast. However, for a useful and engaging introduction see
Hacking, The Social Construction (n 4).
8 This interpretive exercise is particularly acute when looking at principles-based regulation
such as the GAAR. Here, regulation is necessary (and rightly) open-textured to encourage reflexive
engagement with regulatory objectives in an effort to encourage broader behavioural change and
avoid the pitfalls and relative ineffectiveness of a more command and control style approach (see ch 2
for a more detailed discussion of the GAAR and the regulatory principles underpinning it).
9 C Parker and VL Nielsen, ‘Introduction’ in C Parker and VL Nielsen (eds) Explaining
Compliance Business Responses to Regulation (Edward Elgar 2011), 15. As we have already seen,
this interpretation does not always align with regulatory intent.
we can start to see that far from being the product of unbridled free choice, a
person’s determination of compliance is both informed, and constrained, by the
normative environment that they operate within.
One point of clarity should be made from the outset, namely that saying crea-
tive compliance is a social construct is something of a slight misnomer.10 Rather,
a legal subject ‘socially constructs’ compliance, a distinction that might be subtle,
but it is important. By separating the legal subject (in our case the corporation)
from the object of construction (compliance), we are better placed to visualise
the process of interpretation and its implications. In particular, this separation
is helpful in emphasising the role and, more specifically, the perspective of the
individual in ascribing meaning to a particular concept. Understood in this way,
we can start to see how a single object, concept or idea (such as compliance)
can be construed differently by different people and, importantly when looking
to structure reform, the reasons for this. Namely, that each person undertakes
this exercise in construction informed by their own sphere of influence, which is
composed of multiple social norms that are themselves contingent on a range of
variables (including the relevant social context and any applicable social roles).
Against this, we can immediately appreciate that the process of social
construction is not an atomised or siloed exercise. In fact, far from it (indeed
this is the crux of the issue). Whilst understanding the centrality of the person
is critical to anchor the perspective from which a definition is produced, indi-
viduals are subject to a wide and diverse range of influences and it follows that
concepts such as compliance ‘do not exist in a vacuum’.11 Rather, they are viewed
(and therefore defined) through the lens, and subject to the influence, of an indi-
vidual’s wider normative environment.12 As a consequence, to understand how
(and why) a legal subject has defined compliance in a particular way, we need
to understand the norms inherent within their environment, or what DiMaggio
and Powell describe as their ‘organizational field’.13
These social (or environmental) norms inform our interpretation of concepts
such as compliance in a very particular way. They do not simply provide a
dictionary definition of a term;14 they attach meaning to it. In doing so they
not only act as a guide to our behaviour, but also imbue our actions with an
‘expressive dimension’.15 That is, our actions in and of themselves convey mean-
ing as to our ‘attitudes and commitments’.16 For example, when we think about
10 R Mallon, ‘Naturalistic Approaches to Social Construction’, in EN Zalta (ed) The Stanford
Encyclopedia of Philosophy (Spring 2019 Edition), https://plato.stanford.edu/archives/spr2019/

entries/social-construction-naturalistic/ (accessed 9 August 2020).
11 Hacking, The Social Construction (n 4), 10.
12 L Edelman, ‘Legal Environments and Organizational Governance: The Expansion of Due
Process in the American Workplace,’ (1990) 95(6) American Journal of Sociology 1401, 1403.
13 PJ DiMaggio and WW Powell, ‘The Iron Cage Revisited: Institutional Isomorphism and
Collective Rationality in Organizational Fields’ (1983) 48 American Sociological Review 147, 148.
14 On which see HLA Hart, Essays in Jurisprudence and Philosophy (Clarendon Paperbacks, 1983), 21.
15 Sunstein, ‘Social norms’ (n 1) 925.
16 ibid.
paying a ‘tip’ or gratuity to a service provider this is not simply understood as

the giving of money to a person performing their job. Rather, our construction
of the term delineates when, to whom and how much we tip, attaching meanings
to each of these things.17 For example, when we tip our hairdresser this is a posi-
tive act that conveys appreciation for their work. In contrast, an attempt to ‘tip’
a police officer leads to entirely different consequences. We can see, therefore,
that the meaning that a norm applies to any given concept can rarely be under-
stood in isolation but is often highly context contingent.
As well as being context specific, social meaning can change depending on the
social role that someone occupies. A person having a glass of wine on a Satur-
day night with friends will not be met with social disapproval. However, that
same person having a glass of wine in their capacity as a primary school teacher
whilst on a school field trip will.18 Similarly, we may find that corporate officers
described as ‘fat cats’, acting within a perceived ideology of ‘crony capitalism’,
working for organisations described as ‘evil’ will ascribe a similar meaning as
to the expectations of their conduct. Importantly, and this is explored in more
detail in Chapter 4, so too can the regulators that they engage with. By under-
standing how a person defines a particular concept, we can start to build a better
picture of the wider factors that need to be addressed (their social environment,
comprising their social norms, context and role), if we want to develop effective
policies to encourage a redefinition of that term. As later parts of the chapter
discuss, it is this social meaning that also provides the basis for social sanctions,
which act as powerful constraints on behaviour that would otherwise deviate
from the accepted norm.
In some respects, different normative communities (or organisational fields)
can share a number of similar norms. For example, there may be widely and
commonly held norms concerning the presupposition that a legal system exists,
that its framework of rules legitimately demands at least some level of adherence
and that the corporation is a recognisable legal actor in its own right.19 However,
in other respects, these communities can differ significantly (even within the
same jurisdiction). For example, when looking at expectations of corporate
purpose, the normative ordering between profit maximisation and ‘ethical’ deci-
sion making and the perceived legitimacy of the state to control private decision
making. From a compliance perspective, and returning to the question posed at
the start of the chapter, we can therefore start to see how different definitions of
the same term emerge between social groups. As compliance is the product of
social norms, where those norms differ then so too does the corresponding defi-
nition. As Berger and Luckmann observed, the reality of a Tibetan monk may
differ to that of an American businessperson, whilst similarly (and as we saw in
17 The example is drawn from L Lessig, ‘The Regulation of Social meaning’ (1995) 62 University
of Chicago Law Review 943, 952.

18 Sunstein, ‘Social norms’ (n 1) 934.
19 Hart, Essays in Jurisprudence (n 14).
Chapter 1), the expectations of compliance by members of the PAC can differ to
those held by the executives of a large multinational.20
In contrast to the divergent definitions that can emerge between different
communities, when we look within a social group (which embodies a common set
of social norms) it is not surprising that we see a singular definition or construc-
tion emerge. However, what is interesting about this commonality of meaning,
which is considered in more detail in the next section, is how that meaning becomes
entrenched and proliferates across group, rendering it exceedingly resilient to
reform.21
B. Intra-Group Convergence: Habitualisation and Isomorphism
One consequence of the social construction of compliance is that once a mean-

ing attaches to a concept it is often readily accepted and adopted by the rest of
the relevant community. By their very nature, social constructs are ambiguous
meaning that when a person (corporate or individual) seeks to understand and
define a term they look to their normative environment for guidance (particu-
larly when liability can attach to the wrong conclusion).22 These environments
embody a sense of not only what, in the case of compliance, the law means
or what ‘best practice’ might look like, but (as we shall in the next section)
they convey the expectations, and therefore potential social sanctions, of the
relevant community. Returning to our tax examples, legislation might provide a
tax deduction for investment in research and development that was intended for
arm’s length transactions, but in respect of which some communities develop a
norm that accommodates utilising these provisions as part of a manufactured
intra-group arrangement.
After a corporation has adopted a particular interpretation of compliance,
this standard can then become ‘habitualised’.23 That is, having made the deci-
sion to adopt a certain construction (and behaviour) this is simply repeated
when the corporation is faced with a similar set of circumstances in the future.
This replication of behaviour intuitively makes sense. Once a decision to act in
a certain way has been made, there is no longer a need to engage in the cognitive
tension of deciding how to proceed every time the same set of facts is presented
as the normative analysis has already been undertaken. On the contrary, it would
actually increase stress to come to a different decision on similar facts in the
20 Berger and Luckmann, The Social Construction (n 4), 2.

21 As Luckmann later observed, social concepts once defined through ‘social interaction …
they are again transmitted in interaction’. See T Luckmann, ‘The Communicative Construction
of Reality and Sequential Analysis, A Personal Reminiscence’ (2013) 9(2) Qualitative Sociology
Review 40, 43.
22 LB Edelman and SA Talesh, ‘To Comply or Not to Comply – That isn’t the Question:
How Organizations Construct the Meaning of Compliance,’ in C Parker and VL Nielsen (eds)
Explaining Compliance Business Responses to Regulation (Edward Elgar, 2011), 107.
23 Berger and Luckmann, The Social Construction (n 4), 51.
future due to the cognitive dissonance that this would create. The benefit of this
habitualisation, and what makes it so attractive to the individual entity, is clear.
It effectively removes the ‘burden’24 of choice and reduces friction by allowing a
corporation to default to an agreed construction with minimum effort.25
Once habitualised, a particular construction can, remarkably quickly,
become institutionalised across the rest of the organisational field, becom-
ing a norm in and of itself.26 As a practice becomes sufficiently widespread
within a given community (or deployed by particularly influential participants
within it) its adoption becomes a matter of ‘legitimacy rather than improv[ing]
performance’.27 In effect, the construct (such as creative compliance) becomes
‘sanctioned’28 by the group, graduating from an indication of, or guide to,
permissible behaviour to becoming an accepted baseline or, in some cases, even
an expectation. This replication leads to what Meyer and Rowan described as
‘institutional isomorphism’.29 That is, entities within the same organisational
field start to model the successful behaviours of others within the group,30
particularly when faced with uncertainties.31 The systemic consequences of this
convergence and institutionalisation of behaviours is both clear and profound.
Determinations of social constructs, once ambiguous (potentially even ques-
tionable), become normatively permissible, and ‘take on a rulelike [sic] status’.32
Once this institutionalisation has occurred, these norms are ‘in some measure
beyond the discretion of any individual participant or organization … [and are] …
taken for granted as legitimate’.33 In sum, members of a given community are
able to define their own social constructs with the consequence, in the case of
24 ibid, 53.
25 ibid, 52. As we shall see in ch 4, this contributes to a self-perpetuating cycle of behaviour, which
has been a powerful contributor to the current compliance crisis.
26 ibid, 54.
27 DiMaggio and Powell, ‘The Iron Cage Revisited’ (n 13), 148.
28 ibid.
29 JW Meyer and B Rowan, ‘Institutionalized Organizations: Formal Structure as Myth and
Ceremony’ (1977) 83(2) American Journal of Sociology 340, 349. See also DiMaggio and Powell, ‘The
Iron Cage Revisited’ (n 13), 149, drawing on Hawley’s definition of isomorphism as a ‘constraining
process that forces on unit in a population to resemble other units that face the same set of environ-
mental conditions’. A Hawley, ‘Human Ecology’ in DL Sills (ed) International Encyclopedia of the
Social Sciences (New York, Macmillan, 1968), 328–7.
30 In this way, other market participants are subject to ‘mimetic’ isomorphism, that is they seek
to emulate the successful behaviour of others to address ambiguity. This is in contrast to, although
not entirely mutually exclusive from, coercive isomorphism where dominant market actors exert
pressure on other organisations to adopt certain behaviours and normative isomorphism used here
in a very specific sense to refer to the professionalisation of members of a specific occupation).
For a discussion of coercive, mimetic and normative isomorphism see DiMaggio and Powell,
‘The Iron Cage Revisited’ (n 13), 150–4.
31 Note that institutional isomorphism arises for multiple reasons, not merely uncertainty, see:
DiMaggio and Powell, ‘The Iron Cage Revisited’ (n 13), note also their discussion on goal uncer-
tainty (at 155). However, uncertainty as a driver of isomorphism is particularly relevant when
looking at compliance behaviours.
32 Meyer and Rowan, ‘Institutionalized Organizations’ (n 29), 341.
33 ibid, 344.
creative compliance, that they can ‘adapt the law to their own interests’,34 effec-
tively creating their own legal standard.35
C. The Implications of Compliance as a Social Construct
Understanding compliance as a social construct (and how it is so constituted)

provides two crucial insights into the necessary pathways to change. First, and
perhaps reassuringly for advocates of reform, if the current practice of crea-
tive compliance is, in part,36 the product of social construction then it follows
that this construction is not inevitable or, perhaps more accurately, completely
intractable.37 That is, if we change the relevant ‘social practices … social change
will automatically follow’.38 Indeed, we have seen how deeply held social views,
such as those relating to the risks (or otherwise) of passive smoking, have been
subject to rapid and significant change, giving rise to what Sunstein describes as
‘norm cascades’.39
This ability to trigger effective change brings us onto the second insight that
social constructionism offers. Namely, that by understanding how a person
construes a social concept (so-called idea-constructionism)40 we are better able
to identify the levers that need to be engaged to effect reform (including those that
can be used as a catalyst for a norm cascade). For example, in the case of compli-
ance, those parts of the normative environment that not only drive a reductive
and profit focussed definition of compliance, but do so despite, and oftentimes
to the exclusion of, an individual officer’s personal (and potentially conflicting)
views.41 In doing so, this analysis starts to illuminate one of the key reasons
why compliance reform has, to date, been so challenging. By relying on single
issue regulatory reform, the policy response has not yet sufficiently engaged
with the multiple factors that converge to shape the root cause of the problem.
34 L Edelman ‘Legal Ambiguity and Symbolic Structures: Organizational Mediation of Civil
Rights Law,’ (1992) 97(6) Law and Policy 1531, 1534–1535.

35 Edelman and Talish, ‘To Comply or Not to Comply’ (n 22), 103.
36 The process of definition is only one part of the creative compliance process. Having defined a
term, the ‘what’ of compliance, this does not guarantee that a citizen’s actions will follow (the ‘why’
of compliance). The issue of compliance motivation is considered in the next chapter.
37 For a discussion of the relationship between social constructionism and inevitability see
E Diaz-Leon, ‘What is Social Construction?’ (2015) 23(4) European Journal of Philosophy 1137.
38 ibid, 1145.
40 Diaz-Leon, ‘What is Social Construction?’ (n 37) 1139.
41 This is particularly the case for constitutive social construction, such as ‘compliance’. That is,
where the metaphysical possibility of the object in question is not dependent on the construction in
question, rather (and in exceptionally high-level terms) where it is only the meaning of the matter at
hand that is informed by our social construction of it. See Diaz-Leon, ‘What is Social Construction?’
(n 37), 1145.
The Meaning and Influence of Norms 49
That is, how citizens construe the meaning of compliance and the psychological
and behavioural consequences that this gives rise to.
One final note of caution should be raised before the following section
explores the meaning and function of norms in more detail. There is an
understandable risk that discussions of ‘social constructionism’ can give the
impression that a socially constructed term is ephemeral, somehow lacking
weight or authority. That, either way, it is certainly known by those interpreting
it that it is a transient and subjective determination. However, as this section has
discussed, the power of norms is such that the truth is, in fact, quite the opposite.
Once defined, a social construct and its corresponding meaning, underpinned
by the relevant community’s norms, becomes authority for that community,42
embodying a collective reality.43 Indeed, it is this reality that means we accept
currency not as pieces of paper but something representing value, why writing
is not simply ink marks on a page but something that conveys an agreed upon
message and why the very existence of laws that require a discussion of what
compliance means are recognised as claims having authority over our behaviour.
Thus, once conceived, a social construct although not an objective or verifiable
fact, adopts an equivalent status.44 It becomes natural and taken for granted,
conveying meaning and becoming an often-automatic driver of, or constraint
on, our behaviour.
II. THE MEANING AND INFLUENCE OF NORMS
It is beyond dispute that norms impact our behaviour in powerful and instinc-
tive ways. Indeed, we see it in our everyday lives when we automatically give up
our seat on a train if a pregnant passenger boards and raise our hand to cover
our mouths when we sneeze. As the previous section explained, it is also how
a creative standard of compliance becomes an automatic and default rule, no
longer requiring detailed analysis or debate. Norms are, in effect, the rules that
we actually live by rather than those that we are asked to live by.45
This section considers how norms function in such a commanding and
pervasive way. In doing so, it helps to show not only how norms can shape the
initial construction of compliance in narrow and reductive terms but also how
they coalesce to act as formidable barriers to reform.
42 Lessig,‘The Regulation of Social meaning’ (n 17), 947.

43 Luckmann, ‘The Communicative Construction’ (n 21), 44.
44 Berger and Luckmann, The Social Construction (n 4), 19. That ‘traditions and institutions
may appear less tangible than buildings and artifacts, but they are equally real,’ see Luckmann,
‘The Communicative Construction’ (n 21), 43.
45 C Bicchieri, The Grammar of Society, The Nature and Dynamics of Social Norms (Cambridge
University Press, 2006), ix.

A. Defining ‘Norms’
A ‘norm’ operates in one of two key ways, although both serve to express ‘social
attitudes of approval or disapproval’.46 That is, norms both describe a citizen’s
conduct (namely, how does behaviour appear to a third person), whilst also
answering the question, posed from a first person perspective, why is it that
I ought to act in the way in which you are asking?47 In this way norms can be
both descriptive (what is) and injunctive (what ought to be).48
The difference between these two definitions is instructive when seeking to
understand behavioural choices. The descriptive norm ‘describes what is normal’49
and reflects what ‘most people do’.50 In short, a descriptive norm explains (or
indicates) what conduct has occurred and, therefore, by extension, what conduct
is considered permissible within that particular environment or organisational
field.51 As a consequence, descriptive norms motivate the behaviours of others by
communicating the norms and attitudes of the environment in question. In sum,
when we observe the conduct of a community, we make judgments as to what
is acceptable within that community. As we saw in Section I, for an individual,
relying on a descriptive norm as a driver of behaviour is highly attractive (and
efficient) as it reduces the cognitive stress that is otherwise involved in deciding
what course of conduct to pursue.52 Rather than undertake their own normative
analysis, and the attendant risk of coming to the wrong conclusion, an individual
can instead effectively outsource this decision by simply replicating the conduct of
others within the same social group or environment.
In contrast, although often closely related,53 an injunctive norm describes
what ought to be done (as opposed to what is done). It is this aspect of the
normative environment that we tend to discuss in more everyday conversation.
That is, within the relevant community, what is considered the right course of
conduct to adopt? What attitude do we want to convey or do we think should be
expressed? Put simply, what behaviour do we think we should adopt, notwith-
standing the behaviour that is being adopted. It is commonly the injunctive
norm that attracts social sanctions when breached,54 most notably the potential
judgment of the relevant community (and, as we have seen with recent corporate
scandals, those outside of the community when the conduct in question complies
with the actor’s group norms but not that of other stakeholders).
47 CM Korsgaard, The Sources of Normativity (Cambridge University Press, 1996), 16.
48 RB Cialdini, RR Reno and KA Kallgren, ‘A Focus Theory of Normative Conduct: Recycling
the Concept of Norms to Reduce Littering in Public Places,’ (1990) 58(6) Journal of Personality and
Social Psychology 1015–1026, 1015.
49 ibid, 1015.
50 ibid.
52 Cialdini et al, ‘A Focus Theory’ (n 48), 1015. Although see ch 4 for the consequences that
emerge if the norms of our immediate environment when acting in one capacity (eg on behalf of the
corporation) do not align with our personal norms.
53 As behaviour that we consider we ought to adopt is often behaviour that we do adopt (ibid.)
54 ibid.
Importantly, norms are not always as entrenched as we might think and, as we

have seen, are capable of surprisingly rapid change. As a consequence, and given
that our behaviours are commonly norm driven (both descriptive and injunc-
tive), it stands that by changing social norms we can change the attitudes and
behaviours of the citizens subject to those norms. It is for this reason that we
have witnessed significant (and often quite quick) attitude changes towards, for
example, smoking in public places, equal suffrage and the protection of marriage
rights for all.55 In short, if we successfully alter social norms, then we can see
a corresponding and significant change in behaviour.56 When looking at how
to stimulate this norm change, regulation is certainly one tool that is available
to policy makers. However, this is where the importance of understanding the
behavioural impact of norms comes to the fore. As we have witnessed with the
GAAR, regulatory success (or otherwise) can be heavily influenced by the extent
to which the desired change aligns with the wider normative environment (partic-
ularly when those norms constrain the standards of compliance that are deemed
acceptable). For the reasons that the next sections explain, if the proposed policy
change conflicts with the existing community norms (including those enshrined,
or perceived to be enshrined, within existing regulation) then the likelihood of
achieving the intended behavioural change is significantly reduced.
B. The Behavioural Impact of Norms
The importance of norms, particularly injunctive norms, is that they operate

as more than mere ethical ideals. Rather, they make a claim on our behaviour,
suggesting that we ought to act in a certain manner,57 and are enforced through
powerful ‘social sanctions that are, to say the least, pervasive’.58 Indeed, the
influence of norms (and the corresponding social sanctions) is such that we
respond to them in both ‘practical and psychological ways’.59 That is, the fear
of sanction for breaching a norm is so great that it drives (oftentimes auto-
matic) norm-compliant behaviours. In this way, most people refrain from acts
of violence, not because it is unlawful, but because they inherently consider it
morally wrong. In less extreme examples, we might maintain our property in
good condition (notwithstanding that there is no legal mandate to do so) or
turn up to the office in a suit and smart shoes (notwithstanding our preference
for a tracksuit and trainers), not out of personal preference but because we
think it is legitimately expected of us by others. Put starkly, we are willing to
expend money on our property, wear more expensive clothes (and certainly less
55 The speed of this change is attributable to what Sunstein describes as a ‘norm cascade,’
see: Sunstein, ‘On the Expressive Function’ (n 5), 2033.

57 Korsgaard, The Sources of Normativity (n 47), 8.
comfortable shoes) not because we intrinsically want to but because we fear (or
at least anticipate) the judgment of others if we do not.
We can therefore start to see just how powerful the impact of norm-based
social sanctions can be, often exceeding that of more formal instruments (where
the likelihood of breach, and as a consequence, sanction can be perceived as
presenting a far more remote risk). Psychologically, these sanctions operate to
constrain our behaviour as norms serve to facilitate judgment (both of others and
ourselves) and engender corresponding feelings of shame or embarrassment when
behaviours fall outside of the normative framework.60 In doing so, they set the
boundaries of what is deemed to be ‘acceptable’ conduct. If an individual trans-
gresses a norm, rightly or wrongly it shapes our interaction with them. Depending
on the conduct in question, we may judge them silently (feeling frustrated at those
speaking in a library for example), express our dissatisfaction (passively, by staring
at those still speaking in the library, or more directly by raising it with them) or,
ultimately, even shun them from our social community (ending a friendship, not
inviting people to social functions, albeit hopefully for a better reason than talking
in a library).61
It is this fear of social sanction that arises when a norm is violated (often mani-
festing as shame),62 that operates as a powerful ex ante constraint on (or driver of)
individual conduct.63 The impact of these feelings should not be underestimated,
we have all felt the emotional response of breaking an established group norm and
even the anticipation of breach can give rise to surprising behavioural responses.
Norms do of course also work in the opposite direction, providing comfort (or
encouragement) for behaviour that in a different context (or normative commu-
nity) might attract social admonishment. For example, corporations can ‘proudly’
adopt aggressive tax structures, confident that they align with the norms of their
immediate (if not wider) community, behaviour which clearly attracts criticism in
a different social group. Indeed, Chapter 4 returns to the power of group norms
when it examines how individuals were willing to provide clearly wrong answers to
a very simple test (ostensibly diverging from widely held norms that endorse intel-
ligence and success) simply to align themselves with the observable group norm.64
The fear of social judgment is therefore a powerful tool in the regulator’s toolkit,
acting as a powerful motivator to engender change in human behaviour.65 However,
the difficulty in utilising this approach to control corporate behaviour is clear.
60 Sunstein, ‘On the Expressive Function’ (n 5), 2032.

64 See the discussion of the Asch perception experiment in ch 4.
65 Sunstein, ‘Social norms’ (n 1), 8. Although shaming is not without its critics, for example the
risk of shaming being ‘too’ effective, creating a ‘sub-culture’ of those who have been shamed who are
then unable to reintegrate into society. See J Braithwaite, Crime, Shame and Reintegration (Cambridge
University Press, 1989), 54–68. Also, the risk that shaming does not operate equally across all offend-
ers, see TM Massaro, ‘Shame, Culture and American Criminal Law,’ (1991) 89 Michigan Law
Review 1880, 1896. For a summary of common criticisms of shaming, see DA Skeel Jr., ‘Shaming in
Corporate Law,’ (2001) 149(6) University of Pennsylvania Law Review 1811, 1817–1819.
First, the apprehension of social judgment as a sanction is most effective in ‘close-

knit communities’66 as this is where any reputational impact will be felt most acutely.
However, this is not an environment that large public corporations traditionally
inhabit. Second, corporations, as juridical persons, clearly do not feel social sanction
(or shame) in the same way that natural citizens do. Whilst there will be an inflec-
tion point at which reputational damage might act as a proxy for shame, this is a
different psychological trigger. Concerns of corporate reputation align more closely
with considerations of sales and investor relations than intrinsic behavioural drivers.
Indeed, from human rights abuses to bribery,67 numerous examples exist that demon-
strate whilst reputational risk is, of course, a corporate concern it seems insufficient
to operate as a meaningful control on everyday corporate behaviour, certainly not in
the same way that corresponding feelings of judgment curtail individual conduct.68
Thus, whilst authors such as Skeel outline the ‘tangible ways’69 in which a corporate
norm violation can be punished, for example by ‘investors refusing to buy their stock …
and consumers may avoid their product’,70 we have seen, all too frequently that in
practice that this is not often the case.71
One way in which social sanctions may apply to influence corporate behav-
iour is for the transgression to be felt so acutely so as to confer individual
shame on those natural citizens implementing corporate actions.72 However,
for the reasons discussed in Chapter 7, this is a very high threshold to meet.
Moreover, shame, and shaming sanctions, only work if they are enforced. The
convergence of corporate norms means that, particularly in the case of creative
compliance when the impact of the conduct in question is seen to be ‘merely’
financial, the corporate community will often not consider the conduct to be a
norm transgression. When looking to shareholders the problem is twofold. If
creative compliance furthers a shareholder’s interests, they are unlikely to want
to unwind that conduct. Even if they were so motivated, then we run into the
usual collective action problems with any type of shareholder activity.73 Thus,
we are left with an accountability gap that currently can often only be filled
through public enforcement (either by the state or, as with the start of the 2012
66 Skeel, ‘Shaming in Corporate Law’ (n 65), 1811.
67 For example, the alleged human rights violations of retailers such as Gap: G Chamberlain, ‘Gap,
M&S and Next in New Sweatshop Scandal,’ The Guardian (8 August 2010) www.theguardian.com/
world/2010/aug/08/gap-next-marks-spencer-sweatshops (accessed 9 August 2020).
68 That is not to say that market pressures are irrelevant when considering corporate normative
transgressions. Rather, that the operation of the fiduciary ladder (explained in ch 7) is such that the
norm violations do not register in a way so as to act as a behavioural constraint.
69 Skeel, ‘Shaming in Corporate Law’ (n 65), 1823.
70 ibid, 1823.
71 For example, the continued success of Nike, notwithstanding initial consumer outrage at
their production practices. See B Wazir, ‘Nike Accused of Tolerating Sweatshops,’ The Guardian
20 May 2001 www.theguardian.com/world/2001/may/20/burhanwazir.theobserver (accessed
9 August 2020).
72 Arguably, it was this individual shame that operated as an effective sanction when (as cited by
David Skeel as an example of corporate shame) Robert Monks and Nell Minow took out a full-page
advert in the Wall Street Journal ‘shaming the directors of Sears by name’. See Skeel, ‘Shaming in
Corporate Law’ (n 65), 1814.
73 Collective action problems are discussed further in ch 7.
tax scandals, media attention). Leaving the question of legitimacy to one side,
the problem with media scrutiny brings us full circle. Of what effect is a headline
for an entity that does not fear (in real terms) social sanctions?
This resilience to ‘shame’ does not mean that corporations are immune to the
impact of norms. Rather, and as we have seen throughout this book already, it means
that the sheer dominance of the wealth maximising norm (discussed in Section III)
means that, as a general rule, corporations are extremely resilient to social sanc-
tions derived from a breach of norms other than shareholder wealth maximisation
(such as public criticism surrounding the 2012 tax scandals). This resilience (such
as that towards the GAAR) can be understood when we consider the factors that
dictate the extent of influence that a norm is likely to exert. Sunstein argues that the
scope of a norm’s influence depends on five factors: (i) the intensity of the norm;
(ii) the nature of the norm, namely what attitude does compliance with or diver-
gence from the norm convey; (iii) the actor’s attitude towards the norm and any
censure that its breach/convergence will trigger; (iv) the likelihood of forgiveness
amongst the actor’s normative group; and (v) the existence, nature and influence
of other factors relevant to the decision (such as conflicting norms).74 Applying
these factors to corporate creative compliance, a corporation’s robustness in the
face of even global condemnation is perhaps not surprising. Adopting Sunstein’s
framework we see that: (i) creative compliance is driven by a highly salient wealth
maximising norm; (ii) compliance with that norm suggests a (favourable) market-
oriented approach to compliance; (iii) the corporation is, as we have seen, robust
against social sanction; (iv) the corporation’s normative group commonly shares
a profit maximising norm and are likely to forgive the transgression of spirited
compliance in favour of profit; and (v) the dominance of shareholder wealth maxi-
misation is such that there are few conflicting norms of sufficient weight.
However, whilst social sanctions do not operate in the same way to influence
corporate, in contrast to individual, behaviour they remain vitally important if
we are to fully understand how corporations define their compliance obligations.
In particular, whilst corporate norms might be less easily triggered to constrain
behaviour, they perform a clear permissive function, validating behaviour such as
creative compliance that aligns with their demonstrable descriptive norm. More-
over, and as discussed in the next section, when looking at the architecture of
reform, these descriptive norms operate as significant barriers to change, neces-
sitating a holistic approach to intervention. One that addresses both existing
normative obstacles as well as seeking to introduce new norms and behaviours.
C. The Interaction between Descriptive and Injunctive Norms
Whilst it might be a ‘truism’75 that norms influence our behaviour, it is impor-

tant to understand the different role that different types of norms play in the

75 SE Asch, ‘Opinions and Social Pressure,’ (1955) 193(5) Scientific American 31, 31.
construction process. Doing so allows us to structure more tailored policies for

reform, either by changing existing norms (and therefore different definitions of
compliance) or by supporting new norms through external (regulatory) means,
and the challenge that these efforts at reform face. Of particular importance
is the interplay between descriptive and injunctive norms (each as defined in
Section I). More specifically, how descriptive norms can impede attempts to
instrumentalise new or conflicting injunctive norms.
In looking to unpack these questions the answer can be found in a some-
what surprising place: litter. To identify how norms influence behaviour Robert
Cialdini conducted empirical research into littering (an injunctive norm that
does not necessarily correlate to the descriptive one).76 Cialdini and his team
wanted to determine the extent to which the salience of a norm, namely how
observable it was in practice, influenced an individual’s behaviour. To do this,
they monitored individuals as they left a hospital to return to their vehicles
parked in an adjacent car park.77 The project was structured so that one half
of the research subjects walked past members of the research team who were
reading leaflets, which they then discarded (littered) onto the car park floor.
The other half of the research subjects were not exposed to any littering. When
the research subject reached their own vehicle, it had the same leaflet that the
researchers had discarded placed under their windscreen wiper. To test the
impact that the descriptive norm (littering) had on an individual’s behaviour,
variables to the research exercise included changing the physical condition of
the car park so that in some cases the car park was heavily littered and at other
times it had been cleaned.78 A further variable included the extent to which the
subject’s attention was drawn to the norm in question, for example by including
a highly noticeable piece of litter near to the litter pile, or having a member of
the research team visibly tidy up litter in front of the research subject.
The research identified that in cases where the car park had been littered,
41 per cent of subjects also littered by discarding their own leaflets on the floor.
Littering was also more likely when the subject had witnessed littering by others,
namely where there was ‘high norm salience’.79 Moreover, when drawing the
subject’s attention to the relevant norm (be it the presence or absence of litter,
namely either the desirable or undesirable norm), they were more likely to act in
accordance with that norm. Cialdini’s findings provide two important insights
when thinking about how to influence norm-based behaviour. First, we see that
the descriptive (or observable) norms within an environment serve to inform an
actor as to the norms of that particular environment and encourage them or,
as a minimum grant permission, to act in conformity. Therefore, to change the
conduct of someone within a community, it is not enough to simply encourage
76 ibid, 1015–1026.
77 Details of the experiment are explained in: ibid, 1016–1017.
78 ibid, 1016.
79 ibid, 1017.
the introduction of new injunctive norms. Rather, we must also address existing
and conflicting descriptive (or observable) norms as well. Second, that a norm
is more likely to be acted upon when a subject engages with it, namely when
their attention is specifically drawn to it.80 However, there is an obvious word
of caution that arises when looking at the descriptive, rather than the injunctive
norm. Focussing a citizen’s attention on the descriptive norm (here the existing
state of the physical environment) is only of social benefit if that norm aligns
with desirable behaviour.81 That is, if the car park is not littered or, in the case
of tax, if the observable norm is spirited, rather than creative compliance. If we
are seeking to change the descriptive norm, then Cialdini’s findings suggest that
we need to find ways to make the new norm highly visible.82
Cialdini’s findings provide helpful insights into why creative compliance has
seemed so resistant to reform and the techniques that we may adopt to improve
compliance standards moving forward. First, we see that the current descriptive
normative environment (of shareholder wealth maximisation, which is discussed
in Section III) may be impeding the implementation of a new injunctive norm.
As shall be seen (and indeed has been clear throughout the previous chapters of
this book) shareholder wealth maximisation is a highly salient norm that perme-
ates all aspects of corporate activity, from the corporate objective, to financial
incentives and shareholder motivation. The dominance of this norm provides
an incredibly robust and resistant environment in which to introduce new and
conflicting injunctive norms, necessitating a holistic plan for reform. Second, and
as a corollary to the first point, to effectively introduce a new injunctive norm
(for example, moving from creative to spirited compliance), we need to increase
the salience and visibility of the new norm. We cannot rely on passing regulation
and trusting that it will have an impact (particularly if there is a perception of a
relatively low level of enforcement risk). Of note is that the influence of this norm
salience can be further increased when accompanied by a clear, rather than tacit,
expression of approval of the norm (or disapproval of breach). This was tested by
Cialdini and his team by adding a variant to their littering experiment. Here they
replicated their littering study but this time introduced a variable that, for half of
the research subjects, the litter had been swept into piles, indicating disapproval of
littering (effectively enhancing the descriptive norm). In this instance, littering fell
even further (to 18 per cent in conditions of high norm salience).83
Therefore we start to see that whilst norms clearly do have an impact on
individual behaviour, there are ways in which this influence can be increased
(without relying directly on social embarrassment or shame, the challenges of
80 Cialdini et al, ‘A Focus Theory’ (n 48), 1015.

81 ibid,1020.
82 This also challenges the commonly held assumption (and often times over-assumption) as to
the extent to which other people within the organisational field are acting in accordance with the
descriptive norm.
83 Cialdini et al, ‘A Focus Theory’ (n 48), 1022.
The Homogeneity of Corporate Norms 57
which were discussed above).84 Moreover, for corporate compliance, this a nalysis
shows that the descriptive (or observable) norms of the environment, namely
the prevalence of creative compliance, serve to undermine the influence of any
injunctive norms to the contrary (or, more accurately, the attempt to introduce
any such contrary norms through instruments such as the GAAR). As a conse-
quence, it is imperative that reform proposals address both the injunctive and
descriptive norms if they are to increase their chances of success.
III. THE HOMOGENEITY OF CORPORATE NORMS
Having understood the general function of norms in the process of construction,

two immediate questions arise. That is, what specific norms exist in the corporate
community (which shape their interpretation of compliance) and how do these
emerge? Distilling the norms inherent within a corporation’s immediate environ-
ment is arguably a far simpler task than were we to undertake the same exercise for
natural citizens. The latter are subject to a range of complex and multifaceted norms,
reflecting diverse influences such as religion, education, age and family. In contrast, a
corporation’s norms are generally perceived (rightly or wrongly) to coalesce around
a dominant norm of shareholder wealth maximisation.85 As this section explores,
the influential weight of this norm is not simply the product of its homogeneity but
from its perceived endorsement by the company law framework itself.
A. The Expressive Function of Law
The law, much like social actions, can be ‘expressive’.86 That is, it carries a mean-
ing so as to postulate a norm and not simply operate as a control on behaviour.87
By mandating that citizens act in a certain way (or indeed refrain from so
acting) the law is making a normative statement, expressing a view as to the
rights or wrongs of the conduct concerned.88 When the GAAR demands that
84 ibid, 1024.
85 Of course, corporations act by individuals who bring their own norms to the corporate environ-
ment. However, as shall be seen in this section and chs 4 and 7, when acting in a corporate context,
it is the corporate norms that tend to dominate those of the individual. Indeed, it is quite possible
for a group to ‘express attitudes that none of its members have individually’, see ES Anderson
and RH Pildes, ‘Expressive Theories of Law: a General Restatement,’ (2000) 148 University of
Pennsylvania Law Review 1503, 1518, citing the example of a building association that chooses not to
discriminate against a disliked neighbour notwithstanding how all the other residents feel. Here we
see a further importance of ascribing norms to a particular role. That is, when acting in their capac-
ity as a board member (for example) a director adopts the norms of that position rather than those
that apply in their private domain.
87 ibid, 2024.
88 Effectively it ‘manifests a state of mind’. See Anderson and Pildes, ‘Expressive Theories of Law’
(n 85), 1506.
corporations refrain from implementing ‘abusive’ structures, it is not merely

demanding certain behaviour without moral censure. It is also expressing a
belief that such structures are unacceptable or, put another way, morally imper-
missible. Indeed, even the language adopted by the GAAR of ‘abusive’ (rather
than, for example, ‘technical’) has expressive import.89
By performing this expressive function, the law makes a public statement
of expected standards for all citizens to recognise and interpret.90 As a conse-
quence, social norms can be ‘fortified by … [or] even owe their existence to
law’.91 Crucially, when a norm is enshrined in regulation it adopts a particular
status of authority, namely that it is the product of a democratic institution that
speaks for society and has coercive force.92 In this way, the law expresses the view
that the relevant norm is to be regarded as particularly important increasing the
likelihood that it will be institutionalised by the relevant community. Moreover,
the law serves to provide a hallmark of legitimacy to a particular point of view,
especially when that point of view (or norm) is consistently repeated through-
out the legislative framework. In this way, the law is able to make a particular
norm ‘focal’93 enhancing its symbolic or expressive status and, as we saw with
Cialdini’s research, increasing the salience of the norm within a community.
Needless to say, the law is also capable of expressing undesirable norms. That
is, norms that unintentionally signal roles or functions that lead to damaging
behaviour. For example, and considered further in the following section, the law
can express that the ‘sole’ objective of the corporation is profit maximisation,
justifying the creative compliance standards that are the subject of this research.
Importantly, such legal provisions not only express social norms but can cause
‘expressive harm’. That is, the law can convey a message (albeit unintentionally)
that a citizen can be, or is, ‘treated according to principles that express negative
or inappropriate attitudes’.94 Thus, when the law seemingly enshrines a singular
profit maximising norm that applies to corporate conduct it expresses (again,
potentially unintentionally) more than simply the state’s view as to the legiti-
mate objective of the firm. Namely, it risks conveying the view that corporations
are entitled to pursue profit over broader welfare concerns and that it is legiti-
mate for non-corporate citizens to be subject to that conduct.
89 The same, but opposing, claim can be made of ‘creative compliance’. The moniker itself
suggests a view that such practices are clever and normatively acceptable.
90 Anderson and Pildes, Expressive Theories of Law’ (n 85), 1507.
92 Further, that ‘legal standards of conduct … influence the social norms of directors, officers, and
lawyers’. See EB Rock, ‘Saints and Sinners: How Does Delaware Corporate Law Work?’ (1997) 44
UCLA Lew Review 1009, 1016. Rock goes on to argue that company law provides a set of parables
that ‘fill out the normative job description of’ directors and officers (ibid, 1018). This latter obser-
vation endorses Sunstein’s view that in addition to social norms, we also have role norms. That is,
that we identify certain norms with certain roles, such as lawyers, doctors or teachers. See Sunstein,
‘Social norms’ (n 1), 921.
93 EA Posner, ‘Symbols, Signals, and Social Norms in Politics and the Law,’ (1998) 27(S2)
The Journal of Legal Studies 765, 772–3.

94 Anderson and Pildes, ‘Expressive Theories of Law’ (n 85), 1527.
The following section considers this shareholder wealth maximisation norm

with a particular focus on section 172 of the Companies Act 2006. It is this expres-
sive function of law that applies not simply to entrench this norm but also to
powerfully identify it with the function and the role of the corporation in society.95
B. The Dominance of the Shareholder Wealth Maximisation Norm
The dominant norm enshrined within company law and practice is the paradigm
of shareholder wealth maximisation. That is, the perspective that the legitimate
(and sole) objective of the corporation should be to promote the success of the
company (broadly defined as the ‘long-term increase in value’96 of the company)
for the benefit of its members as a whole.97 Were this perspective in doubt, the
Company Law Review Steering Group made it clear that, notwithstanding the
introduction of the concept of ‘enlightened’ shareholder value, the Companies
Act 2006 was nonetheless predicated on (and therefore endorsed), a model of
shareholder exclusivity. Namely that the corporation was ‘managed for the benefit
of shareholders’98 and simply ‘subject to safeguards’99 for creditors, whilst being
bound by disclosure obligations for the benefit of the wider community.
As a consequence, the significant reforms introduced by the Companies
Act 2006 did little to disrupt the view that the ultimate objective of the corporation
was to ‘generate maximum value for shareholders’.100 Rather, when section 172
of the Act (which codified a director’s duty to promote the success of the company)
introduced the concept of enlightened shareholder value, it simply provided that
in discharging this duty directors should ‘have regard’ to, amongst others, the
list of statutory factors (namely, wider interests) set out in section 172. That is,
directors should have regard to interests more commonly associated with a stake-
holder view of the firm, including those of the community, employees and the
environment. The list of statutory factors is not exhaustive and could, quite feasi-
bly, include an obligation to consider the impact of compliance practices on, for
example, the local community (by reducing the public purse) and the legitimacy
and stability of the legal and market order (by undermining the principle of equal-
ity before the law).101 Indeed, this view is strengthened if we recall the judicial
95 For a discussion of the identification of certain norms with certain social roles see Sunstein,
‘Social norms’ (n 1), 918.

96 Lord Goldsmith, Lords Grand Committee, 6 February 2006, column 255, cited in Ministerial
Statements, Companies Act 2006, Duties of Company Directors, June 2007, 7. https://webarchive.
nationalarchives.gov.uk/20090609024504/http://www.berr.gov.uk/files/file40139.pdf (accessed
9 August 2020).
98 Company Law Review Steering Group, Modern Company Law For a Competitive Economy:
The Strategic Framework, (February 1999) para 5.1.4.

99 ibid.
100 ibid, para 5.1.9.
101 See ch 6.
observations noted in Chapter 2, namely that a purposive interpretation of tax

statutes was not only permissible, but it was surprising that tax law had operated
as such a purposive island for so long.102 Nonetheless, for reasons that this chapter
explores, section 172 has yet to be fully interpreted by boards in this way.
In response to the inevitable criticism as to the uncertainty of how section 172
should be applied (and, in particular, the relative standing of the statutory factors
against the primary duty to promote the success of the company), the govern-
ment released a collection of non-binding ministerial statements that sought to
expand upon what was meant by section 172. These statements suggested that
‘have regard to’ should be construed to mean ‘give proper consideration to’103
the statutory factors set out in section 172.104 Returning to the expressive func-
tion of law, it is trite to say that a requirement to have ‘proper consideration’ of
the statutory factors when discharging the duty to increase shareholder wealth
has little, although granted, some, symbolic force. The challenge that exists is
the manner in which this duty is interpreted by the board (namely that it remains
one of pure, rather than enlightened, shareholder value), which is exacerbated
by the lack of obligation to act on any concerns that may be identified once
‘regard’ has been given to the statutory factors.
As a result, despite the effort of section 172 to introduce wider considera-
tions into the corporate decision-making process, the Act continues to be seen as
one which promotes an uncompromising shareholder wealth maximising norm.
This in itself has several important consequences. First, it justifies and legiti-
mises a suite of potentially powerful shareholder rights set out in the Companies
Act 2006.105 In particular, it validates the claim that directors owe their fiduci-
ary duties to the company (which, in effect is taken to mean the shareholder
body),106 and that shareholders possess the right to remove directors by a simple
majority.107 Crucially, this legislative endorsement of shareholder primacy is
then reflected in internal incentive structures. As discussed in more detail in
Chapter 7, remuneration and rewards packages are linked to firm ‘performance’,
which is itself equated with earnings per share. Further, it is shareholders who
have the right to enforce a breach of section 172 by way of derivative claim.108
102 See ch 2 Section II A.

103 Lord Goldsmith, Ministerial Statements (n 96), 9.
104 Extrasure Travel Insurances Ltd v Scattergood [2003] 1 BCLC 598.
105 Companies Act 2006: s 168 (right to remove directors); s 172 (duty to promote the success of the
company for the benefit of its members); s 239 (ability to ratify acts of directors); s 260 (derivative
claims); ss 302–305 and 338 (convening general meetings); s 314 (power to circulate statements);
s 510 (power to remove auditors); s 551 (authorisation of share allotment); s 561 (rights of pre-
emption); and rule 21, The City Code on Takeovers and Mergers (restrictions on frustrating action).
The literature on shareholder exclusivity is vast. Key works include: S Bainbridge, ‘In Defense of
the Shareholder Wealth Maximization Norm: A Reply to Professor Green,’ (1993) 50 Washington
and Lee Law Review 1423; DG Smith, ‘The Shareholder Primacy Norm,’ (1997) 23 Journal of
Corporation Law, 277; L Stout, ‘Bad and Not-So-Bad arguments for Shareholder Primacy,’ (2009)
75 Southern Californian Law Review 1189.
106 On this see ch 7.
108 Companies Act 2006, 260(1).
These practical factors coalesce to mean that when considering how to discharge
their obligation to have ‘proper consideration to’ the statutory factors, it is
perhaps not surprising that many directors will do so in a manner that is going
to satisfy the cohort to whom they are accountable. Thus, when looked at in the
round, section 172 did little to intrude upon the widely held view that the polar
star of corporate management is the unwavering profit maximisation.
From a compliance perspective, this manifestation of shareholder wealth maxi-
misation across the corporate law and governance framework creates a homogenised
norm within the corporate community, effectively creating a self-reinforcing norma-
tive system (encouraging, and then rewarding, behaviour that furthers the wealth
maximising norm).109 This self-perpetuating norm therefore adopts a position of
authority, legitimising not only the norm per se but those acts, omissions and regula-
tory provisions that support it, whilst undermining the legitimacy of those adopting
a contrary view.110 One consequence of this is that it starts to embody and legitimise
a view that the only role of the corporation is as a pure profit maximising entity,
devoid of broader responsibilities and considerations (also contributing to the views
of the market that are considered in Chapter 5). We thus start to appreciate why
within this environment it becomes increasingly unrealistic to expect corporations
to pursue anything other than a ‘pricing’ approach to compliance, notwithstanding
the actual breadth of discretion that the Companies Act 2006 grants to directors
(which is considered further in Chapter 7). Indeed, it starts to explain the view put
forward by Easterbrook and Fischel that ‘managers not only may but also should
violate the rules when it is profitable to do so’.111
To be clear, this section is not suggesting that shareholder wealth maximisation
(and the consequential provisions in the Act that derive from it) is an objectionable
corporate objective per se. As Carroll identified, the corporation has many faces,
an important one of which is profit maximisation. Indeed, Chapter 5 explores the
benefit that the pursuit of self-interest has for both the individual corporation and
for wider society.112 From a functional perspective, this singular objective serves
to facilitate the efficiency of corporate decision-making as well as enhance (albeit
relatively) corporate accountability.113 Rather, the claim that the book makes is
that over the years corporate norms have been interpreted and applied to create
109 For a broader discussion of law as an autopoietic system see G Teubner, Law as an Autopoietic
System (Blackwell, Oxford 1993). For a critical discussion of Teubner’s theory, see A Beck, ‘Is Law
an Autopoietic System?’ (1994) 14 Oxford Journal of Legal Studies 401.
110 Recall Eric Schmidt’s justification of creative compliance, namely that there was ‘probably
some law’ against spirited tax compliance, see ‘Google’s Tax Avoidance is Called “Capitalism,”
Says Chairman Eric Schmidt,’ The Telegraph (12 December 2012) www.telegraph.co.uk/technol-
ogy/google/9739039/Googles-tax-avoidance-is-called-capitalism-says-chairman-Eric-Schmidt.html
111 FH Easterbrook and DR Fischel, ‘Antitrust Suits by Targets of Tender Offers,’ (1982) 80
Michigan Law Review 1155, 1177.

112 For a complementary argument see A Carroll, ‘The Four Faces of Corporate Citizenship,’
(1998)100(1) Business and Society Review, 1.

113 S Bainbridge, ‘Director Primacy: The Means and Ends of Corporate Governance,’ (2002) 97
Northwestern University Law Review 547, 557–558.

an erroneous ‘focal point’,114 endorsing an unyielding commitment to this norm.

Instead, this work suggests there is a legitimate basis within the current legal
framework to constrain the harmful expressive and normative effects of how this
norm is currently (and narrowly) being construed.
IV. THE FUNCTION OF NORMS: FREE TO CHOOSE?
The preceding parts of the chapter explored the process of construction that
legal subjects adopt to determine their compliance obligations. In doing so, it
becomes clear that a critical determinant of this social construction, and the
behaviours that ensue, are the norms inherent within a subject’s environment.
Indeed, these norms are so powerful that not only do they ascribe meaning to
our actions but can automate them, legitimising behaviours that are norm-
compliant and sanctioning those that are not social sanctions.
This part draws those discussions together to consider a question of fundamen-
tal importance in the legal arena. Namely to what extent can a person be said to
have freedom of choice over their behaviour if it is dictated in this way? Is there, as
Sunstein observed, a ‘serious obstacle to freedom in the fact that individual choices
are a function of social norms, social meanings and social roles, which individual
agents may deplore, and over which individual agents have little or no control’?115
A. Norms and Freedom of Choice: Taxes and Subsidies
We have seen how norms operate to apply a social meaning to a person’s acts or
omissions. Our conduct is not simply a neutral act, normatively speaking, but
conveys a message about who we are. It is from this social meaning that social
sanctions can be applied, giving rise to either opprobrium or acceptance. Put
another way, and to use Sunstein’s taxonomy, norms operate so as to impose ‘taxes
or subsidies’.116 Thus, when deciding to act, one important factor (conscious or
otherwise) is the normative tax or subsidy that is likely to arise as a result.
As we start to understand the function of norms in society, and the extent
to which they operate as a driver of, or constraint on, individual behaviour, this
necessarily raises questions about the reality and extent of freedom that an indi-
vidual truly has to define a term such as compliance. As Sunstein notes, the
freedom that we consider an individual has in this context depends on whether
we are concerned with the technical ability to choose (notionally we could
diverge from the norm) or the reasons underpinning any such choice.117 Tech-
nically, we can choose not to work for a corporation if we disagree with its
114 RH McAdams, The Expressive Powers of Law, Theories and Limits (Harvard University Press,
2015), 7.
116 ibid.
117 ibid, 932.
The Function of Norms: Free to Choose? 63
‘corporate ideology’ but, in reality, for most of us that is not a feasible option.
Technically, as an individual we can refuse to implement the strictly lawful instruc-
tions of our employer if we don’t agree with them but, for reasons explored in
more detail in Chapter 4, for most of us that is not a feasible option. Technically,
corporations can choose to adopt spirited c ompliance standards but, as we are
witnessing, for most of them that is not proving to be a feasible option.
It is here that we start to see complex and challenging questions emerge. If
we consider an individual’s freedom to be curtailed by the powerful influence
of social norms, some of which are derived from the legal system itself, to what
extent can (or should) we hold that person responsible for their decisions? Alter-
natively, and perhaps more legitimately, to what extent is (or should) the state be
responsible for mitigate those harmful norms?
B. Influencing Norms to Influence Behaviour
Changing a dominant norm is not an easy task. As we saw, efforts to introduce

a new injunctive norm are likely to be of limited effect without a change in the
descriptive norm or some other trigger event. An associated challenge is that
norms are ‘commonly based on beliefs about relevant facts’.118 Whilst smoking
is seen as ‘cool’ teenagers will still do it, if littering is not seen as a ‘big deal’
then people continue to drop their rubbish. In contrast, once passive smoking was
understood to cause serious medical harm, smokers respected the ban on smok-
ing in public places and significant social censure arises in the event of breach.119
The speed and breadth of normative (and therefore behavioural) change regard-
ing smoking was significant, demonstrating a highly efficient method of ‘norm
management’.120 That is, one effective way to change a norm is to change the
beliefs that are attached to the facts surrounding, or associated with, the norm.
Returning to smoking is a useful example. It was not that long ago that people
could smoke in hospitals, airplanes and offices. Today, such behaviour is unheard
of and unimaginable to those who were not born at that time, primarily because
of the change in our understanding of the harm caused by the activity in question.
Thus, to change a social construction, we need to change the underlying
norm (at scale to address the collective action issues that would otherwise arise)
and the beliefs associated with it. As the smoking example shows, one valuable
technique for doing this is to change a person’s understanding of the harm (or
lack thereof) associated with the norm in question. This is particularly impor-
tant in cases such as creative compliance where the dominant descriptive norm
is not only incredibly salient but runs counter to the objective of reform (namely
less profitable spirited compliance). Disrupting such a long-held, and singular,
belief is not an easy or straightforward task. However, Chapters 5 and 6 offer
118 ibid, 930.

119 ibid, 911.
120 ibid, 907.
a basis for doing so by demonstrating the damage that creative compliance can
cause to both the market order (Chapter 5) and the rule of law (Chapter 6). Not
only does this help to show the systemic harm caused by creative compliance but
it should act as a salient warning of both the risk and consequences of further
reactionary regulation if creative compliance is not meaningfully curtailed.
There is one other way of expediting change, which is to appeal to people’s
natural tendency towards conformity (as seen when looking at the institutionalisa-
tion of norms earlier in the chapter). Research has shown that people ‘are willing
to cooperate, and hence to solve collective action problems without coercion, if
most people are seen as co-operators’.121 Indeed this was replicated in the Cial-
dini experiments were the observation of other people clearing the litter prompted
non-littering behaviour in the research subjects. Appealing to this sense of colle-
giality and cooperation (whilst challenging the view that ‘everyone’ is creatively
complying) is a useful component of what will need to be a holistic and varied
toolkit of reform if we are to effectively challenge creative compliance behaviours
that align with the current, highly salient, and dominant descriptive norm.
V. CONCLUSION
This chapter has examined the influences that shape how corporations define compli-
ance, in particular how the impact of pervasive corporate norms support a reductive
and profit-maximising construction. Recognising the power and influence of norms
provides important, instrumental, insights into the path forward and those aspects
of the corporate community that we need to understand if we are to structure an
effective toolkit for reform. In this way, this chapter helps to highlight the roadmap
for the rest of the book, demonstrating the critical need to take a holistic view of the
organisational field that corporations operate within, from market ideology to the
very architecture of the firm itself, if we are to truly understand the barriers to reform.
However, before we turn to that exercise there is one final aspect of the current
landscape that we need to consider. That is, having explored how corporations
define compliance we also need to understand what motivates them to comply
(or otherwise) with the law. The definition of a term does not necessarily guar-
antee that we act accordingly. Moreover, whilst corporate norms might drive
a profit-driven definition, the corporation does necessarily act through human
officers. This raises the question of how their, arguably more complex norms,
factor into the corporate decision making framework and the implications that
this has on the motivation to implement corporate compliance strategies. As
such, in concluding the book’s analysis of the current context to the compliance
crisis, the following chapter explores what it is that motivates people to comply
with the law, including the added layers of complexity that need to be considered
when considering this question in a corporate setting.

4
Motivating Compliance:
Freedom to Act?
a theory of legal behaviour must be multiple; legal acts work on the minds of subjects
in various ways … First there are sanctions – threats and promises. Second, there is
the influence, positive or negative, of the social world: the peer group. Third there
are internal values: conscience and related attitudes, the sense of what is and is not
legitimate and what is or is not worthy to be obeyed. Each of these factors is itself
complex1
Lawrence Friedman
All other things equal, most [business people] would unhesitatingly choose the high
road. But, except in hypothetical situations, all other things are never equal. And we
often see that factors with more motivational punch – sales quotas, corporate finan-
cial health and survival, competitive concerns, career advancement – outweigh ethical
choices in business decisions.2
Robert B Cialdini
O
ne aspect of Google’s response to the PAC investigation that was
particularly striking was just how zealous it was.3 Rather than simply
defend their use of the tax structures (discussed in Chapter 2) on the
basis of their legality, the company’s officers were emphatic in their justification
of the decisions that had been made. The schemes were not simply lawful, but
executives were ‘very proud’4 of the arrangements in question. Indeed, despite
the increasing, and intense, global controversy surrounding the practice, it was
argued that not only had the company done nothing wrong but, on the contrary,
implementing the schemes was ‘absolutely’5 the right thing to do. There was, it
1L Friedman, The Legal System: A Social Sciences Perspective (Russell Sage Foundation, 1975),
69.
2 RB Cialdini, ‘Social Influence and the Triple Tumor Structure of Organizational Dishonesty’ in
DM Messick and AE Tenbrunsel (eds) Codes of Conduct: Behavioral Research into Business Ethics
(Russell Sage Foundation, 1996), 51.
3 See ch 1.
4 N Kumar and O Wright, ‘Google boss: I’m very proud of our tax avoidance scheme’
The Independent (13 December 2012) www.independent.co.uk/news/uk/home-news/google-boss-

im-very-proud-of-our-tax-avoidance-scheme-8411974.html (accessed 8 August 2020).
5 S Cao, ‘Ex-Google CEO Eric Schmidt Defends Tax Dodging, Monopoly in New Hardball
Interview’ Observer (15 May 2019) https://observer.com/2019/05/ex-google-ceo-eric-schmidt-defends-

tax-dodging-monopoly-bbc-interview/ (accessed 9 August 2020).
66 Motivating Compliance: Freedom to Act?
would appear, an eagerness not merely to defend, but to rationalise and justify,
the compliance strategy that had been adopted.
On the one hand, this approach is not surprising. The company was facing
international condemnation and no one would expect it to equivocate in its
response to an investigation such as this. Yet, on the other, when in the same year,
individual taxpayers were found to have engaged in similarly creative schemes
their responses were entirely different, with the comedian Jimmy Carr acknowl-
edging a ‘terrible error of judgment’.6 But why such a difference in response and
what does this tell us about taxpayer motivation? The answer is more instructive
about corporate compliance practices, and their resistance to reform, than may
at first seem. In particular, it sheds light on the surprisingly powerful psycho-
logical drivers and compensatory responses that shape, legitimise and ultimately
entrench a corporate culture of creative compliance. As shall be seen, it is this
legitimation (and ultimate habitualisation) of creative compliance that acts as
a significant barrier to reform and it is here that we need to focus our efforts if
we are to achieve meaningful progress towards a more spirited interpretation of
corporate compliance responsibility.
To fully understand this interaction between compliance decisions and
the psychological processes that underpin them, it is first necessary to reflect on
the factors that motivate people to comply (or otherwise) with the law. As such,
this chapter begins by considering traditional, but somewhat limited, deterrence-
based explanations of compliance, which suggest that it is simply a fear of
sanction the promotes legal obedience. In looking at this orthodox approach,
Section I recognises that whilst an ongoing role for deterrence-based sanc-
tions does remain (and that exploring our historic experience with this model
provides valuable lessons to help improve the modern regulatory relationship),
taken in isolation it is unable to engender the transition towards spirited compli-
ance that is being called for. Rather, and as Section II explores, a more accurate
explanation of people’s compliance behaviours is grounded in notions of legiti-
macy (specifically, perceptions concerning the existence and exercise of power
by enforcement authorities). By moving beyond a purely instrumental approach,
to incorporate sociological and psychological considerations (amongst others),
legitimacy theory helps to provide a more accurate framework in which to recog-
nise the complexities of what motivates compliance and understand why people
behave in the way that they do. As a consequence, whilst economic theories (such
as the deterrence model) suggest that legal subjects are entirely rational actors,
a legitimacy-based approach recognises that, in reality, citizens (both corporate
and human) can make decidedly irrational compliance decisions.
The theories considered in Sections I and II are helpful in highlighting the
factors that shape an individual’s compliance behaviour, but they can stop
short in offering a complete explanation of corporate compliance. To fully
6 ‘Comedian Jimmy Carr, I’ve Made a Terrible Error of Judgment’ BBC News www.bbc.co.uk/
news/uk-politics-18531008 (21 June 2012) (accessed 9 August 2020).

Deterrence-Based Compliance: Motivating ‘Amoral Calculators’ 67
understand corporate compliance behaviours, we need to take into account the

consequences that arise from the fact that, in contrast to individuals, corpo-
rate decision-making involves multiple parties. In particular, that a decision is
made by one party (often the board or senior management, who are themselves
subject to dominant corporate norms) but implemented by another (manage-
ment or mid- and junior-level employees). This separation of decision and
execution can, as Section III explains, result in the psychological triggers and
compensatory responses referred to earlier that operate to entrench a culture
of reductive decision making. This understanding is critical if we are to rethink
our approach to a hitherto intransigent compliance problem. Without it, we
risk continuing to explain (and respond to) corporate behaviour simply as the
product of a singular profit maximising norm, whilst failing to address how this
norm gets embedded to such a degree that is supersedes individual preferences.
This not only belies the complexities that often underpin corporate conduct but
also potential avenues for more sustainable and effective reform.
In contrast, by examining the interplay between legitimacy, the mechanics of
corporate decision-making and the behavioural consequences of this, we are then
better placed to model the corporate compliance process and understand the chal-
lenges of reform to date. With this in mind, Section IV introduces what I call the
‘compliance degeneration cycle’. The compliance degeneration cycle draws on the
analyses in Chapters 3 and 4 to provide insights into why creative compliance has
become an almost self-perpetuating practice, whilst showing where in the decision-
making cycle reform needs to be targeted for maximum effect. Subsequent chapters
then use this model as a foundation to explore these issues in more detail.
I. DETERRENCE-BASED COMPLIANCE: MOTIVATING

‘AMORAL CALCULATORS’
Traditionally, the dominant explanation for why corporations obey the law (or
not, as the case may be), has been a purely economic one. At its most fundamental,7
this instrumental, deterrence-based, approach views all legal subjects as homo
economicus, or rational actors, who will comply with regulation only when it is
profitable (or utility) maximising for them to do so.8 Returning to the question of
tax compliance, this model suggests that a rational taxpayer will comply with tax
regulation only if the probability of conviction is low, or the penalty for breach
7 The early development of the deterrence model was based on four key assumptions. First, that
corporations are fully informed utility maximisers, second that legislation is clear and unambigu-
ous, third that legal punishment is the primary incentive for compliance and finally that enforcement
agencies adequately prosecute breaches. For a more detailed discussion of these see JT Sholz,
‘Enforcement Policy and Corporate Misconduct: The Changing Perspective of Deterrence Theory,’
(1997) 60(3) Law and Contemporary Problems 253, 254.
8 MG Allingham and A Sandmo, ‘Income Tax Evasion: A Theoretical Analysis,’ (1972) 1 Journal
of Public Economics 323.

does not sufficiently outweigh the possible gain.9 Seen in this way, motivation is
simply, and consistently, the product of a binary cost-benefit analysis.
This section explores this orthodox approach to compliance and its relation-
ship with the dominant, and by now familiar, construction of corporate and
capitalist market ideology. In doing so, it suggests that a deterrence-based model
does not fully account for taxpayer behaviour and that it is necessary to look to
a more holistic theory to better understand taxpayer motivation. Nonetheless,
that does not mean that this approach is entirely without value. On the contrary,
it provides helpful insights into the matters that we should be cognisant of when
looking to structure an effective approach to reform, including the nature of the
regulatory relationship itself.
A. It’s Called Capitalism … Again
The claim that corporate compliance decisions are motivated solely by unbi-
ased, economic, factors is undeniably compelling. Corporations are artificial
legal constructs and it could be argued that they are the epitome of a rational
actor. Freed from concerns of shame and solidarity, corporations famously have
‘no soul to damn’10 and are ‘rationalistic, amoral and unsentimental’11 enti-
ties. They are, quite simply, unconstrained in their pursuit of self-interest, with
considerations of the common good and free riding12 being ignored in favour of
entirely individualistic decision making.
This image of the self-interested decision-maker is reinforced by a return
to the stereotypes and rhetoric of market ideology. When discussing regula-
tory strategy, we see the characterisation of corporations ‘in a liberal capitalist
society [as] nothing but vehicles for profit-maximisation’.13 Moreover, even
if corporations wanted to pursue a primary commitment to social responsi-
bility then this, it has been suggested, ignores the very ‘nature of the existing
economic system’.14 Very few would deny that corporations are imbued with a
9 This approach applies Becker’s ‘economics of crime’ model that offered ‘economic analysis to
develop optimal public and private policies to combat illegal behavior’, see G Becker, ‘Crime and
Punishment an Economic Approach,’ in G Becker and W Landes (eds) Essays in the Economics of
Crime and Punishment (National Bureau of Economic Research, 1974), 43. Becker’s model incor
porates, inter alia, the view that ‘an increase in a person’s probability of conviction or punishment …
would generally decrease … the number of offenses he commits’ and that a ‘person commits an
offense if the expected utility to him exceeds the utility he could get by using his time and other
resources at other activities’ 9.
10 J Coffee, ‘“No Soul to Damn: no Body to Kick”: An Unscandalized Inquiry into the Problem of
Corporate Punishment,’ (1980) 79 Michigan Law Review 386.

11 E Sutherland, White-Collar Crime: The Uncut Version (Yale University Press, 1983), 237.
12 M Olson, The Logic of Collective Action (Harvard University Press, 1965).
13 HJ Glasbeek, ‘The Corporate Social Responsibility Movement – The Latest in Maginot Lines to
Save Capitalism,’ (1988) 11(2) Dalhousie Law Journal 363, 367 (at fn 17).
14 F Pearce and S Tombs, ‘Ideology, Hegemony, and Empiricism’ (1990) 30(4) British Journal
of Criminology 423, 424.

profit-maximising norm, one that is further endorsed by the legal, commercial

and market environments that they operate within. Indeed, Chapter 3 explored
the strength of this norm more fully.15 However, the challenge raised by this
book is whether this narrow interpretation of a corporation’s objective, and its
perceived alignment with fundamental market principles, is correct. If not, the
implications of obscuring the arguably more complex and nuanced motivations
underpinning compliance practices are significant.
From a behavioural perspective, a critical problem with this somewhat
myopic understanding of the corporation is that it has a considerable impact on
regulatory policy and design, risking several unintended consequences. If corpo-
rate decisions are perceived to be the product of an entirely rational, economic
analysis, driven by a singular and unwavering profit maximising norm then it
follows that regulation should be structured accordingly. That is, traditional
deterrence models are correct and all that is needed to increase compliance with
a given requirement is to increase the visibility, likelihood and cost of breach.16
Applying this reasoning, provided it is rigorously enforced (and that enforce-
ment actions are sufficiently publicised to the market), the introduction of the
GAAR penalty should yield results.17
However, whilst this deterrence-based approach to legal obedience (or
otherwise) is attractive for its conceptual clarity, it faces two key problems, both
of which are explored further below. First, the fact that it does not fully explain
the compliance decisions that corporations actually make, which for reasons that
we shall come on to are far more nuanced than this traditional model suggests.
Second, to the extent that the model is theoretically effective, it suffers from
several, significant, practical limitations. In particular, it can drive behaviours that
risk damaging the quality of the regulatory relationship, which in turn can under-
mine the quality of compliance practices. This is quite aside from the perennial
funding challenge that deterrence models face. Namely, that, most governments
lack the resources necessary to implement an effective deterrence strategy, which is
dependent on robust (and resource heavy) oversight and enforcement for success.
B. Explanatory Limitations of a Deterrence-Based Approach
A deterrence-based model of compliance faces one, fairly fundamental (some might

say fatal), challenge. That is, it does not fully explain taxpayer behaviour. On the
15 A view that is supported, in part, by the size of the global tax advisory services market, which
has an estimated value of $34.4 billion. See Source Global Research, The Global Tax Advisory
Market 2019, (December 2019). This figure does not of course relate solely to ‘abusive’ or aggres-
sive tax advice. However, it does indicate the rise of specialist advice in navigating the increasingly
complex regulatory environment.
16 B Torgler, ‘Tax Morale and Compliance, Review of Evidence and Case Studies for Europe’
(2011) The World Bank Policy Research Working Paper 5922, 3.

17 What is needed to enhance compliance is simply to adopt ‘a more punitive regulatory approach’. See
Pearce and Tombs, ‘Ideology’ (n 14), 436. See ch 2 for a more detail discussion of the GAAR reforms.
contrary, if it was an accurate explanation as to why people obey the law, then there
should in fact be more instances of tax avoidance.18 Research demonstrates that, on
the whole, the likelihood of detection and the severity of sanction for tax evasion
and avoidance has, traditionally, been quite low.19 In which case, when applying a
deterrence-based (or instrumental) model of compliance ‘the puzzle of tax compli-
ance is that most people continue to pay’20 taxes, not that they evade them.
This anomaly between economic explanations of compliance and actual
taxpayer behaviour was recognised by Dwenger et al in their empirical study
looking at the legal obligation to pay Church taxes in Germany.21 Their research
found that a significant proportion of individuals complied with the obligation
to pay, despite the fact that that it was widely known that the Church would not
enforce its claim in the event of avoidance or evasion.22 The deterrence baseline
was, in effect, zero. In this environment, if the decision to comply was prem-
ised solely on an economic calculation a decision to avoid (or even evade) tax
would be entirely rational and we would expect to see a significant amount of
non-payment. However, the high levels of compliance suggested the existence of
other factors that were operating to constrain purely opportunistic (or, in the
language of an economic model, rational) behaviour.
One immediate response to Dwenger’s study is that it focuses on individual
compliance behaviour within a closely held community (although it is noteworthy
that many of the taxpayers did not actively attend Church services).23 However,
we also see examples where, similarly, corporations do not creatively comply even
though it would be economically beneficial to do so (and in circumstances when
the likelihood of sanction was low).24 In their review of empirical studies exam-
ining corporate compliance practices across a range of sectors Kagan and Sholz
found little structural correlation (for example in firm profitability) to explain why
some firms would violate regulations, whilst others would comply.25 Rather, and
in a reflection of Dwenger’s findings, their work revealed that it was ‘manage-
rial attitudes toward the particular regulation or agency in question’26 that was
determinative, ‘rather than (or in addition to) purely economic calculations’.27
18 See J Alm, I Sanchez, and A de Juan, ‘Economic and Non-economic Factors in Tax Compliance,’
(1995) 48(1) KYKLOS 1, 2; Torgler, ‘Tax Morale’ (n 16).

19 Alm et al, ‘Economic and Non-economic’ (n 18), 1.
20 J Alm, G McClelland and W Shulze, ‘Why do People Pay Taxes?’ (1992) 48 Journal of Public
Economics 21.
21 N Dwenger, H Kleven, I Rasul, and J Rincke, ‘Extrinsic and Intrinsic Motivations for
Tax Compliance: Evidence from a Field Experiment in Germany,’ (2016) 8(3) American Economic
Journal: Economic Policy 203.
22 ibid, 3. Thereby mitigating a sense of religious obligation to pay.
23 For more on this discussion, see Pearce and Tombs, ‘Ideology’ (n 14).
24 R Kagan, Regulatory Justice: Implementing a Wage-Price Freeze (New York Russell Sage
Foundation, 1978).
25 R Kagan and J Scholz, ‘The “Criminology of the Corporation” and Regulatory Enforcement
Strategies’ in Blankenburg and Lenk (eds) Organisation und Recht. Jahrbuch für Rechtssoziologie
und Rechtstheorie vol 7 (VE Verlag für Sozialwissenschaften, 1980) 357.
26 ibid, 358.
27 ibid.
We therefore start to see two important, but related, themes emerge. First, that
the perception of individual managers as to what constitutes a legitimate compli-
ance standard is critical. Second, that it is not only a manager’s perception of the
regulation in question that is relevant but also their view of, and relationship with,
the applicable enforcement authority. As will be seen in Section II, both factors are
significant when considering legitimacy-based models of compliance.
C. Regulatory Relationships and Practical Challenges
Relying on a purely deterrence-based approach to compliance can also give rise

to several unintended consequences, not least the impact it has on the regu-
latory relationship. How we characterise any regulated entity can, consciously
or otherwise, influence the tenor of the relationship between a regulator and
regulatee. Perhaps unsurprisingly, when corporations are viewed simply as

‘amoral calculators’, or indeed as ‘evil’, this creates the risk that regulators will
treat them as such, resulting in a rigid enforcement culture.28 However, as shall
be seen, the behavioural impact of this framing of the regulatory relationship
is not limited to the regulator. Rather, it operates to narrow attitudes on both
sides of the regulatory divide, with the risk that this can trigger the very behav-
iours that the authorities are seeking to discourage. In contrast, as Murphy’s
empirical work on tax compliance showed, the more a regulator demonstrated
trustworthy behaviours towards investors, in this case the Australian Taxation
Office, the greater the trust that investors had in the regulator.29
Indeed, it is becoming increasingly clear that the nature of the relationship
between corporations and the relevant enforcement authorities is not merely
a ‘nice to have’ but it has an instrumental impact on compliance behaviours.
Research demonstrates that where the regulatory relationship is adversarial in
nature, it can result in a formalistic approach to enforcement, reduce the oppor-
tunity for collaborative or cooperative compliance and, ironically, risks ‘legalistic
counter measures’30 by regulated entities. These counter measures can manifest
in socially and institutionally damaging behaviours, such as an unwillingness to
provide voluntary disclosures31 and the replacement of a trained safety engineer
as the lead of an accident prevention programme with a lawyer.32 In these cases,
far from supporting the achievement of regulatory objectives, the adoption of
a deterrence model (without wider contextual considerations) was a catalyst
for moving corporate actions away from them. This emergence of regulatory
28 ibid, 359, with the discussion of ‘amoral calculators’ at 357.

29 K Murphy, ‘The Role of Trust in Nurturing Compliance: A Study of Accused Tax Avoiders,’
(2004) 28(2) Law and Human Behaviour 187, 203.
30 Kagan and Scholz, ‘Criminology of the Corporation’ (n 25), 359.
31 ibid.
32 ibid, 360.
trust is a particularly valuable policy tool for one fundamentally practical reason
(beyond its instrumental benefit). That is, and as Murphy recognised, it is a vari-
able that is within the regulator’s sphere of influence and control meaning that it
can be readily (and efficiently) explored as a basis for effective reform.33
Beyond this relational concern, deterrence-based models face a very stark
and very real practical problem. Namely, a lack of resources. To be effective,
economic models rely on the assumption that penalties will be sufficiently severe
and that ‘enforcement agents optimally detect and punish misbehaviour’.34
Indeed, it is the monitoring aspect of sanctions-based approaches that have
proven to be the most salient in achieving behavioural change. Research
analysing the effectiveness of Occupational Safety and Health Administration
regulation in the US found that regular and thorough inspections can have a
greater impact than penalties.35 However, very few (if any) enforcement authori-
ties have adequate funding to monitor and enforce all compliance breaches. If
proof beyond the well-publicised pressures on public resources were needed,
one commentator observed that ASIC’s36 estimate of the resources needed to
effectively monitor all regulated entities revealed ‘in very brutal terms … there
is at present no realistic prospect of developing anything approaching a regular
surveillance or inspection programme’.37 This does, of course, leave to one side
the secondary question of whether, even if the requisite resources were available,
we would want them to be deployed in this way.
This issue of enforcement serves to highlight one final limitation of rely-
ing on deterrence as the sole motivation for compliance. To the extent that a
deterrence-based model is effective in securing compliance it tends to motivate
the temporary, strict and formalistic approaches to compliance that character-
ised the 2012 scandals and that reform is now seeking to change. Indeed, this is
the very crux of the issue. Absent intrinsic motivation, compliance standards
‘are not maintained when the risk of punishment diminishes or disappears’.38
33 Muprhy, ‘The Role of Trust’ (n 29), 8. As an aside, it is at this juncture that we can start to see
the oblique, but powerful, consequences that seemingly discrete compliance decisions can have on
wider corporate culture. It sends a very robust message to the workforce about cultural norms and
priorities, regardless of what any formal policy might say, when the lead safety engineer is replaced
with a lawyer. When decisions such as these are made, it also becomes easier to understand why
reductive compliance practices are not simply a ‘tax’ problem but go to the wider question of corpo-
rate responsibility, helping to explain why a corporation that implores compliance with both the
‘spirit and letter’ of its own corporate code of conduct can nevertheless implement creative compli-
ance strategies with ‘pride’.
34 JT Sholz, ‘Enforcement Policy and Corporate Misconduct the Changing Perspective of
Deterrence Theory,’ (1997) 60(3) Law & Contemporary Problems 253, 253.
35 W Gray and J Scholz, ‘Analyzing the Equity and Efficiency of OSHA Regulation’ (1991) 13(3)
Law and Policy 185.

36 The Australian Securities and Investment Committee.
37 D Kingsford-Smith, ‘A Harder Nut to Crack? Responsive Regulation in the Financial Services
Sector’ (2011) 44(2) University of British Columbia Law Review 695, 724.
38 T Tyler, Why People Obey the Law (Princeton University Press, 2006), 275.
This leaves societies vulnerable to the ‘collapse of social order’39 if, or when,
enforcement activity is reduced or is otherwise insufficient (whether due to
resource scarcity, a change in political focus or any other such disruptions).
We thus start to see that not only does a deterrence model fail to fully explain
corporate behaviour but that it is simply not structured to meet the challenge of
creative compliance. In short, it is not well-placed to engender the extra-legal,
voluntary, behaviours needed to fill the legislative gaps and loopholes that will
inevitably, and unavoidably, always remain.
D. Retaining a Role for Deterrence?
The misalignment between a purely economic model of compliance and actual

tax paying behaviour required a new understanding of why people (both
corporate and natural) make the compliance decisions that they do. In a move
away from defining taxpayers as wholly rational economic actors, an increased
focus on the influence of social (collective) and personal (individual) norms
emerged. Recognising the potential impact that a more normative approach to
compliance could have in explaining compliance behaviours, attention turned
to understanding the influence of intrinsic motivations and, in particular, the
impact that the perceived legitimacy of legal instruments (and their enforcement
authorities) had on compliance decisions. Importantly, this work revealed that
legitimacy was not only a driver of compliance in absolute terms but was a key
motivation for voluntary and spirited compliance, in contrast to the temporary
and strict standards that were often the product of extrinsic motivation borne
from a risk of sanction.40
Nevertheless, before we turn to an alternative, legitimacy-based, theory
of motivation one final comment on the value of deterrence is needed. For all
its limitations, an ongoing role for deterrence-based sanctions does nonethe-
less remain. As much as we would want to be able to envisage a society where
everyone is intrinsically motivated to voluntarily adopt a spirited compliance
standard the fact remains that we need to provide some form of sanction for
the most incalcitrant of actors. However, the claim that this section makes is
that we need to be very deliberate about how sanctions are engaged to avoid the
risks that an inflexible and rigid enforcement regime can cause (including, albeit
inadvertently, undermining regulatory effectiveness).41 When built on the right
foundations (namely a complete understanding of the root cause of corporate
39 T Tyler, ‘Psychological Perspectives on Legitimacy and Legitimation’ (2006) 57 Annual Review
of Psychology 375, 377.

40 Alm et al, ‘Economic and Non-economic’ (n 18), 1; Torgler, ‘Tax Morale’ (n 16), 6.
41 J Braithwaite and V Braithwaite, ‘The politics of legalism: Rules versus Standards in
Nursing-Home Regulation,’ (1995) Social and Legal Studies 307.

compliance behaviours) sanctions retain value as a final, rather than central,

pillar of regulatory strategy and design. In particular, when utilised in the right
way (and as discussed in Chapter 3), penalties can serve not only an instrumen-
tal role but also an expressive one,42 making a clear normative statement as to
the expected conduct of corporate citizens. In this way, and the importance of
this becomes clear in the following section, sanctions can be engaged to help
increase the salience of regulatory norms over others that may otherwise assert
dominance within the wider corporate environment.
II. LEGITIMACY-BASED COMPLIANCE
In his seminal work exploring the question of legal obedience,43 Tom Tyler
sought to address the shortcomings of a deterrence model by showing that it
was a citizen’s perception of the legitimacy of the law, rather than the threat
of sanction, that was a critical determinant of their ‘law-related behaviour’.44
Specifically, Tyler found that it was a normative commitment to the law, based
on either personal morality (a view that the law is just) or legitimacy (that an
authority has the right to control their behaviour),45 rather than the risk of
detection, that was a key driver of voluntary compliance. Put simply, people
were motivated to comply with the law because they felt it ‘appropriate, proper
and just’46 to do so, not (as conventional wisdom at the time suggested) because
they feared a penalty for breach.
A. Legitimacy-Based Compliance
The impact of Tyler’s work was profound. It challenged the then ‘ubiquitous’47
view discussed in Section I that, as rational actors, citizens are most likely to
respond to a deterrence-based approach to regulation. Rather, Tyler’s findings
suggested that to achieve greater compliance (and, in his subsequent work, legal
deference)48 it was necessary to enhance trust in, and the legitimacy of, the law
rather than simply increase sanctions.49 His research showed that c ompliance
42 CR Sunstein, ‘On the Expressive Function of Law,’ (1996) 144 University of Pennsylvania Law
Review 2021.
43 ibid.
44 T Tyler and J Jackson, ‘Future Challenges in the Study of Legitimacy and Criminal Justice,’
in S Simpson and D Weisburd (eds) The Criminology of White-Collar Crime (Springer, 2009), 83.
45 Tyler, Why People Obey the Law (n 38), 4.
46 Tyler, ‘Psychological Perspectives’ (n 39), 376.
48 ibid, 273.
49 This discussion of penalties is different to that considering the expressive function of the law
discussed in Section I. Here, Tyler is looking at sanctions simply as a driver of compliance based on
a fear of punishment, not their capacity as a normative statement of moral wrong.
Legitimacy-Based Compliance 75
decisions were not simply the product of a rational, cost-benefit, analysis.

Instead, it was a person’s attitudes and beliefs about the exercise of power and
control,50 as well as how they felt they should behave, that were much bigger
drivers of their compliance behaviours (irrespective of the risk of punishment).51
Beyond its explanatory value, legitimacy-based compliance is important
because of the type of compliance that it gives rise to. Whereas deterrence-based
compliance tends to be technical and transient (fluctuating according to the
likely risk of enforcement), decisions driven by legitimacy are more likely to be
voluntary, constant and spirited. This remains true even when the regulatory
demand conflicts with a person’s immediate material self-interest, as is often
the case with taxation. Provided an authority’s right to control our behaviour
is deemed to be legitimate, or we consider the request itself to be reasonable
(namely aligned with our sense of personal morality), we are generally willing
to comply with the demands being made. As a consequence, we see that most
people will buy a train ticket on a route where they know there is no conduc-
tor, adhere to speed limits in busy residential areas regardless of whether or not
there are traffic cameras or stop at a red light even though no one else is around.
It is not due to the fear of prosecution that we act in this way but because we
recognise that this is conduct that is reasonably and legitimately expected of
us. Moreover, if we consider a demand to be legitimate, then we generally also
extend our expectation of compliance to others (in addition to ourselves).52
The instrumental importance and value of this voluntary, legitimacy-based,
compliance should not be underestimated as it acts as a powerful instrument
of change when properly engaged (and, as multiple corporate scandals have
shown, the reverse is also true). If our compliance decisions are driven by intrin-
sic motivation, namely because we think spirited compliance is the right thing
to do, they become automatic and self-regulating.53 Using the examples above,
without incentive or threat we purchase a ticket, stop at a red light or stick to
the speed limit. Similarly, as the participants in Dwenger’s study demonstrated,
if we are motivated by legitimacy, we pay our taxes on demand even if the risk
of sanction is remote (or non-existent). Thus, in contrast to deterrence-based
motivation, legitimacy-based compliance reduces the need for external surveil-
lance (although of course some exists as a necessary insurance policy where
the consequences of breach are serious), alleviating the resource burdens and
barriers that arise with sanctions-based models.54 Aligned with this is the fact
50 Tyler and Jackson, ‘Future Challenges’ (n 44), 87. See ch 5 for a detailed analysis of the factors
that influence our perception of the legitimacy of the state’s right to regulate.
52 J French and B Raven, ‘The Bases of Social Power’ in D Cartwright (ed) Studies in Social Power
(Ann Arbor: Research Center for Group Dynamics, Institute for Social Research, University of
Michigan, 1959), 150, 156.
53 Tyler, ‘Psychological Perspectives’ (n 39), 378. See also M Weber, Economy and Society
(University of California Press, 1968).

54 For a more detailed discussion between legitimacy-based power and surveillance see French and
Raven, ‘The Bases of Social Power’ (n 52).

that intrinsically motivated compliance offers a more stable and sustainable

compliance model, as compliance behaviours are less susceptible to fluctuating
enforcement risks. It is this sustainability, and the predictability of behaviours
that it supports, which helps to maintain the social orders (considered further in
Chapter 5) that civil society depends upon.55
Recognising that compliance is motivated by legitimacy, not simply the fear
of sanction, provides important insights into where to focus reform efforts and
the nature of the tools that should be engaged (and avoided) to achieve regula-
tory objectives. If we consider this approach alongside our understanding of
norm-driven behaviours (and perceptions of legitimacy derived therefrom) that
were considered in Chapter 3, we can start to develop a holistic understanding of
the landscape in which compliance decisions are made (and where reform might
be needed). However, before we do so, several preliminary questions remain.
Not least, what we mean by ‘legitimacy’ in this context and the implications of
how this manifests in a corporate setting.56
B. Procedural Justice: The Legitimacy of the Originating Authority
Legitimacy-based compliance is, fundamentally, a psychological model of

understanding compliance decisions.57 One that seeks to explain why a person
responds to legal demands in the way that they do. In particular, it explores
how a person’s perception of both the existence and exercise of coercive power
(be it by the police, courts or other regulatory body) influences their compli-
ance behaviours.58 Adopting this approach, psychologists have shown that it
is a person’s subjective interpretation of whether a system satisfies notions of
‘procedural justice’, that are determinative of their law-abiding behaviour.59
A legitimacy-based theory of compliance is comprised of two stages. The
first is concerned with whether or not a citizen considers the relevant author-
ity to be legitimate, with the second being focussed on the fair exercise of
power.60 Commonly, discussions exploring the definition of ‘legitimacy’ centre
55 Tyer, Why People Obey the Law (n 38), 269; T Tyler and Y Huo, Trust in the Law, Encouraging
Public Cooperation with the Police and Courts (Russell Sage Foundation, 2002), xiii. See also,
D Beetham, The Legitimation of Power 2nd edn (Palgrave Macmillan, 2013).
56 Whilst ch 5 explores the broader question of the legitimacy of a state’s originating authority.
57 TR Tyler, ‘Procedural Justice, Legitimacy, and the Effective Rule of Law,’ (2003) 30 Crime and
Justice 283, 285.

58 ibid.
59 Chapter 5 looks at the origins of political power, specifically how a citizen’s interpretation of
the state’s right to intervene in their freedom of activity influences perceptions of legitimacy. Histori-
cally, the perceived ‘unfairness’ or ‘illegitimacy’ of legislation was cited as a justification for tax
avoidance, which could ‘make fair what legislators have made unfair’. This, Sears argued, justified
taking advantage of regulatory loopholes. See JH Sears, ‘Effective and Lawful Avoidance of Taxes,’
(1921) 8(2) Virginia Law Review 77, 79. See also, Tyler and Huo, Trust in the Law (n 55), 104.
60 Tyler, ‘Procedural Justice’ (n 57), 306.
on the second phase, considered in the next section, namely the process-based
determinants (or antecedents) of legitimacy. Whilst this focus on process is
understandable (as discussed previously authorities have greater ability to influ-
ence the exercise of power rather than individual and subjective views as to its
originating legitimacy), there are two key reasons why it is important that the
influence of the first stage (a person’s perception of an authority’s coercive power)
is nonetheless borne in mind. First, it demonstrates the instrumental importance
of the market norms and narratives that have emerged in our modern economy
and that shape our view of the legitimacy of coercive power (these narratives
are discussed throughout this book but in particular in Chapter 5). Second, it
also helps to frame and explain the particular challenge that individuals face
when making (or implementing) compliance decisions within a corporate
setting (a challenge that is considered further in Section III). That is, the signifi-
cant psychological consquences of being subjected to two legitimate forces of
authority, namely the state through regulation and the corporation through the
employment relationship.61
Our perception of the legitimacy of the state to exercise authority, or domi-
nance, over our behaviour is anchored in our own personal political philosophy,
which can itself be heavily influenced by social norms (the power of which
we discussed in Chapter 3).62 In particular, it reflects an internalised view of
the state’s legitimate right (or otherwise) to intervene in our individual lives,
constrain our freedom of choice and curtail or direct our decision making.63
It is therefore at this juncture that we can start to see the instrumental impor-
tance of the fact that corporate compliance decisions (and the corresponding
social judgment of them) are closely entwined with everyday notions of capi-
talist market ideology, often characterised in libertarian terms. Put simply, if
a corporation’s primary strategic framework is shaped by commonly accepted
notions of market libertarianism, which reject the right of state interference, this
operates to fundamentally undermine the legitimacy of that authority and, as a
consequence, our intrinsic motivation to comply with their directions. Includ-
ing, for example, regulatory demands to adopt a more spirited, or ‘non-abusive’,
compliance strategy.
Whilst Chapter 5 challenges the accuracy of this interpretation of market
ideology, it is nonetheless important to acknowledge. When exploring why a
person adopts certain compliance behaviours, it is their subjective perception of
legitimacy, regardless of its factual accuracy, that we are concerned with. Thus,
a legal subject’s theoretical framing of their relationship with the state can have
a powerful impact on their everyday decision making. In particular, although by
61 H Kelman and L Hamilton, Crimes of Obedience (Yale University Press, 1989), 16.
62 See ch 3.
63 As to the internalised values of legitimate power and authority see French and Raven, ‘The Bases
of Social Power’ (n 52), 156.

no means exclusively, when looking at matters of taxation, a libertarian view

of both the power of the state to intervene and the objectives of the substantive
rule in question, can serve to dismiss taxation statutes as an illegitimate intru-
sion on individual freedom and private property, driving a technical approach
(if any) to compliance. Put simply, if people do not consider an authority to have
the legitimate right to demand deference, then this has a significant influence on
the scope of their compliance behaviour. Moreover, this impact is not limited
to the first phase of the procedural justice model. Our view of the legitimacy
of an authority’s originating power has the potential to shape our interactions
with them, thereby also influencing our perception of the manner in which that
power is then exercised.
C. Procedural Justice: The Legitimate Exercise of Authority
Much like assessing the legitimacy of the state’s originating power to exercise
authority, identifying the procedural elements of what constitutes a ‘procedur-
ally just’ system is not a clear or binary process either. Procedural justice is a
‘psychological construct’64 that is shaped by an individual’s perception of an
authority’s conduct, rather than by an objective or universal standard.65 As a
result, the term ‘procedural justice’ is not only a subjective concept but a multi-
dimensional and contextual one.66 There are a broad range of factors that
influence an individual’s experience with an enforcement authority (and that
can vary from person to person), from personal and social norms to actual inter-
actions with the legal system and its institutions. Despite this subjectivity, there
are common elements that usually inform a person’s perception of procedural
justice and an understanding of these is useful in identifying the mechanisms that
authorities can, to a large degree, influence (or engage) in an effort to improve
the regulatory relationship. As has been noted elsewhere, regulators might not
be able to ‘change unpopular laws but they are able to change the way they treat
those they are charged with regulating’.67
There is a vast body of literature that looks to define the exact contours of
what could be seen as the otherwise amorphous concept of ‘procedural justice’
in any given context. However, these generally coalesce around four key pillars,68
which are both relational and instrumental in nature. That is, they concern both
64 R Hollander-Blumoff and TR Tyler, ‘Procedural Justice and the Rule of Law: Fostering
Legitimacy in Alternative Dispute Resolution,’ 2011(1) Journal of Dispute Resolution 1, 3.

65 EA Lind and TR Tyler, The Social Psychology of Procedural Justice, (Springer, 1988) 63–65.
Tyler, Why People Obey the Law (n 38), 164.

66 Tyler, Why People Obey the Law (n 38).
67 K Murphy, ‘Procedural Justice and its Role in Promoting Voluntary Compliance,’ in P Drahos
(ed) Regulatory Theory: Foundations and Applications (ANU Press, 2017) 43, 46.
68 T Tyler and SL Blader, ‘Justice and Negotiation,’ in MJ Gelfand and JM Brett (eds) The
Handbook of Negotiation and Culture (Stanford Business Books, 2004) 295, 300. See also, Murphy,
‘Procedural Justice’ (n 67), 46.
the interpersonal contact between a regulator and the regulated entity as well as
the outcome that is ultimately reached and the processes that are followed to get
there.69 In fact, repeated studies have demonstrated that not only are relational
factors important, but these can often be more influential than the favourability
of the result in shaping a person’s perceived legitimacy of, and therefore defer-
ence to, legal institutions and their decisions.70
The first pillar concerns a person’s right to exercise their voice, namely the
opportunity and ability to be heard. Specifically, people that are engaged in
a legal process (of whatever nature) need to feel that they have been able to
participate in that process.71 This goes beyond a notional right for someone to
state their point of view, but necessitates a process in which an individual feels
that not only were they able to put their case but this was genuinely listened to
and, where relevant, reflected on and responded to. A hearing (or other such
equivalent), which is seen as nothing but a ‘show trial’, or foregone conclusion,
will do little to enhance the legitimacy of the adjudication process in the eyes
of the regulated. It is of note that this need to be heard can also extend to the
ability to influence, or at least be represented in, broader policy decisions.72 We
thus start to see how the disproportionate ability of corporations, particularly
economically significant ones, to lobby or otherwise engage with the policy
process (including the eventual application of, or compliance with, any legal
instruments) can undermine the legitimacy of (and therefore compliance with)
the system in the eyes of those who are not so positioned.
Beyond its impact on the personal experience of the respondent and their
perception of the legitimacy of proceedings, protecting the right to participate
in this way also facilitates one oblique, but potentially very powerful, benefit.
Namely, that the parties get to engage and interact with each other.73 If struc-
tured correctly and conducted with respect (see pillar three), this interaction
can serve to enhance the regulatory relationship, humanising both parties whilst
allowing some appreciation of the other side’s point of view. This then serves
to strengthen the underpinning of trust that Murphy recognised, and discussed
above, as being so important to engendering voluntary compliance practices.
Returning to the core elements of procedural justice, the second pillar
explains that the neutrality of the decision maker is, unsurprisingly, critical.
However, this plays a particularly important and specific role when looking at the
relationship between legitimacy and creative compliance. Here we are not solely
concerned with the lack of perceived bias, but the ‘consistency in the application
69 TR Tyler, ‘The Psychology of Legitimacy: A relational Perspective on Voluntary Deference to
Authorities,’ (1997) 1(4) Personality and Psychology Review 323, 323.

70 Tyler and Huo, Trust in the Law (n 55). Hollander-Blumoff and Tyler, ‘Procedural Justice’
(n 64), 7. Tyler, Why People Obey the Law (n 38), 115–124.

72 M Levi, A Sacks and T Tyler, ‘Conceptualizing Legitimacy, Measuring Legitimating Beliefs,’
(2009) 53(3) American Behavioral Scientists 354, 360.

of rules over time’.74 People want to be reassured that enforcement bodies are
treating them in ‘the same way as any other individual in society’.75 However, as
we saw in Chapter 2, one of the more systemic consequences of creative compli-
ance is that it undermines the equal application of rules. In particular, it is large
multinational corporations that are both technically and financially much more
able to creatively comply in comparison to smaller organisations or individuals.
Quite simply, ‘[a]voidance opportunities, however, are likely to be dispropor-
tionally available to the better off and to the better advised’.76 The implications
of this asymmetry are discussed further in Section IV but, put simply, when laws
are unequally applied ‘disobedience is likely to increase’.77
This inequality aligns with concerns raised by the third pillar of procedural
justice, namely whether or not an authority treats people with respect. As one
would expect, this includes everyday concepts of politeness and professional
courtesy, such as whether the authority treats a regulated entity with due regard.
However, it also extends beyond the interpersonal and includes whether or not
an authority has ‘respect for people’s rights’.78 Again we see the inherent tension
between these critical determinants of legitimacy and the inequality that creative
compliance gives rise to. The principle of equality before the law, including the
equal application of laws, is a basic right of citizenship in a society governed by
the rule of law (and discussed further in Chapter 6). However, this is fundamen-
tally compromised when a specific cohort (namely corporations) can, effectively,
‘manipulate’79 the application of the law. Whilst undermining the rule of law in
this way has clear consequences for the integrity of the legal framework, it also
operates to undermine a widespread view of the legitimacy (defined in proce-
dural justice terms) of the legal system as citizens are influenced by ‘the degree
to which … the authorities did or did not act in terms of the ideas underlying the
rule of law’.80 Thus, we see a common theme emerge across all pillars, namely
how the act of creative compliance can in and of itself undermine the legiti-
macy of the legal framework and, as a consequence, the ‘everyday rule-following
behaviour’81 of other regulated entities. Put another way, if it is manifest fairness
that ‘enhances voluntary compliance’,82 then it is manifest unfairness that risks
enhancing creative compliance.
74 Hollander-Blumoff and Tyler, ‘Procedural Justice’ (n 64), 5.

75 Murphy, ‘Procedural Justice’ (n 67), 46.
76 Malcolm Gammie QC, The Draft Finance Bill 2013: Oral and Written Evidence, 13 March 2013,
114 citing the Royal Commission on the Taxation of Profits and Income Final Report, Cmd 9474
June 1955.
77 M Levi, A Sacks and T Tyler, ‘Conceptualizing Legitimacy, Measuring Legitimating Beliefs,’
(2009) 53(3) American Behavioral Scientists 354, 360.

78 Hollander-Blumoff and Tyler, ‘Procedural Justice’ (n 64), 6.
79 D McBarnet and C Whelan, ‘The Elusive Spirit of the Law: Formalism and the Struggle for
Legal Control,’ (1991) 54 Modern Law Review 849.

80 T Tyler, ‘Does the American Public Accept the Rule of Law? The Findings of Psychological
Research on Deference to authority,’ (2007) 56 DePaul Law Review 661, 669.

81 Tyler, Why People Obey the Law (n 38) 274.
82 L Martinez, ‘Taxes, Morals, and Legitimacy,’ (1994) Brigham Young University Law Review 521,
548, 550.
The fourth and final pillar returns to the role of trust in the compliance
process and, in particular, the trustworthiness of the decision maker. We
will see throughout the book (and specifically in Chapter 5) the instrumental
role that trust, and the predictability of behaviours that it supports, plays in
protecting social order. However, it also performs an equally impactful role in
enhancing legitimacy-based compliance. Research has repeatedly shown that
trust in an enforcement authority (social trust based on relationships),83 and the
decisions that it makes (instrumental trust borne from outcomes),84 ‘nurtures
compliance’.85 Whilst both social and instrumental trust are important, recent
studies have found that it is social-based trust, established through relationships
and fair treatment that can be paramount.86 In short, ‘trust in government’87 has
more of an impact on compliance than outcome and the fear of being caught.
Developing this type of trust is not necessarily easy. It is an ‘inference on
the part of the subject that the authority was sincerely trying to do what was
right … shaped by how the authorities act’.88 It is here that we can start to
see the interaction between the four pillars of procedural justice and a return
to the reciprocal nature of trust in the regulatory relationship.89 If an author-
ity is deemed to treat a subject with courtesy, respect and a genuine openness
to listening to their position this will enhance that subject’s trust (both social
and instrumental) in the authority in question. Conversely, we can better under-
stand the damaging effect that the use of, often widely publicised, rhetoric in
the enforcement and investigatory process can have on compliance practices.
Cases involving tax avoidance can become both inflammatory and politicised.
However, even if this rhetoric speaks to commonly shared public sentiment, by
understanding the relational pillars that comprise procedural justice we can
start to recognise how this language can risk undermining the perception (if not
the actuality) of trust in the decision-making process. In doing so, the narrative
that often characterises capitalism and corporations as ‘amoral calculators’ (and
worse) risks driving further rigid, legalistic and entrenched responses, moving us
away from the behavioural change that is often being sought.
Understanding these pillars of procedural justice, and the impact that a citi-
zen’s perception of the legitimacy of authority has on their deference to that
authority, enables a more nuanced (and effective) examination of how to enhance
compliance behaviours. In practical terms, it endorses the need (discussed in
Chapter 3) to adopt a pluralistic regulatory toolkit, one that engages techniques
beyond sanctions and incorporates this understanding of the normative under-
pinnings of creative compliance. Specifically, it helps to distil the fact that when
83 Murphy, ‘The Role of Trust’ (n 29).

84 J Sholz and M Lubell, ‘Trust and Taxpaying: Testing the Heuristic Approach to Collective
Action’ (1998) 42(2) American Journal of Political Science 398.
85 J Braithwaite and T Makkai, ‘Trust and Compliance’ (1994) 4(1) Policing and Society 1.
87 Sholz and Lubell, ‘Trust and Taxpaying’ (n 84).
88 Hollander-Blumoff and Tyler, ‘Procedural Justice’ (n 64).
seeking to change behaviour in one domain (such as tax) we cannot adopt a

myopic view of the issue. Rather, we need to appreciate a subject’s broader rela-
tionship with authority and, specifically, their perception of its legitimacy. It
is this insight that starts to build a framework in which to address the seem-
ing paradox that emerges when looking at corporate compliance. That is, if so
many individuals found the 2012 tax structures to be illegitimate (and, as Kagan
and Sholz’s meta-study discussed in Section I demonstrated, it is the attitudes
of individual managers that is a significant factor in shaping corporate compli-
ance strategies), why did so many individual managers (as many before them)
implement the structures in question? Thereafter, why were they so robust in
their defence of it?
D. The Duality of Authority
The answer can be found if we start to look at the reality of corporate decision
making and how this influences the lens through which corporate determinations
of legitimacy are made. Indeed, one of the oblique benefits of understanding
legitimacy-based compliance is that it helps us to reflect upon, and identify, the
fact that an individual corporate officer or employee has two sources of author-
ity, and therefore two points of legitimacy, to navigate. That is, the state (through
regulation) and the corporation itself (through the employment relationship).
As employees, we accept and acknowledge (both positively and normatively) the
right of our employer to determine the scope of our employment obligations,
how we occupy our time at work and the strategic direction of the company.
If we are asked to achieve a certain corporate objective, focus on a particular
sector or meet specific sales targets then that is what we do (the psychological
impacts of which are explained in detail in Chapter 7). This duality gives rise to
several persistent and powerful challenges, the most immediate being which line
of authority an individual should (or will) comply with if the two are in conflict.
On the face of it, and in the abstract, this decision might seem both binary and
also fairly straightforward to resolve. The corporation is itself a subject of the
state and an individual should simply adhere to the directions of the state as the
highest order in the hierarchy. However, the luxury of this conceptual clarity
very rarely exists in practice. As shall be seen, we are, as a general rule, willing
not only to acquiesce to the demands of non-state authority but take positive
steps to implement them.90
Establishing which source of authority will prevail (that is, which one an
individual will comply with), is not the only problem that emerges from this
duality. There is an important third party to consider, namely the individual
themselves. As individual citizens we do, of course, hold personal views as
90 See Section 3 and ch 7.

Legitimising Creative Compliance 83
to our expected rights and obligations towards the state, civil society and its
citizens. Thus, a further conflict arises from this duality if the demands of the
corporate authority on our behaviour do not align with our own views as to
our legal or moral obligations to the state and society. Again, the answer might
appear simple, individuals should ‘do the right thing’, in situations of legal or
moral conflict. Regrettably, if there is any doubt as to the influence of author-
ity on our behaviour, countless examples exist where, even in the most extreme
of situations, ‘individuals characteristically feel obligated to obey the orders of
authorities, whether or not these correspond with their personal preferences’.91
From a compliance perspective, this duality means that a situation can arise
where an individual acts in a manner that does not fully align with their own
personal attitudes and beliefs. That is, they may implement an aggressive tax
structure to minimise the amount of tax that a corporation pays, thereby reduc-
ing public funds and undermining social cohesion even when they hold personal
views that do not support this reductive approach to compliance. This conduct
may well trigger immediate and apparent tensions for the individual concerned.
However, it also gives rise to a more systemic issue, which is explained in the next
section, namely that this conflict between a person’s beliefs and their actions
triggers a powerful (and oftentimes subconscious) psychological response. It is
this response that can, ironically, act as a catalyst to further embed and legiti-
mise the conflicting behaviour within the normative environment.
III. LEGITIMISING CREATIVE COMPLIANCE: DISSONANCE

REDUCTION AND OVER-RATIONALISATION
Recognising this duality of authority, and its relationship with legitimacy, is a

critical first step in understanding the persistent challenge that we have faced
when trying to reform corporate compliance practices. Specifically, it helps us
to appreciate that corporate behaviour is not simply the product of the abstract
motivations of an artificial legal entity nor, separately, those of the individual
officers that it necessarily acts by. Rather, it is the outcome of decisions made by
those individual officers whilst acting on behalf of the corporation.92
Unpacking this subtle distinction can seem like an idiosyncratic exercise but
it is absolutely crucial that we do so. It is the nuance of this interaction that
precipitates a powerful psychological tension (and reaction) that arises when an
individual acts in conflict with their own beliefs. A tension that is more instru-
mental in creating a culture of reductive decision making than may at first seem.
In particular, understanding this conflict helps to explain both the lens through
91 Kelman and Hamilton, Crimes of Obedience (n 61), 16. See also ch 7.

92 Asshall be seen, and as we explore throughout the book, the decisions individuals make when
acting within a corporate setting can, oftentimes, be quite different to those that they would make
outside of it.
which corporate determinations of legitimacy (and therefore compliance)

are made and why that (reductive) perspective has become so entrenched in
corporate culture.
A. The Duality of Norms
The duality of authority that corporate officers operate within gives rise to a
related issue, namely a corresponding duality (or potential triality) of norms.
As discussed in more detail in Chapter 3, norms operate to shape a person’s
perception of right and wrong in any given situation, acting as a powerful
determinant of legitimacy. They are, as Bicchieri described, the ‘grammar of
society’,93 embodying the values of a community and functioning as the baseline
from which social sanctions are applied. Personal norms have a wide sphere of
influence, informing our judgments about the ethics of tax evasion, the legiti-
macy of government regulation,94 the desire to be part of a group or the guilt
of not paying our fair share. In short, they are fundamental to our determina-
tions of the compliance standards that we should legitimately adopt and the
tax strategies we should apply. Indeed, they are such a powerful driver of behav-
iour that, when harnessed correctly, some commentators have suggested that
they could render deterrence-based and sanction-oriented compliance models
‘superfluous’.95
The problem for individuals discharging corporate responsibilities is that
they are operating within a normative environment that embodies a potentially
different set of norms from their own, with little practical opportunity to move
to a different normative environment.96 That is, as Chapter 3 discussed, a corpo-
ration’s normative environment generally embodies a dominant shareholder
wealth maximising norm, endorsing a purely creative approach to compliance,
whereas individuals may take a broader, more holistic view, towards the value
and legitimacy of spirited compliance. Nonetheless, when acting on behalf of
the corporation an individual is, of course, discharging their corporate responsi-
bilities in respect of corporate assets. They are conducting themselves on behalf
of a third party (albeit an artificial legal one) and in respect of assets that are
‘endowed [not] earned’.97 Understood through this lens, the normative frame-
work for corporate decision making could be said to actually be quite clear.

94 See ch 5.
95 M Wenzel, ‘The Social Side of Sanctions: Personal and Social Norms as Moderators of Deter-
rence,’ (2004) 28(5) Law and Human Behaviour 547, 549.

96 For a discussion of exiting normative communities see CR Sunstein, ‘Social Norms and Social
Roles,’ (1996) 96(4) Columbia Law Review 903, 920.

97 A Downs and B Stetson, ‘Economic versus Non-Economic Factors: An Anlaysis of Corporate
Tax Compliance,’ (5 August 2011) 2011 American Accounting Association Annual Meeting – Tax
Concurrent Sessions. Available at SSRN: https://ssrn.com/abstract=1905075.
Namely, that individuals will simply act in accordance with the profit maximis-
ing norm of the corporation and do so with impunity. Indeed, as we shall see, it
is commonly the case that individuals will favour corporate norms to their own.
In which case, can it be said that a normative conflict arises at all.? Moreover, if
so, why?
The answer lies in the fact that this analysis views the corporate decision-
making process in an artificially clinical and abstract way. The reality is that
individuals acting in a corporate capacity unavoidably remain exposed to the
norms that exist in, and govern, their everyday life. Far from enjoying the clar-
ity of a singular profit-maximising norm (even if this ultimately dictates their
behaviour) they are instead navigating, even if subconsciously, a more complex
normative framework. That is, one where corporate and personal norms inter-
sect. In a corporate environment, personal norms are not simply overridden
and left at the proverbial corporate door but have to co-exist with potentially
conflicting, but oftentimes more salient, corporate norms. As humans, we are
not able to simply segregate or ‘box’ our values, nor are we the wholly rational
decision makers that economic theory would have us believe (although note the
discussion in Chapter 3 of the hidden ‘taxes’ of norm divergence, which goes
some way to helping explain seemingly irrational decisions). We are, as Thaler
and Sunstein observe, homo sapiens, not homo economicus.98
It is this complex normative environment that presents a particular challenge
for explanatory models of corporate compliance. Nonetheless, it is crucial that
we fully understand this interaction (or collision) of personal and corporate
norms and the consequences that it gives rise to. This is not simply an interesting
theoretical or academic debate. Without it, when considering the architecture
of reform, we are left with an unreliable focus on profit maximisation as the
singular driver of ostensibly self-interested behaviour, ignoring (at worst) or
over-simplifying (at best) the complex cognitive processes that underpin corpo-
rate compliance decisions and create hostile environments for change.
B. The Salience of Corporate Norms
The following sections explore the consequences that arise from this norma-
tive tension. However, first we need to address the basic assumption that this
analysis is based upon, namely that individuals will indeed favour corporate
norms and objectives over their own when the two are in conflict. In partic-
ular, we need to reflect upon whether this a fair assumption to make. Do we
all step into our places of work and immediately avail ourselves of corporate
values at the expense of our own? Perhaps not entirely. There are undoubt-
edly personal norms that we either consider to be shared by the relevant group
98 R Thaler and C Sunstein Nudge (first published 2008, Penguin Books, 2009), 7.
(and therefore feel comfortable upholding in the face of conflict) or that we hold
so strongly that we are willing to risk ‘rejection’ by the group to act in align-
ment with them. For example, we would very comfortably refuse an instruction
to act in a violent way against a colleague (confident that it is a shared norm)
or decline to eat meat at a corporate function if we are vegan (a strongly held
personal norm). However, outside of these extremes, the extent to which we are
willing to ignore our personal beliefs, in some cases even disregard facts that
are self-evidently true, in an effort to adhere to group norms (subconscious or
otherwise) is striking.99 This willingness to conform is often exacerbated by the
norms that are internalised with respect to certain roles, such as the subservi-
ence of an employee or the expectations we have of a Finance Director.100
Psychologists, keen to understand the extent to which people will alter their
personal behaviour to conform to group norms, have long studied the impact of
group behaviour on individual decision-making. One of the most remarkable of
these was the Asch conformity experiments.101 Asch convened a group of eight
participants in the same room all of whom, bar one (the ‘research participant’),
were actors. The research participant was not aware that the other participants
were actors and had been informed that the experiment was designed to test
perception. Once introductions had been made (to maintain the pretence that
all participants were unknown to each other) the group was asked to look at two
cards. The first card had a single line on it and the second had three lines on it
(labelled individually A, B and C), each of which was clearly a different length
to the other. The participants were then asked in turn to state which of the three
lines was the same length as the single line on the original card. Each participant
would answer in front of the whole group, with the research participant answer-
ing last (research participants had been deliberately seated at the end of the line
of participants to ensure that this would be the case).
The simplicity of the line perception task was such that the correct answer
was, deliberately, beyond all reasonable doubt.102 Indeed, the ease of the exer-
cise was borne out by the fact that in a control group where all participants
were genuine research participants the error rate in identifying the correspond-
ing line was less than 1 per cent.103 Nevertheless, when the real experiment was
99 This goes some way to answering the question of why is that individuals who wouldn’t act
unethically outside of the firm can nevertheless perpetrate a fraud, or implement an abusive tax
structure when acting within the corporation. As Anand, Ashforth and Joshi observe, most of
the acts were ‘committed by individuals who were upstanding members of the community’. See
V Anand, BE Ashforth and M Joshi, ‘Business as Usual: The Acceptance and Perpetuation of
Corruption in Organizations,’ (2004) 18(2) Academy of Management Executive 39, 39. Chapter 7
considers how the architecture of the firm contributes to this seeming paradox between individual
values and actions within the corporation.
100 Sunstein, ‘Social Norms’ (n 96), 922.
101 SE Asch ‘Opinions and Social Pressure,’ (1955) 193(5) Scientific American 31.
102 Asch had been concerned that similar, earlier experiments, had used questions that did not have
a definitive answer and that this risked obscuring the clarity of their findings, eg Sherif, ‘A study of
some social factors in perception,’ Archives of Psychology, 27(187).
103 Asch, ‘Opinions and Social Pressure’ (n 101), 3.
conducted, the results were astounding.104 Asch ran the perception test 18 times.
However, for 12 of the 18 tests the actors in the room gave a pre-agreed incorrect
answer when asked to identify the matching line. Notwithstanding an error rate
of less than 1 per cent in the control experiment, in the 12 test experiments the
error rate by the research participant (by providing the same incorrect answer
as the actors in the group) was 36.8 per cent.105 That is, a third of people were
willing to state that two lines, which were clearly of different length, were identi-
cal simply because the remainder of the group had expressed that opinion. As
Asch observed, and in something of an understatement, the fact that intelligent
people (the participants were all college students) ‘are willing to call white black
is a matter of concern’.106
If Asch’s findings are troubling in a research setting, their application to
a corporate environment can be even more profound. Not only are the stakes
considerably higher, but the psychological pressure of group conformity is much
greater, increasing the likelihood that individuals will act against their own opin-
ion in favour of the group. In Asch’s experiment, the only pressure to conform
came from the mere existence of group members who were to all extents and
purposes strangers (although there was homogeneity of age and gender as all
group members were male college students). Furthermore, there were no finan-
cial or professional incentives (or tangible negative consequences) that would
arise from acting in accordance with, or contrary to, the group norm.
In contrast, for individuals in a corporate setting, the group is comprised of
individuals with whom there is either a social, cultural or hierarchical relation-
ship, which serves to increase the pressure to conform. Moreover, this relational
influence is then exacerbated by the significant material incentives that exist
within a corporation to encourage compliance with the relevant group norms
(or culture). Not least through direct financial benefit (salary or bonus) and the
real risk of negative repercussions (again both social and financial), including
reputational impact and being shunned for ‘not being a team player’. Faced
with the decision of having to challenge group norms, or comply with a lawful,
even if challenging, direction to implement creative compliance structures, it
is not surprising that acquiescing (and as we shall see rationalising) the deci-
sion to act in conformity is often considerably more palatable.107 As Thaler and
Sunstein observed, there is ‘no question that social pressures nudge people to
accept some pretty odd conclusions and those conclusions might well affect their
behaviour’.108
104 As with many experiments of this nature, the Asch conformity tests have been subject to criti-
cism. These generally centre on the homogeneity of male-college student participants. Nevertheless,
subsequent experiments have found similar responses in respect of the pressure of group conform-
ity. For criticisms, see F Gibbons, ‘Self-Attention and Behavior: A Review and Theoretical Update,’
(1990) 23 Advances in Experimental Social Psychology 249.
105 Asch, ‘Opinions and Social Pressure’ (n 101), 4.
106 ibid, 5.
107 ibid, 8. Downs and Stetson, ‘Economic versus Non-Economic’ (n 97).
108 Thaler and Sunstein, Nudge (n 98), 64.
The sheer impact of a tendency towards group conformity can be appreci-

ated if we consider it alongside two other important, and common, phenomena
in a corporate setting. First, that the voice of a dominant individual can have
a disproportionate impact on group decisions. Sherif109 found that an opinion
expressed assertively by a dominant individual would be disproportionately
persuasive in leading the rest of the group to a particular decision. That is,
whilst Asch’s experiment showed the power of the group in effectively impos-
ing a conflicting opinion on an individual, Sherif found that a similar outcome
could also be achieved by a single person acting with confidence. For example,
the well-known case of the dominant CEO.110 Once the view of a group has
been swayed, this is then compounded by the second phenomenon, namely a
propensity towards ‘collective conservatism’,111 which embeds the initial deci-
sion within the organisation. That is, and reflecting the habitualisation of norms
introduced in Chapter 3, once a decision has been made by an organisation there
is a strong (individual and group) tendency to act in accordance with the status
quo when making future decisions of a similar nature.112 Not only is this the
easiest path to choose, removing the friction of undertaking further normative
analysis, but adopting the default option diffuses a sense of personal responsi-
bility (an outcome that can, as Chapter 7 explains, have fatal consequences), as
a person is simply following a path that has already been decided by others. This
susceptibility towards inertia thus serves to entrench a decision (and the culture
it promotes) for years beyond its immediate adoption. Moreover, it is a decision
that could have been driven entirely by the, potentially erroneous, views of a
group dominated by a single individual.
Thus, we start to see the importance of the salience and impact of corpo-
rate norms in corporate decision making. Individuals are subject to a myriad of
norms and influences. However, in a corporate setting profit maximisation, and
the rejection of the legitimacy of efforts to constrain it, is, currently, dominant.
It is the status quo, shared across the market and has become the default frame
of reference. When faced with a compliance decision, it is cognitively easier to
comply with the relevant corporate norm (reinforced by personal incentives) than
risk the economic, social and cultural consequences of an alternative approach.
This is particularly the case when the corporate environment means that indi-
viduals are often distanced from the ultimate or long-term consequences of their
decision making and when concerns of creative compliance can be moderated
by the ‘perceived legality’113 of the transaction. However, whilst there are clear
explanations for why an individual may favour (and implement) creative compli-
ance strategies in line with corporate norms, this does not mean it is without
109 Sherif, ‘A study of some social factors’ (n 102).

110 The impact of authority is discussed further in ch 7.
111 Thaler and Sunstein, Nudge (n 98), 62.
112 ibid, 8 and 64.
113 ibid, 8.
personal consequences. Even when an individual consciously chooses (for poten-

tially understandable reasons) to act in accordance with corporate rather than
personal norms, these personal norms still exist, giving rise to potentially signifi-
cant psychological tension. It is the consequences of this tension that the following
section explores, namely the cognitive responses that are triggered when a person
acts in accordance with a set of norms that are in conflict with their own.
C. Cognitive Dissonance and Over-Rationalisation
Returning to the question of corporate compliance, why does the salience

of corporate norms, and an individual’s willingness to comply with them
notwithstanding conflicting personal norms, really matter? Is it not a person’s
prerogative to choose to prioritise compliance with the arguably self-serving
(in the short-term) corporate norm over their personal attitudes and beliefs?
Whilst an ostensibly persuasive point of view, one problem this gives rise to
is that the psychological consequences that this seemingly free choice triggers
have significant, and potentially systemic, consequences. When a person acts in
a manner that is contrary to their intrinsic values or beliefs, be it consciously
or otherwise, this generates a cognitive tension, or dissonance, that triggers an
attempt to reduce that discomfort.114 In particular, and as shall be seen, people
engage in (surprisingly predictable) compensatory efforts designed to legiti-
mise the conduct in question and thereby minimise or remove the conflict. It is
these compensatory efforts that serve to legitimise (and ultimately entrench and
habitualise) the behaviours that would otherwise cause conflict, in this case, the
adoption of creative compliance practices.
Recognising this phenomenon, Leon Festinger explained that once a deci-
sion to act has been made, individuals seek ‘internal … consistency’115 for the
conduct in question. That is, we have an innate need for our actions to be aligned
with our personal (and sometimes) social norms, for us to be able to view them
as legitimate. In contrast, if there is a contradiction between either two beliefs
that we hold or, as can be the case with compliance, between our beliefs and
our actions then this gives rise to psychological stress or, as Festinger termed
it, cognitive dissonance. Indeed, this is an experience that we can all recognise
in our personal lives. When we act in a manner that does not align with our
personal norms (even if we believed we had a justification for doing so) this trig-
gers negative feelings that we want to rid ourselves of.
It is this last point that is critical. Cognitive dissonance is not simply a passive
feeling or occurrence. Despite being a term that has taken on an increasingly
114 That is, to maintain ‘cognitive consistency’. On this, see M Wenzel, ‘Motivation or
ationalisation? Causal Relations between Ethics, Norms and Tax Compliance,’ (2005) 26 Journal
R
of Economic Psychology 491, 494.
115 L Festinger, A Theory of Cognitive Dissonance (Stanford University Press, 1957), 1 and 260.
colloquial use, cognitive dissonance is in fact a highly influential driver of

individual (and therefore, ultimately, collective) behaviours. It is, as Festinger
described, a ‘motivating state’.116 In particular, the presence of cognitive disso-
nance triggers steps to reduce the psychological tension that emerges as a
result.117 We try to reduce the feelings of discomfort by rationalising and, for
reasons that shall be seen, over-rationalising our behaviour. Whilst Festinger
identified several ways in which cognitive dissonance is reduced (and that are
deployed with surprisingly predictable accuracy), two are particularly pertinent
to the compliance debate.118
First, individuals may seek to justify or rationalise the behaviour in
question.119 If we are rude to someone then we note how they were being unrea-
sonable in the first instance, if we eat unhealthy food we justify it on the basis
that we have had a bad day or ‘one bite won’t hurt’. We arguably saw examples
of this in Chapter 1, where corporations sought to justify creative compliance
by claiming that it aligns with market ideology, that there is an obligation to
shareholders to act in this way or simply that it is something that all corpora-
tions engage in. Put simply, we try to legitimise the conduct in question, to align
it with our perceived norms (of being kind or healthy), in an effort to reduce
our cognitive discomfort. Alternatively, people (such as taxpayers or corporate
officers) seek to consciously reframe their personal ethics and beliefs ‘so as to
justify their behaviour as right and ethical’.120
Second, people seek to avoid cognitive dissonance by ignoring conflicting infor-
mation or values that could otherwise suggest that their behaviour is either harmful
or morally objectionable. Again, we see these strategies engaged in response to the
scandals that gave rise to the GAAR. By either justifying creative compliance, or
ignoring arguments against it (suggesting there may even be ‘some law against’
not creatively complying), corporations not only disregard the damage it causes
but they force themselves to positively deny there is anything wrong with it. Far
from it, they are proud of their conduct. That is, to consciously affirm creative
116 L Festinger, Cognitive Dissonance, (1962) 207(4) Scientific American 93, 94.
117 ibid, 3.
118 ibid, 19–24.
119 LB Edelman and SA Talesh, ‘To Comply or Not to Comply – That isn’t the Question: How
Organizations Construct the Meaning of Compliance,’ in C Parker and VL Nielsen (eds) Explain-
ing Compliance Business Responses to Regulation (Edward Elgar, 2011), 103. In the case of creative
compliance, this rationalisation is further helped by the use of ‘euphemistic language’, that helps to
reduce stigma, see Ashforth et al, ‘Business as Usual’ (n 99), 47. When adopted, such language helps
to reduce any stigma associated with the conduct concerned. For example, conduct is not discussed
or labelled as being contrary to the spirit of the law, removing funds from the public purse or trans-
ferring an undue burden onto fellow citizens. Rather it is deemed to be ‘creative’ compliance, whilst
tax structuring products are given abstract names, such as the Double Irish (ch 2). It is perhaps
not surprising that Doreen McBarnet referred to this type of conduct as ‘whiter than white collar
crime’, see D McBarnet, ‘After Enron Will “Whiter Than White Collar Crime” Still Wash?’ (2006)
46(6) British Journal of Criminology 1091. These factors coalesce to tacitly support the legitimacy
of creative compliance as a market and industry norm, something that is the acceptable within a
capitalist economy.
120 Wenzel, ‘Motivation or Rationalisation?’ (n 114), 19–20.
compliance as a legitimate strategy to pursue. This has two profound conse-

quences. First, it shapes a corporation’s culture, which now inculcates a view that
technical compliance (even beyond tax regulation) is legitimate. Second, this then
influences the behaviours of other corporations that look to their competitor’s
decisions to creatively comply to further reinforce and justify their own similar
conduct (furthering the mimetic isomorphism discussed in Chapter 3). Whatever
approach taken, these compensatory responses serve to legitimise (and ultimately
habitualise) behaviours that otherwise contravene a person’s sense of right and
wrong. However, whilst arguably problematic for individuals on a diet looking to
justify a second slice of cake, such habitualisation can be catastrophic for corpo-
rate compliance as our baseline sense of ‘legitimacy’ is moved further and further
away from our starting point of view.
One particularly concerning aspect of this process of justification (or ration-
alisation) is that it is not a perfect science. It is simply not possible to determine
with specificity the extent of rationalisation required in any given situation.
As such, when individuals seek to reduce any anxiety they may feel, they often
need to over-rationalise their conduct, to ensure that it is adequately justified
(thereby alleviating in full any cognitive discomfort).121 The consequence of this
over-rationalisation is that, in effect, a greater misdeed is ultimately justified
than the one in question.122 As a result, the boundary of what is considered
‘ethical’ (or justifiable) expands with each iteration of over-rationalisation. In
this way, the corporate ethical parameters (or culture) that individuals operate
within become more and more permissive, changing the frame of reference in
which decisions are made and compliance is defined.123 It is perhaps not surpris-
ing therefore, that when considering the accounting scandals of 2001, we saw
that creative compliance escalated into a culture of systemic and eventually
even illegal behaviour.124 When looking at those cases it also appeared that
the individuals involved often saw nothing wrong with their early behaviour,
a perspective that is seemingly reflected in corporate responses to the 2012 tax
scandal.125
Recognising the willingness of individuals to conform to group norms is not
to criticise any given individual, indeed far from it. One fundamental theme
of this book is to emphasise the pressing need to understand the oftentimes
unavoidable influence of institutional rules and architecture on individual behav-
iour, raising the question as to the impact that this influence has on individual,
121 SC Zyglidopoulos, PJ Fleming and S Rothenberg, ‘Rationalization, Overcompensation and the
Escalation of Corruption in Organizations,’ (2009) 84 Journal of Business Ethics 65, 66.

122 ibid, 66.
123 ibid, 70.
124 ibid, 69.
125 The extent to which an actor will engage in these dissonance reduction processes is influenced,
in part, by the extent to which they are committed to (or invested in) a particular position. Not only
does the individual need to feel justified by their decision to act in that way but they are then subject
to confirmation bias in which they have regard to (or actively seek) only those opinions or positions
that support their own. See P Jenoff, ‘Going Native: Incentive, Identity and the Inherent Ethical
Problem of In-house Counsel,’ (2011) 114 West Virginia Law Review 725, 743.
corporate and institutional responsibility and reform. To help answer this

question, the final section of this chapter uses these insights to model the corpo-
rate compliance decision-making process, providing guidance as to where within
that process we should focus efforts at reform.
IV. THE COMPLIANCE DEGENERATION CYCLE
Drawing together the earlier parts of this chapter and the discussions in
Chapter 3, we are able to better model corporate creative compliance to under-
stand how it has become an almost self-perpetuating cycle of behaviour. This
section sets out the three stages of what I term the ‘compliance degeneration
cycle’,126 which shows how once the decision to creatively comply has been made
(predicated on current perceptions of dominant market norms) a cycle of behav-
iour is triggered that serves to both legitimise creative compliance and create
powerful barriers to reform.
A. Stage One: Initial Drivers of Creative Compliance
The first stage of the cycle encapsulates the initial decision to creatively comply
and the factors that motivate this. As we saw in Chapter 3, compliance deci-
sions (accepting that most legal subjects accept technical obedience as a baseline
level of compliance) are driven by a citizen’s construction of that term and, as
discussed in this chapter, what they consider to be a legitimate course of conduct
to pursue.
For individuals, this construction can be informed by a wide range of influ-
ences, including education, religion and shame,127 which often contribute to
broad (and diverse) notions of what compliance should mean. In contrast,
for corporate actors, compliance is a term that is more singularly defined by
industry and market norms, which eventually become institutionalised and,
ultimately, legitimised. For corporations, these norms (rightly or wrongly) are
perceived to coalesce to legitimise unwavering wealth maximising behaviour.128
Within this framework, profitable, yet creative, interpretations of compliance
become acceptable, legitimised and habitualised.
Thus, the first stage of the compliance degeneration cycle is the perceived
legitimacy and implementation of creative compliance strategies, predicated on
126 Degeneration is used in this context to denote both the state of something getting worse,
but also to encapsulate the notion of a low standard of behaviour.

127 The role of shame, and its lack of application to corporations, is discussed further in ch 3.
128 Bankman discusses the factors that corporations take into account when undertaking a
cost-benefit analysis of engaging aggressive, creative, tax structures. These include the expenses
of implementing the structure, the likelihood of sanction and the cost of sanction (if at all). See
J Bankman, ‘The New Market in Corporate Tax Shelters,’ (1999) 83 Tax Notes 1775, 1778.
The Compliance Degeneration Cycle 93
corporate norms that legitimise a narrow construction of compliance obliga-

tions. As outlined earlier in this chapter, this legitimacy is then entrenched by the
engagement of behavioural mechanisms that operate to mitigate any dissonance
felt as a result of such conduct, whilst excluding any suggestions that creative
compliance is, itself, an illegitimate practice to pursue.
B. Stage Two: Undermining Legitimacy
In direct contrast to the increasing legitimisation of creative compliance, the

legitimacy of regulation itself is undermined as creative compliance becomes
more widespread. One critical reason for this is that not all citizens are equally
positioned to creatively comply. Rather, as discussed further in this chapter
(and Chapter 2), it is a practice that is predominantly available to large corpo-
rate groups that have the legal and economic capacity to operate in this way.129
Therefore, this difference in capability applies not only between corporations
and individuals but also between larger corporate groups and smaller private
entities. As a result, a limited number of corporations can effectively elect how
certain regulatory provisions apply to them, giving rise to a system where the
regulated, rather than the regulator, determine the application of rules. As a
consequence, regulation no longer applies (and is perceived to no longer apply)
equally to all legal subjects.
This unequal application of law has two, related, effects. First, other corpo-
rations feel justified in adopting a similarly creative approach to compliance.130
Put another way, ‘if it is not necessary that everybody should play fair, why
should I?’131 Therefore, we see that unfairness encourages avoidance,132 leading
to what Wheatcroft described as the practice of a neighbour seeing you ‘get away
with it’133 and seeking to replicate the benefit by whatever means possible.134
This reflects the fact that (as discussed in Chapter 3) our behaviour, much like
the law, also has an expressive function. By implementing creative compliance
strategies, corporations are expressing, through action, their perspective that
such conduct is normatively permissible.135 In this way, our conduct is a function
129 In brief, the reason being that multinational groups can utilise the multiple ‘personalities’ within
the group to manufacture legal relationships, economic positions (such as dividends or tax deduct-
ible losses) and ring-fence liability. Further, these groups commonly have the economic resources to
pay for the requisite professional advice to implement such structures.
130 K Arrow, The Limits of Organization, (W. W. Norton & Company, 1974), 72.
131 J Murray, ‘The problem of Mr Rawls’s Problem’ in S Hook (ed) Law and Philosophy a
Symposium (New York University Press, 1964), 33.

132 J Freedman, ‘Defining Taxpayer Responsibility: In Support of a General Anti-Avoidance
Principle,’ [2004] 4 British Tax Review 332, 343.

133 G Wheatcroft ‘The Attitude of the Legislature and the Courts to Tax Avoidance,’ (1955) 18(3)
Modern Law Review 209, 212–213.

134 ibid.
135 ES Anderson and RH Pildes, ‘Expressive Theories of Law: A General Restatement,’ (2000) 148
University of Pennsylvania Law Review 1503, 1508.

of both the existence of social norms and also the observation of the conduct of
others (as a reflection, and reinforcement, of those norms).136
Second, this manipulation, and unequal application, of regulation erodes
the legitimacy of both the regulation in question and also of the wider legal
system as a whole.137 As Tyler recognised, our perception of legislative legiti-
macy is shaped not simply by the content of any given rule but (as we saw in
Section II) also its implementation. Creative compliance is a striking demonstra-
tion of the inequality of regulatory application as only those corporations with
the requisite legal and financial resources (and risk profiles) to implement such
technical structures can do so. This observable inequality before the law serves
to significantly undermine legal legitimacy and, indeed, trust in the wider legal
and corporate systems. A consequence that was, anecdotally, apparent from the
public response to the corporate scandals that gave rise to the GAAR.
C. Stage Three: Illegitimacy and Creative Compliance
It is this loss of legitimacy that brings the cycle full circle. The practice of crea-
tive compliance (stage one) undermines the legitimacy of regulation (stage
two), which, as outlined in Section II of this chapter, undermines an actor’s
motivation for compliance. Thus, the act of creative compliance itself gives
rise to a wider, systemic, compliance problem (stage three). The ‘perception
of unfairness … overshadow[s] any moral obligations’138 to comply with the
law. Moreover, legitimate authority (and as a consequence compliance with
its demands) is the subject of ‘convergent expectations. An individual obeys
authority because he expects that others will obey it.’139 When a citizen sees
that others are not complying with the spirit of the law (and doing so with
impunity) then they will not feel bound to do so, by replicating this approach
they are simply ‘joining in’.140
We thus have a cycle of behaviour, where corporate norms are seen to support
creative compliance, these initial acts of creative compliance result in a loss of
legitimacy, which then contributes to further creative compliance.141 Understood
136 Sunstein, ‘Social Norms’ (n 96), 905.

137 As to illegitimacy as an output ofinequality, see M Levi, ‘Legitimacy, Crimes and Compliance in
‘the City’: De Maximis Non Curat Lex?’ in J Tankebe and A Liebling (eds) Legitimacy and Criminal
Justice, an International Exploration (Oxford University Press, 2013), 157.
138 Leo Martinez, ‘Taxes, Morals, and Legitimacy’ (n 82), 548.
139 Arrow, The Limits of Organization (n 130), 72.
140 M Truman, ‘How Far Would You Go?’ Taxation 3 July 2012.
141 Chapter 5 explains the importance of predictability to market order, and argues that creative
compliance undermines that predictability. One challenge to this claim, premised on the compliance
degeneration cycle, could be that the cycle itself is sufficiently certain to create a new predictabil-
ity (albeit of undesirable behaviour). However, the inequality in corporations’ abilities to creative
comply means that the cycle is not sufficient to create a new pattern of predictability and does not
therefore provide an adequate basis to contest the arguments set out in ch 5. See also, ch 2, Section IV.B
for a more detailed explanation as to why creative compliance does not itself create sufficient
predictability for the market order to operate efficiently.
Conclusion 95
in this way, we can start to see how creative compliance forms part of a self-
perpetuating cycle of behaviour that also serves to reinforce the early norms
that defined compliance in such narrow terms. To interrupt this cycle requires
a change in the perceived legitimacy of creative compliance (and corresponding
illegitimacy of calls for spirited compliance). That is, we must first address the
perceived norms of corporate conduct that contribute to a corporation’s narrow
definition of what constitutes legitimate compliance obligations. As Chapter 3
showed, one way to do this is to challenge the perceived lack of harm (in the
eyes of the corporate community) that creative compliance causes. Without this
normative change, ad hoc regulation such as the GAAR is likely to have only
limited success as it fails to interrupt this cycle of behaviour. Rather, it serves to
apply only after the damage has occurred, that is, after the initial stages of the
legitimisation of creative compliance and the perceived illegitimacy of regula-
tion has occurred.
V. CONCLUSION
Chapter 2 demonstrated how repeated attempts to constrain reductive corporate

compliance practices have, to date, failed to achieve a change in how corpo-
rations interpret their compliance responsibilities. This chapter, together with
Chapter 3, has started to shine a light on why that is and why, without more
fundamental change, it will continue to be, the case. Compliance decisions are
predicated not simply on a binary economic calculation but are the product of a
multiplicity of influences that comprise a person’s view of the legitimacy of their
law-related behaviour. These influences are complicated enough in our everyday
lives but are compounded in a corporate environment where both corporate and
social norms have a role to play.
By modelling the, ultimately self-perpetuating, cycle of creative compli-
ance the compliance degeneration cycle helps to explain why the solution to the
compliance crisis does not lie in single-issue tax regulation. Rather, it demands
that we interrupt commonly held conceptions of the legitimacy of creative
compliance, predicated to a large part on the view that creative compliance is
a legitimate course of conduct to pursue in a capitalist market economy. One
that does not cause harm to society and is not a normative wrong or transgres-
sion. As the next chapter demonstrates, common conceptions of classical liberal
market ideology are in fact subject to challenge. Moreover, that far from further-
ing market ideology, creative compliance (and rejecting regulatory intervention)
can in fact undermine the fundamental principles that classical liberalism and
market ideology are predicated upon.
96
Part II
The Case for Reform

98
5
Compliance, Predictability
and the Market Order
If man is not to do more harm than good in his efforts to improve the social order,
he will have to learn that, in this, as in all other fields where essential complexity of
an organised kind prevails, he cannot acquire the full knowledge which would make
mastery of the events possible. He will therefore have to use what knowledge he can
achieve, not to shape the results as the craftsman shapes his handiwork, but rather
to cultivate a growth by providing the appropriate environment, as the gardener does
for his plants.1
FA Hayek
W
hat if it is not called capitalism? We have seen in the earlier chapters
of this book that the perceived norms of a capitalist market economy,
premised on a classical liberal ideology, have frequently and consis-
tently been offered in support of reductive compliance practices.2 Put simply,
that a technical approach to compliance is nothing more than the permissible
(some may say inevitable) product of market philosophy. However, for the
reasons that this chapter explores, not only is this view based on a misconcep-
tion of the core tenets of classical liberalism but, ironically, it actually risks
damaging the proper functioning of the very market order that it relies on in
support. Recognising this risk is, of course, intrinsically important. However,
it also plays a critical role in challenging prevailing views about the relative
lack of harm caused by, and fundamental legitimacy of, creative compliance.
A challenge that must, as Chapter 3 explored, be addressed if we are to achieve
effective and sustainable reform.
This narrow interpretation of market ideology is, undeniably, persuasive.
‘Liberalism’ is generally perceived to enshrine uncompromising principles of
individualism, private property and limited state interference,3 messages that
align with widely held views of capitalist thinking. In contrast, when seen
1 FA Hayek, ‘The Pretence of Knowledge,’ Nobel Memorial Lecture (11 December 1974), 7.
2 Encapsulated in the view that managers do not have an ‘ethical duty to comply with r egulatory
laws … that managers not only may but also should violate the rules when it is profitable to do
so,’ see FH Easterbrook and DR Fischel, ‘Antitrust Suits by Targets of Tender Offers,’ (1982) 80
Michigan Law Review 1155, 1177 (fn 57).
3 These principles are discussed further in Sections I and II (from a libertarian and classical liberal
perspective respectively).
100 Compliance, Predictability and the Market Order
through this lens, efforts to constrain creative compliance are viewed as noth-
ing more than an illegitimate interference with a citizen’s freedom to act within
their private domain.4 However, if we examine the roots of classical liberalism
we see that it is in fact predicated on wider notions of social cooperation, trust
and the maintenance of the rule of law.5 These principles are not offered by
classical liberals simply as ethical ideals but as characteristics that are function-
ally integral to the proper order of society. In particular, they are necessary to
facilitate the ‘spontaneous orders’6 (of which the market is a paradigm case) that
are essential for the coordination of complex social systems.7 It is these princi-
ples, and the order that is dependent upon them, that are at risk from creative
compliance. Indeed, when understood in this way, spirited compliance is not
only accommodated within the classical liberal tradition but strengthens one
of its core objectives, namely the facilitation of the unique coordination that is
crucial for the development of society.8
4 This question of legitimacy, as discussed in ch 4, has a number of profound consequences
concerning behavioural change and the scope of legitimate government. The primacy of individual
property rights, an ostensibly liberal ideal, has been argued in support of the moral (and legal) legiti-
macy of tax avoidance. See Weeks v Sibley (1920) 269 Fed. 155, where the court held that the right to
structure a corporation’s affairs to avoid tax: ‘is an incidental right, inseparably connected with an
individual’s right to own and control his property’. As to the potential tension between tax and the
protection of private property more generally (whilst acknowledging that both are fundamental to
civil society) see E Troup, ‘Unacceptable Discretion: Countering Tax Avoidance and Preserving the
Rights of the Individual,’ (1992) 13(4) Fiscal Studies 128.
5 These themes at first sight seem antithetical to market ideologies. However, they are commonly
accepted as integral to the proper function of the market. For example, Mark Carney was clear that
the ‘real economy relies on the financial system. And the financial system depends on trust’, see
M Carney, ‘Rebuilding Trust in Global Banking’ (Remarks to the 7th Annual Thomas d’Aquino
Lecture on Leadership, Lawrence National Centre for Policy and Management, Richard Ivey
School of Business, Western University, London, Ontario,’ (25 February 2013) www.bis.org/review/
r130226c.pdf (accessed 9 August 2020). Further, John Kay explained that ‘financial intermediation
depends on trust confidence’, see Department for Business Innovation and Skills, The Kay Review of
UK Equity Markets and Long-Term Decision Making: Final Report, July 2012, 5.
6 M Polanyi, The Logic of Liberty, (first published 1951, Liberty Fund Inc., 1998), 195. Hayek
wrote extensively on the spontaneous order. However, for an instructive introduction to his work
on the market as a spontaneous order, see F Hayek, Law, Legislation and Liberty (first published as
one volume 1982, Routledge, 2013), 34–52 (spontaneous orders generally) and 267–290 (markets as
spontaneous orders).
7 See, eg, J Gray, Liberalism 2nd edn (Oxford University Press, 1995), 61: ‘free markets r epresent
the only noncoercive means of coordinating economic activity in a complex industrial society’.
As we shall see in Sections III and IV Hayek, in contrast, would take this statement one step further
and argue that the market, properly supported, is the only way (coercive or otherwise) to effectively
coordinate economic activity in a complex society.
8 As discussed in ch 3, repositioning the normative value of compliance is much more likely
to result in behavioural change. See also T Tyler, ‘The Psychology of Self-Regulation: Normative
Motivations for Compliance,’ in C Parker and VL Nielsen (eds) Explaining Compliance Business
Responses to Regulation (Edward Elgar, 2011), 78. As ch 3 explains, it is a corporation’s n ormative
environment that can both seemingly endorse creative compliance, whilst rejecting claims for
spirited compliance. As a consequence, it is the normative framing that is of crucial importance and
one powerful influence on this framework is the norms of the political philosophy that dominates
the market.
Compliance, Predictability and the Market Order 101
This chapter begins by examining the perceived legitimacy of creative compli-

ance within the market economy and, in particular, the influence of current
misconceptions of the ‘liberty tradition’9 on corporate compliance practices.
In doing so, it suggests that the erroneous conflation of disparate political
philosophies under the broad rubric of ‘liberalism’ has resulted in a mischarac-
terisation of classical liberalism. It is this mischaracterised notion of ‘liberalism’
that is then relied upon to legitimise creative compliance practices as aligning with
market ideology.10 Dispelling this misconception, Section II explores the founda-
tions of individualism and limited state interference within the classical liberal
tradition. It explains why a classical construction of individual freedom does not
endorse an unfettered right to pursue self-interest and introduces the perhaps
surprising relationship between individualism and the realisation of broader
social benefits. Section II also starts to introduce the important role that classi-
cal liberals ascribe to government in protecting this freedom and the legitimate
role (and function) of law in society. Thus, it is here that we start to see the value
that classical liberalism places on social cooperation and order, a benefit that
is explained (not precluded) by the methodological individualism engaged by
classical liberal thinkers.
Having established the importance of social cooperation and order, Section
III explores the market as a paradigm case of social order,11 distilling the specific
way in which complex social systems operate and the unique value that they
contribute to society. In particular, it shows how the complexity of social
systems (complexity in this context meaning that the system is comprised of
multiple variables) necessitates their operation as a polycentric system, with each
constituent part reacting to the actions of the other. It is this fluidity of opera-
tion that enables us to better understand the importance of the relationships
between system participants inter se, the regulatory architecture that is required
to support them and the damage that is caused when participants undermine
that regulatory framework.
Developing this analysis, Section IV sets out the contours of what this
regulatory framework should look like. Specifically, it examines how complex
systems (unlike those with limited variables) operate as spontaneous, rather
9 This term is offered by Mack and Gaus to capture the wide spectrum of views within the broad
spectrum of ‘liberalism’ that whilst different ideologies nevertheless share sufficient ‘fundamental
agreements’ to fall within MacIntyre’s characterisation of a ‘tradition’. See E Mack and GF Gaus,
‘Classical Liberalism and Libertarianism: The Liberty Tradition,’ in GF Gaus and C Kukathas (eds)
Handbook of Political Theory (Sage Publications, 2004), 11 citing A MacIntyre, Whose Justice?
Which Rationality? (University of Notre Dame Press, 1988), 12.
10 For a discussion of the principles of classical liberalism and their relationship with a c
apitalist
market, see S Freeman, ‘Capitalism in the Classic and High Traditions,’ (2011) 28(2) Social
Philosophy and Policy 19.
11 Other examples include language, money and queuing, see E van de Haar, Classical Liberalism
and International Relations Theory: Hume, Smith, Mises, and Hayek’ (Palgrave Macmillan,
2009), 28.
than planned, orders.12 Drawing primarily on the work of Friedrich Hayek, it

explores how spontaneous orders can be achieved by adopting a framework of
general rules of behaviour that are applied equally to all. It is this principle of
equality, and the predictability of behaviour that it engenders, that is critical
to the success of a spontaneous order. Without it, the system lacks integrity
as it is missing a vital component, risking inefficiency or even failure.13 More
immediately, and as we have seen in previous chapters, this inequality can act as
the catalyst for the introduction of targeted reactionary regulation, which itself
undermines the optimum architecture needed for the system to survive.
By looking at the operation of society in this way, this chapter seeks to reframe
how we address the question of compliance by recognising the intrinsic and
instrumental value of compliance itself.14 In doing so, it builds upon the architec-
ture for reform outlined in Chapter 3, by providing the foundation for challenging
and changing the normative environment that corporate compliance is commonly
analysed, defined and legitimised within. Importantly, this systems-based approach
(namely starting from a position of understanding the value of compliance and
only then analysing corporate responsibility to maintain it), provides a framework
in which to consider the additional and often challenging questions that calls for
corporate spirited compliance necessarily raise (and that are explored in the next
chapter). Namely, whether within a paradigm based on the values of equality and
the rule of law there are justifications for a departure from this principle of equal-
ity? That is, whether we are legitimately able to hold corporations to a higher
standard of compliance than their natural counterparts?15
I. (MIS)CONCEPTIONS OF THE ‘LIBERTY TRADITION’
Chapter 3 explained how wider environmental norms shape a citizen’s definition

of compliance. For corporations, the dominant norm of wealth maximisation
supports the belief that creative compliance is not only unobjectionable but,
to the contrary, positively endorsed by a capitalist economy. Underpinned by
perceptions of individualistic ideology and a belief that the sole responsibility
of the corporation is ‘to increase its profits’,16 not only is creative compliance
12 The term ‘spontaneous order’ was originally used by Polanyi (see n 6) and later developed in a
market context by Hayek, see Hayek, Law, Legislation and Liberty (n 6), 37–52.
13 Adopting Erhard, Jensen and Zaffron’s definition of ‘integrity’, namely the need for both
‘completeness’ and ‘trust,’ (discussed further in ch 8). See W Erhard, MC Jensen and S Zaffron,
‘Integrity: A Positive Model that Incorporates the Normative Phenomena of Morality, Ethics and
Legality,’ (March 23, 2009). Harvard Business School NOM Working Paper No 06-11; Barbados
Group Working Paper No 06-03; Simon School Working Paper No FR 08-05.
14 That is, spirited compliance is intrinsically valuable as it maintains the rule of law (discussed
further in ch 6) and instrumentally valuable as, which is explored further in Sections II and III, it
facilitates the market order that society depends on.
15 These questions are considered in ch 6.
16 M Friedman, ‘The Social Responsibility of Business is to Increase its Profits,’ New York Times
Magazine (13 September 1970), 1.

(Mis)Conceptions of the ‘Liberty Tradition’ 103
seen as a legitimate standard to pursue within a corporation’s normative envi-

ronment but calls for spirited compliance are rejected as illegitimate intrusions
on corporate purpose.
However, if ‘all told, the market faces no serious contender as an approach
to organising large scale economies’17 are we really left with an economy where
we have little choice but to accept such a reductive approach to compliance?
One where the most influential economic actors in civil society can legitimately
‘manipulate’18 their relationship with our legal framework? In challenging this
view, this section explores the core tenets of classical liberalism and suggests that
by returning to the roots of this ideology we can see how it has been miscon-
ceived. In doing so, it starts to lay the foundations (developed throughout the
chapter) for understanding how spirited compliance is not only justified within
this political philosophy but positively supports its fundamental objectives.
A. Perceptions of Self-Interest and Illegitimate Government Interference
At its core, creative compliance reflects a view that the pursuit of self-interest,
through the adoption of profitable compliance strategies, is entirely legitimate,
notwithstanding the harm that this can cause (to the extent that any such harm
is even acknowledged by those adopting this approach). In essence, this encapsu-
lates the fundamental belief that an individual citizen is, and should be, free to
pursue whatever ends they please with minimal state interference.
This primacy of the individual, to the exclusion of wider considerations,
reflects the (libertarian) ideal that individuals are full ‘self-owners’,19 much like
one can own property. The consequence of this, and its analogy with property
ownership, is significant. To the libertarian, property ownership confers on an
owner the right to exercise complete control over the underlying asset including,
given the definition of self-ownership, oneself.20 Understood in this way, not only
is an individual free to control what they do (without a duty to help others) but
this perspective embodies an enforceable claim that third parties cannot inter-
fere with such personal sovereignty.21 Indeed, to advocates of this libertarian way
17 EA Posner and EG Weyl, Radical Markets, Uprooting Capitalism and Democracy for a Just
Society (Princeton University Press, 2018), 19.

Legal Control,‘ (1991) 54 Modern Law Review 849, 849.

19 For a discussion of self-ownership, see W Block, ‘Toward a Libertarian Theory of Inalienability:
A Critique of Rothbard, Barnett, Smith, Kinsella, Gordon, and Epstein,’ (2003) 17(2) Journal of
Libertarian Studies 39.
20 Thus, for a libertarian, citizens have the right to freely contract themselves into servitude,
see Block, ‘Toward a Libertarian Theory’ (n 19). A view that is not shared by classical liberals
(see, Freeman, ‘Capitalism’ (n 10), 20).
21 Aligned with this robust notion of self-ownership is the libertarian conception of the absolute
nature of economic rights, such as the right to freedom of contract and property ownership.
On which, see Freeman, ‘Capitalism’ (n 10), 20.
of thinking, it is entirely legitimate to pursue a strategy of creative compliance

as a means of furthering a corporation’s self-interest (to increase its profits),
notwithstanding the externalities that it may cause. It is perhaps also the reason
that libertarianism is seen to advocate an ‘unbridled selfish materialism’,22
whilst the market economy it endorses has been characterised as an ‘impersonal
monster’.23
Given this ‘extreme individualism’,24 it follows that libertarians reject most
forms of government intervention,25 which is considered to be a violation of an
individual’s freedom.26 Taxation is a clear case in point which, if applying this
philosophical lens, can be construed as an illegitimate demand for the transfer
of individual assets.27 In contrast, creative compliance is simply the permis-
sible pursuit of self-interest and the legitimate exercise of control over one’s
own property. That said, libertarian arguments against central control are not
only grounded in autonomy and self-sovereignty. Rather, if we adopt a libertar-
ian perspective, regulatory intervention is also considered to be inefficient, as it
undermines individual utility. When individuals are free to act as they wish, they
will, it is argued, naturally choose to do so in a utility maximising way.28 Thus,
to a libertarian, regulatory demands are by their very nature asking for conduct
that would not have been entered into voluntarily and that is not therefore utility
maximising.29
It is these libertarian principles of self-ownership and minimal government
intervention that support the view that a liberal market economy rejects the coer-
cive constraint of creative compliance. In particular, the market is perceived to
promote the unfettered pursuit of self-interest, which ‘repudiates sacrifice’30 and
22 MN Rothbard, Man, Economy, and State with Power and Market 2nd edn (Mises Institute,
2009), 1321.
23 ibid, 1324.
24 S Razeen, Classical Liberalism and International Economic Order (Routledge, 1998), 16.
25 Rothbard outlines three forms of intervention: (i) autistic intervention (the unilateral coercion
by the state over a citizen without receiving anything in return, eg the prohibition on murder); (ii)
binary intervention (coerced exchange where the state received something in return, such as taxa-
tion); and (iii) triangular intervention (where the state compels or prohibits exchanges between
two subjects, such as price control and licensing). See Rothbard, Man, Economy, and State (n 22),
877–878.
26 To the extent that individual coercion is required (and few admissions are made in this regard),
libertarians argue that it can (and should) be left to the freely competitive market to identify a private
agency that would perform such services, see Rothbard, Man, Economy, and State (n 22), 1030.
This broad commitment to the primacy of the market extends to the provision of ‘public’ goods
such as police or judicial protection, see Rothbard, Man, Economy, and State (n 22), 1048. It is
not surprising that libertarian approaches to compliance adopt a highly formalist practice, on this
see WH Simon, ‘After Confidentiality: Rethinking the Professional Responsibilities of the Business
Lawyer,’ (2006) 75(3) Fordham Law Review 1453, 1459.
27 L Murphy and T Nagel, The Myth of Ownership (Oxford University Press, 2002), 9.
28 Rothbard, Man, Economy, and State (n 22), 879.
29 ibid.
30 E Mack, ‘Individualism, Rights and the Open Society,’ in T Machan (ed) The Libertarian Reader
(Rowman and Littlefield, 1982), 4.

(Mis)Conceptions of the ‘Liberty Tradition’ 105
where individuals are concerned with ‘nothing but [their] own enrichment’.31
Yet is it really the case that our modern economy is founded on principles that
endorse such myopic behaviours? Fortunately, as Section II explains, this liber-
tarian analysis does not reflect the classical liberalism that the market is premised
upon, giving rise to the question as to how this misconception has occurred.
B. The Emergence of ‘Everyday’ Liberalism
The difficulty in distilling the true principles of the market economy is that
‘liberalism’ or the ‘liberty tradition’ enshrines a number of diverse philosophies,
including libertarianism and classical liberalism.32 It is indeed the case that, at
their core, all ‘liberals’ share a commitment to the ‘polar star’33 of freedom.34 That
is, freedom of the person is seen as a fundamental (or basic) liberty that, whilst
not wholly absolute,35 is to be protected from coercion, be it by the government
or fellow citizens.36 As a consequence, most liberals also agree that the role of
government should be limited, often to the protection of the individual rights that
are necessary to maintain this freedom.37 However, notwithstanding these broad
similarities, significant differences exist across the liberal spectrum as to the appro-
priate scope of individual freedom and the corresponding sphere of legitimate
government intervention (and, as a corollary, compliance with such interven-
tion).38 In particular, and as outlined further in Section II, there are important
distinctions between libertarian thinkers and their classical liberal counterparts.
31 L von Mises, Liberalism, the Classical Tradition (first published 1927, Liberty Fund, 2005), xxvi.
32 In general terms, a helpful taxonomy (understanding that the extent of variations are such
that a precise definition, and one without criticism, is a difficult task) is that offered by Edwin van
de Haar: social liberalism (a modern variant that calls for the greatest government intervention);
libertarianism (which advocates individualism in the strictest sense and favours minimal state
intervention); and classical liberalism that occupies the middle ground. See Evan de Haar, Classical
Liberalism (n 11), 19. The distinctions between these schools of thought, which are premised on
different p hilosophical foundations, result in important policy consequences (for example, as to
the legitimacy of state interference and the provision of public goods, on this, see NP Barry, On
Classical Liberalism and Libertarianism (Palgrave Macmillan, 1986), 3.
33 A liberal is a person whose ‘polar star is liberty’, Lord Acton, cited in GH Smith, The System of
Liberty, Themes in this History of Classical Liberalism (Cambridge University Press, 2013), 2.
34 Hence the name liberal from liber ‘to be free’.
35 Important exceptions do exist for the classical liberal, which are discussed in Section II. These
basic liberties, whilst not ‘absolute’ can only be infringed to ‘protect other basic liberties and main-
tain essential background conditions for their effective exercise, see Freeman, ‘Capitalism’ (n 10), 19.
36 For a discussion of basic liberties (including the qualification that basic liberties should be capa-
ble of equal coterminous enjoyment by all citizens, which is discussed in Section II) see P Pettit,
‘The Basic Liberties,’ in MH Kramer (ed) The Legacy of H.L.A. Hart: Legal, Political and Moral
Philosophy (Oxford University Press, 2008), 201–224.
37 van de Haar, Classical Liberalism (n 11), 19–20; and Gray, Liberalism (n 7), 70–77. These
rights include the basic liberty of freedom of the person, together with economic rights such
as the freedom of contract and property, on which see Freeman, ‘Capitalism’ (n 10), 31–35;
S Freeman, ‘Illiberal Libertarians: Why Libertarianism is Not a Liberal View,’ (2001) 30(2) Philosophy
and Public Affairs 105, 108–111.
38 Freeman, ‘Illiberal Libertarians’ (n 37); van der Haar, Classical Liberalism (n 11), 19.
Regardless of these differences, the perceived similarities between ‘liberal’

ideologies have caused an ‘everyday’39 liberalism to emerge, which conflates
multiple liberal philosophies into a single school of thought. In doing so, the
important diversity across the liberal spectrum is lost40 as elements of a particu-
lar liberal ideology are ‘taken to be the whole liberal story’41 giving rise to ‘much
misunderstanding’.42 Most notably, it is the more extreme libertarian ideolo-
gies discussed in this section that are adopted as key tenets of this ‘everyday’
liberalism. Notwithstanding its lack of conceptual coherence, this conflated,
hybrid philosophy gains legitimacy as a school of thought as its libertarian-
esque principles align, as we saw in Chapter 1, with common perceptions of the
shortcomings of a capitalist market economy. As a consequence, the nuances of
various liberal ideologies become lost, resulting in a somewhat binary interpre-
tation of the needs and values of classical liberal thinking.
This convergence of broad ideals is unlikely to survive more than a cursory
analysis. However, as we have seen,43 it is the perception of these norms, rather
than their reality, that shape a corporation’s understanding of the legitimacy
of regulation and their corresponding compliance obligations. Therefore, it is
perhaps not surprising that if we return to Friedman’s oft-cited quote, we see
that it is circumscribed to simply refer to a corporation’s singular responsibil-
ity to increase profits, presenting a view that aligns with a decidedly libertarian
ideology. However, in doing so, this obscures the fact that Friedman proceeded
to expressly restrict this duty in a manner that demonstrates the stark contrast
between libertarian and classical liberal principles (particularly from a compli-
ance perspective). That is, Friedman was clear that the obligation to increase
profits was subject to a duty to conform ‘to the basic rules of the society, both
those embodied in law and those embodied in ethical custom’.44
II. DEFINING (AND CONSTRAINING) FREEDOM

WITHIN THE CLASSICAL TRADITION
In contrast to this highly libertarian approach, classical liberalism acknowledges

an important, but not absolute, role for the state within society. Specifically,
39 This ‘everyday liberalism’ reflects the ‘extension of more restricted concepts beyond the bounda-
ries within which they actually apply … a muted or confused version of the real thing’. See Murphy
and Nagel, The Myth of Ownership (n 27) 34–35. See also Razeen, Classical Liberalism (n 24), 16.
40 The ‘idea that there is one doctrine of liberalism is illusory’, see Barry, On Classical Liberalism
(n 32), 17. Indeed, the search for unity across this ideology ‘disintegrate[s] even under the most
superficial of analyses,’ Barry, On Classical Liberalism (n 32), 11. Ludwig von Mises lamented that
the ‘term “liberalism” today … stands in direct opposition to what the history of ideas must desig-
nate as liberalism’. See von Mises, Liberalism, the Classical Tradition (n 31), 157.
41 van de Haar, Classical Liberalism (n 11), 1.
42 Barry, On Classical Liberalism (n 32), 17.
43 See ch 4.
44 Friedman, ‘The Social Responsibility’ (n 16), 1.
Defining (and Constraining) Freedom within the Classical Tradition 107
whilst classical liberalism clearly endorses personal freedom as a basic liberty it

nevertheless recognises vital constraints that preclude an unfettered right for a
citizen to do as they please (including the adoption of creative compliance strat-
egies). By understanding these foundations of individualism within the classical
tradition, we are able to appreciate both how this informs the boundaries of
‘legitimate’ regulatory intervention and its, perhaps surprising, interaction with
the importance that classical liberals place on cooperation. As shall be seen, it
is this cooperation that depends upon a respect for, and meaningful compliance
with, the necessary rules of civil society including the fundamental (and instru-
mental) importance of the maintenance of equality before the law.
A. Freedom of the Individual
In common with other liberal traditions, and by its very definition, classical
liberalism is normatively individualistic,45 recognising individual freedom as a
basic liberty.46 Its central claim is that citizens should be free to pursue their own
self-interest across all aspects of life: social, political and economic, subject only
to the corresponding right of others to do the same (an important qualification
that this section will return to).47 Thus, the primary objective of classical liberal-
ism (and the government that it endorses) is to maintain the equal freedom of
citizens as a bulwark against illegitimate encroachment, be it from the monar-
chy, the state or other citizens.48 It follows from this characterisation that any
restriction (or coercion) of that freedom, whilst not prohibited, must neverthe-
less be justified, regardless of the source of such interference.49
For the classical liberal, this focus on the individual encompasses both a
positive and normative analysis.50 Positively, it adopts a methodological indi-
vidualism that, far from disregarding social cooperation (or responsibility),
acknowledges the role and importance of collectives within society.51 Rather,
45 That is, it endorses both the freedom of the individual and a methodological individualism
(Razeen, Classical Liberalism (n 24), 16. On the latter see FA Hayek, Individualism and Economic
Order, (first published 1948, University of Chicago Press, 1980).
46 Gaus and Mack, ‘Classical Liberalism’ (n 9), 116.
47 See Section II.B. For classical liberals, the individualism that characterises their philosophy was
that introduced by Locke, Mandeville and Hume and developed by the Scottish Enlightenment, in
particular Ferguson and Smith, see Hayek, Individualism and Economic Order (n 45), 4.
48 It is important to note that the right to freedom extends to protection from encroachment
by both the state and fellow citizens. Chapter 6 considers this right further to consider whether it
extends a corresponding duty to citizens as well as the state.
49 FA Hayek, The Constitution of Liberty (first published 1960, Routledge Classics, 2006), 19.
50 D Boaz, The Libertarian Reader (Free Press, 1997), 117.
51 Hayek described individualism as ‘a theory of society, an attempt to understand the forces
which determines the social life of man, and only in the second instance a set of political maxims
derived from this view of society. This fact should by itself be sufficient to refute the silliest of the
common misunderstandings: the belief that individualism postulates … the existence of isolated or
self-contained individuals instead of starting from men whose whole nature and character is deter-
mined by their existence in society.’ See Hayek, Individualism and Economic Order (n 45), 6.
what it suggests is that as society (or any other collective group) is comprised of,
and acts by, individuals then the individual should be the first unit of analysis.52
Thus, whilst the actions of a collective or institution are important,53 to under-
stand them we must first discern what motivates the individuals that they are
comprised of (hence the importance of the analyses in Chapters 3 and 4). This is
a conceptually significant contrast to libertarian notions of individualism. That
is, classical liberals do not reject the value of society, cooperation or the need to
protect the frameworks that support them. Instead, they simply acknowledge
that to understand society we must first understand its individual citizens.
Normatively, this respect for self-interest enables the diversity of a society
to develop, as citizens are free to pursue a wide range of personal preferences.54
In doing so, individuals are able to contribute their own perspective, abilities
and knowledge to society and Section III examines the integral role that these
contributions make to the proper order (and development) of the market as a
vital social system. However, at this juncture it is important to note that there is
a significant public utility in facilitating the freedom to pursue self-interest. It is
by striving to meet our own needs (for example, wealth maximisation) that we
identify and serve the needs of others.55 As Adam Smith famously observed, ‘it is
not from the benevolence of the butcher, the brewer or the baker that we get our
dinner, but from their regard to their own self-interest’.56 Somewhat ironically, it
is these benefits (amongst others) that are at risk if we damage, through narrow
compliance practices, the institutional architecture that supports them.
The fallacy of the claim that a market economy, premised on classical liberal
ideals, promotes (or should promote) an unbridled self-interest is immediately
clear when we consider the implausibility of such a proposition. Whilst the
broad classical liberal commitment to individual freedom is not in dispute, it
is equally apparent that such a right cannot be absolute.57 If each individual
were free to pursue their own self-interest this would involve granting citizens
an unhindered right over the otherwise private and protected domain of others.
By way of example, my right to reside in my own property to the exclusion of
others cannot coexist with an unfettered right in others to occupy it (should they
52 ibid.
53 The impact of corporate actions, norms and architecture are considered in chs 3, 4 and 7.
54 FA Hayek, ‘The Use of Knowledge in Society,’ (1945) 35(4) The American Economic Review 519.
55 When the rights of this autonomous individual are protected, they will ‘exchange with … fellow
men so as to advance the values of each’, see Barry, On Classical Liberalism (n 32), 4. However,
as made clear in this section and ch 6, this pursuit of self-interest ought to be constrained when it
intrudes on the equal rights of others and damages the legal and market orders.
56 A Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, (first published 1776,
Oxford University Press, 2008) book 1, ch II, para 2. See also ‘The advantages derived from peace-
ful cooperation and division of labor are universal. They immediately benefit every generation …
When social cooperation is intensified by enlarging the field in which there is division of labor or
when legal protection and the safeguarding of peace are strengthened, the incentive is the desire of
all those concerned to improve their own conditions. In striving after his own – rightly understood –
interests the individual works toward an intensification of social cooperation and peaceful inter-
course.’ von Mises, Liberalism, the Classical Tradition (n 31), xxii.
57 P Manent, An Intellectual History of Liberalism, (Princeton University Press, 1995), xvi.
so wish). Thus, the question arises as to how, within an ideology of freedom and
individualism, are citizens’ respective rights to freedom compatible with each
other?58
The classical liberal response to this challenge is that the freedom of the indi-
vidual is, broadly, constrained in one important way. An individual’s freedom is
limited to the extent that it would otherwise encroach upon another citizen’s
equal right, such that ‘every man may claim the fullest liberty to exercise his
faculties compatible with the possession of like liberty by every other man’.59
This negative conception of freedom60 means that I can act as I wish so long
as I do not interfere with your equal right to do so.61 Therefore, to live (and
prosper) in society, without fear of encroachment, requires mutual agreement
between citizens to curtail the absolute freedoms they may otherwise enjoy.
As Pettit acknowledges, as a right of citizenship, it is critical that the basic
liberties coexist, that is, that they are capable of co-enjoyment.62 We thus start
to see the integral importance of mutual agreement and trust (namely that
one’s co-citizens will adhere to this agreement) to the order of society and the
protection of individual freedom within it.
This right to freedom, subject only to a duty to respect the corresponding
right of others, enshrines the classical liberal commitment to equal treatment.63
It is this commitment that delineates the ‘classical liberal view, [that] liberty and
the protection of the individual domain partly depend on protection through law
secured by the state’.64 As a consequence, we start to understand the two princi-
ples that inform a classical liberal interpretation of what individual compliance
obligations should be. First, that the state does have some form of legitimate
right of intervention (or coercion) over individual freedom. Second, that the
proper order of society is premised on a strong principle of equality, and, in
particular, equality before the law (a principle considered further in Chapter 6).
B. Limited State Interference
Pursuant to this negative conception of freedom, it follows that it is legitimate

(indeed, necessary) for the state to create a protected sphere of individual action.65
58 On ‘compossible’ rights see H Steiner, ‘The Structure of a Set of Compossible Rights,’ (1997)
74(12) The Journal of Philosophy 767.

59 H Spencer, Social Statistics; or, the Conditions Essential to Human Happiness Specified, and the
First of them Developed, (first published 1851, Palala Press, 2016), part two, ch four, § 3.
60 Namely, that ‘liberty in this sense is simply the area within which a man can act unobstructed
by others’, see I Berlin, Four Essays on Liberty (first published 1969, Oxford University Press,
2013), 122.
61 Rights ‘always have obligations as their correlative’, see Mack, ‘Individualism’ (n 30), 5.
62 Pettit, ‘The Basic Liberties’ (n 36), 207.
63 Barry, On Classical Liberalism (n 32), 4. This commitment reflects a particular understanding of
equal rights and, as a corollary, equal liberties. This concept of equality is examined further in ch 6.
64 van de Haar, Classical Liberalism (n 11), 30.
65 Hayek, The Constitution of Liberty (n 49), 130.
That is, the legal space within which an individual is able to act, free from
illegitimate coercion, but subject to (namely, delineated by) the equal right of
other citizens. Seen in this way, the ‘common misconception’66 that classical
liberals advocate an absolute laissez-faire state becomes clear.67 That far from
endorsing a lack of regulation, it would be ‘disastrous’68 to suggest that it is not
possible to limit personal freedom. Rather, classical liberals seek to understand
the appropriate scope of legitimate government action,69 premised on this nega-
tive construction of freedom and the belief that the onus of proof on justifying
regulatory intrusion rests on those seeking to introduce it.70
It follows from this analysis that one role of government is to establish
and enforce the rights necessary to facilitate personal freedom whilst protect-
ing ‘every member of society from the injustice or oppression of every other
member’.71 In broad terms, these rights include the performance of promises
(including the freedom of contract), the protection of property rights and the
maintenance of the rule of law.72 Protecting the performance of promises not
only facilitates the freedom to engage with (and control) individual property but
it reflects a deeper need to be able to rely on the voluntary agreements that we
enter into with others. Namely, to trust that others will act in the way that they
have agreed to, that they will honour their word. It is by protecting the perfor-
mance of promises that we help to support the certainty and predictability of
behaviour that is vital to maintain the very particular order that complex social
systems depend upon.
It will be of no surprise that property rights are fundamental to a classical
liberal society. However, their role is not to delineate the relationship between
a citizen and an asset per se, but ‘between a person and a person’.73 That is,
they identify what other citizens cannot do, including the right of an owner to
largely exclude both citizens and the state from interfering with their property.
It is by safeguarding a person’s title to their property that we grant them the
freedom to exchange it, to create and extract value from it. Thus, the protection
66 BZ Tamanaha, On the Rule of Law: History, Politics, Theory (Cambridge University Press,
2004), 45.
67 Indeed, ‘probably nothing has done so much harm to the liberal cause as the wooden insist-
ence of some liberals on certain rough rules of thumb, above all the principle of laissez faire’, see
F Hayek, The Road to Serfdom, (first published 1944, Routledge Classics, 2001), 21.
68 C King, ‘Moral Theory and the Foundations of Social Order’ in T Machan (ed) The Libertarian
Reader (Rowman and Littlefield, 1982), 31.

69 Hayek, The Constitution of Liberty (n 49), part two of the Constitution of Liberty discusses
this issue, specifically ch 10.

70 The onus of proof ‘of making out a case always lies on the defenders of legal prohibitions’, see
JS Mill in J Riley (ed) Principles of Political Economy and Chapters on Socialism (first published 1899,
Oxford University Press, 1998), 327.
71 Smith, An Inquiry (n 56) book 4, ch 9, 51.
72 For a more detailed discussion of these rights see Boaz, The Libertarian Reader (n 50), 64–70.
73 I Shivji, ‘Lawyers in Neoliberalism: Authority’s Professional Supplicants or Society’s Amateurish
Conscience?’ Valedictory Lecture (15 July 2006) 6 http://mokoro.co.uk/wp-content/uploads/shivji_

lawyers_in_neoliberalism.pdf (accessed 9 August 2020).
of promises and property rights are, largely, permissive. They enable a citizen to
act freely, entering into voluntary relationships to pursue their own interests (the
importance of which is, as we shall see, fundamental not only to intrinsic human
enjoyment but also to the proper function of the market order). In contrast, it is
the rule of law and, in particular the principle of equality before the law, which
operates to constrain the otherwise broad freedom of the individual. It is this
principle that provides the necessary protection to ensure that ‘individualism’ is
not construed to mean an ‘unfettered right to do as one pleases’ with the atten-
dant difficulties and chaos that would ensue. Moreover, and as Sections III and
IV explore, it is this principle that is under threat by creative compliance, risking
damage to the order that society is dependent upon.
Against this overview, we start to see that, for the classical liberal, the state is
justified in intervening to establish the regulatory and institutional frameworks
that are necessary to protect individual freedom and the coordination (or order)
of the complex social systems that such freedom operates within.74 In contrast
to common perceptions of the everyday liberalism outlined above, these frame-
works are premised, and depend, upon broader notions of trust and equality,
the functional impact of which is considered later in the chapter. Indeed, the
institutional importance of maintaining this architecture of rules is such that
when these frameworks break down ‘it is government’s role to intervene’.75
Thus, when understood in this way, it is not surprising that Ludwig von Mises
described the suggestion that classical liberalism rejected government interven-
tion as a strategy adopted by critics to misrepresent and impose a completely
‘pejorative connotation’76 on classical liberal philosophy. To the contrary, a great
deal of attention was paid by classical liberals to the appropriate ‘rules of the
game’ and the remaining parts of this chapter consider what these rules, and
their relationship with compliance, are.
C. Dispelling the Paradox: Individualism and Cooperation
Creative compliance is, inherently, an act of self-interest. It prioritises the pursuit

of individual profit over broader social interests including fundamental princi-
ples of civil society such as equality before the law. We have seen that to constrain
individual freedom within a classical liberal ideology requires justification, but
that there is, nonetheless, legitimate scope to do so. Nevertheless, there is a
seeming paradox between a philosophy premised on individualism (including
74 Oakeshott observed that civil society had identified a set of ‘arrangements in which we are
associated with each other … agreed-upon procedures that secure opportunities for self-regulating
individuals to pursue their self-chosen, widely varying forms of flourishing in voluntary associa-
tions, supported especially by the rule of law’, see M Oakeshott, On History and Other Essays
(Liberty Fund, 1999), xii.
75 Freeman, ‘Capitalism’ (n 10), 23.
76 von Mises, Liberalism (n 31), xxvi.
the pursuit of self-interest) and calls for spirited compliance that are based (as
shall be seen in the following section) on broader notions of social order.
Notwithstanding this ostensible tension, classical liberalism does not exclude
considerations of social interest and coordination.77 On the contrary, the need to
protect the order of society is a ‘central element’78 of classical liberal thinking.
It is this order that helps facilitate the benefits outlined in Section A, includ-
ing the diversity of society and the attainment of social needs. For individuals
to prosper and live peacefully together within society, they necessarily need to
(and do) engage with each other. Classical liberal ideology is therefore clear that
‘individualism and community are coextensive, not in conflict’.79
In fact, achieving voluntary (and, as shall be seen in Section IV, spontaneous)
social order is not simply coexistent with individual freedom but rather a mech-
anism for protecting it. Early classical liberals, including Adam Smith, accepted
that the Great Society was a ‘complex and productive society made possible
by social interaction’.80 Rather, the challenge that arises is how to achieve such
coordination, namely how the apparent chaos of a complex social system can
find order.81 The problem identified by classical liberals is that if order is not
secured voluntarily then citizens are exposed to the risk of compulsion.82 There-
fore, what is important to the classical liberal (and the subject of the remainder
of this chapter) is establishing the necessary regulatory and institutional archi-
tecture that facilitates voluntary cooperation, rather than facing a centrally
planned (or dictated) order that restricts individual freedom.
To the classical liberal, individualism serves both as a protection against ille-
gitimate coercion and as a means of contributing to the interests of society as
a whole.83 It is the foundation for understanding the unique framework that is
needed to support the maintenance of order in a diverse and fragmented society,
the paradigm case of which is the market. The capitalist market economy is, as
we have seen, also the justification offered by corporations in defence of creative
compliance. The following sections explore the function and architecture of the
market order in more detail, demonstrating both the value of this very particular
order to society and why, far from maintaining it, creative compliance funda-
mentally undermines the principles of trust and equality that it is premised on.
77 Hayek, Individualism and Economic Order (n 45), 6.

78 Described as a ‘central element’ of classical liberalism. See van de Haar, Classical Liberalism
(n 11), 17.
79 Boaz, The Libertarian Reader (n 50), 51.
80 D Boaz, The Libertarian Mind (Simon & Schuster, 1997), 120. In this way, society is a produce
of human action in which individuals cooperate to best meet their needs, see L von Mises, Human
Action, a Treatise on Economics Volume I (first published 1949, Liberty Fund, 2007), 146–147.
82 H Spencer, ‘The New Toryism’ in AJ Nock (ed) The Man Versus the State (first published 1892,
Liberty Classics, 1981), 10.

83 van de Haar, Classical Liberalism (n 11), 27; L von Mises, Human Action: A Treatise on
Economics (first published 1949, Liberty Fund, 2007), 731.

In Defence of the Market Order 113
III. IN DEFENCE OF THE MARKET ORDER
As Section II explained, for the classical liberal, social cooperation is a funda-

mental element of civil society.84 Whilst this has been true throughout the ages,
in a modern, global, society we find ourselves almost wholly dependent on others
to meet even our most basic of individual needs such as the provision of work,
food, infrastructure and support. Yet, as with many things that have become
both commonplace and essential for day-to-day living, we risk a complacency as
to the function and value of this cooperation to society. None more so than in
the case of the market order.
This section reflects upon the unique benefit that the market provides to soci-
ety. In doing so, it not only acts as a salient reminder of, for all its challenges,
the benefits that the market provides but it also distils the relationship between
individual freedom and cooperation (thus helping to explain the methodologi-
cal individualism explored in Section II). It is by exploring the function of the
market that we can start to identify the relationships that it depends upon and,
in so doing, better understand the interactions that the market’s regulatory
architecture needs to support. Section IV then examines this infrastructure, and
its relationship with creative compliance, in more detail.
A. The Market as a Conduit of Knowledge
Notwithstanding its importance, the primary purpose of the market is often

misunderstood. It is commonly presumed that the central function of the market
is to help market participants logically allocate their resources, premised on
complete knowledge.85 However, there is a deeper and infinitely more difficult
problem that a modern, global economy faces and which the market manages
to resolve. That is, those who possess resources need to know where to invest
(or deploy) them. To do that, it is necessary to know the needs of others to
understand how those needs might be met.86 Without this information, it is
simply not possible to ‘allocate resources according to consumer preferences’.87
As such, the critical challenge we face in society (particularly a dispersed one
such as ours) is how to allocate resources when no single individual possesses the
entire knowledge necessary to make such a decision.88
Thus, the fundamental role that the market performs is not resource a llocation
but the necessary precursor to that (secondary) function, namely the collation
and communication of knowledge. The ability of the market to convey such

85 ibid, 77.
86 ibid, 78.
87 Boaz, The Libertarian Reader (n 50), 12.
knowledge is critical to the proper functioning of society, facilitating research

and development, the growth of business, the creation of jobs and the protec-
tion of competition (in favour of the consumer). However, this function of the
market as a conduit of knowledge is commonly forgotten or, at best, taken for
granted. This risks a dangerous complacency (particularly when public senti-
ment tends to concentrate on the negatives of a market economy), both as to
the important role of the market in society and the unique framework required
to support it.
The complexity of this communication task becomes clear when we examine
(in broad terms) the nature of the information that the market conveys. The
knowledge that the market communicates is highly fragmented, dispersed and,
importantly, context specific.89 That is, this information is held on a piecemeal
and global basis, distributed across a wide array of unconnected individuals.
Nevertheless, the market is able to collate this information from multiple actors
and communicate it to otherwise unconnected market participants.90 The conse-
quences of this should not be, but often are, underestimated. Specifically, that
those operating within (or even simply observing) the market are able to employ
information that neither they, nor any one individual, possesses in totality.91 The
outcome is that market participants are able to utilise knowledge that they do
not, and cannot, possess,92 to satisfy the demands of people whom they have
never met and whose needs they do not, personally, know. Thus, it is the utilisa-
tion, not simply possession, of knowledge that is made possible by the market.93
The scale of this coordination and communication exercise can be under-
stood by considering, briefly, a simple yet common transaction. Each morning
busy commuters buy cups of coffee at train stations across the country, drinks
that are purchased with little thought and are a fleeting part of a person’s day.
However, this seemingly simple purchase is part of a transaction that brings
together coffee farmers and owners from around the world, local landlords,
franchisors from North America, cargo and transportation companies, airlines,
utility companies, branding executives and a supporting plethora of profes-
sional advisors including lawyers and accountants, all to produce a hot drink
for a busy traveller that is forgotten within half an hour. Yet how does the coffee
franchisee know where to locate their shop, the landlord know how much to
charge for the lease, the professional advisors know what to charge for their
services and where to advertise them, the farmer know which type of bean to
89 ibid, 80.
90 ibid.
91 This is the fundamental value of the market, namely that partial knowledge can be acted on and
contribute to the whole, see Razeen, Classical Liberalism (n 24) 19.

92 Hayek, Law, Legislation and Liberty (n 6), 16.
93 The function of the market as an aggregator of dispersed knowledge was something that
Friedrich Hayek wrote on extensively (particularly in response to what he saw as the threat of central
planning in a socialist’s political environment). His work in this regard is extensive but a useful
introduction is Hayek, Individualism and Economic Order (n 45).
grow, in what q uantities and for how much (and that’s before we even start to
consider the array of milks, syrups and blends that are now on offer)?94
The magnitude of this task and its ramifications are, put simply, remarkable.
The market enables individuals to act upon an ever-changing cycle of informa-
tion, which they do not personally possess. In this way, business has developed on
a global scale with concomitant increases in, amongst other things, k nowledge
and financial prosperity. However, this information cannot be realistically
gained from a costly and time-consuming process of due diligence. The question
considered in the following section is how this knowledge is conveyed in a quick,
efficient and meaningful way allowing market participants to act in a timely and
relatively frictionless manner.
B. Conveying Knowledge Through the Price Mechanism
To share such dispersed and fragmented knowledge effectively, the market

requires a communication method that satisfies two conditions. First, whilst the
information to be conveyed is highly fragmented and complex, the method of
communication must be simple and accessible. Each market participant must be
able to access the same information at the same time to enable them to respond
quickly to changes in market knowledge. Second, the knowledge that market
participants require (and therefore that needs to be communicated) is not abso-
lute knowledge but the relative value of particular goods or services. That is,
the market needs to know about their scarcity or demand, not the reason why
they are so coveted (or not as the case may be).95 For example, the coffee vendor
simply needs to know that they should invest resources into a particular location
because there is sufficient demand (not that this demand exists because of a lack
of competition or popularity of route).96
The way that the market meets these two challenges is through the price
mechanism.97 The price mechanism is, ostensibly, a deceptively simple process
94 This example is drawn from T Harford, The Undercover Economist, (Abacus, 2011), 2.
96 This decision as to resource allocation is made possible because of the economic calculation
facilitated by the simplicity of the price system: ‘Capitalist economic calculation, which alone makes
rational production possible, is based on monetary calculation. Only because the prices of all goods
and services in the market can be expressed in terms of money is it possible for them, in spite of
their heterogeneity to enter into a calculation involving homogeneous units of measurement.’ See
von Mises, Liberalism (n 31), 47.
97 The price mechanism is ‘the sum of information reflected or precipitated in the prices is wholly
the product of competition, or at least of the openness of the market to anyone who has relevant
information about some source of demand or supply for the good in question … Competition oper-
ates as a discovery procedure not only by giving anyone who has the opportunity to exploit special
circumstances the possibility to do so profitably but also by conveying to the other parties the infor-
mation that there is some such opportunity. It is by this conveying of information in coded form that
the competitive efforts of the market game secure the utilisation of widely dispersed knowledge.’ See
Hayek, Law, Legislation and Liberty (n 6), 276–277.
that aggregates information concerning the scarcity of a particular commodity

and communicates it, via a single number, to the market as a whole.98 In
doing so, it takes the local knowledge of all market participants and enables
the rest of the market to utilise it; knowledge that they do not possess them-
selves. Crucially, this system is automatic, communicating local information to
the market without the need for intermediaries. Effectively, the system ‘works
itself’.99 In response, market participants are able to adjust their own behaviour
to facts that they simply do not know and, in doing so, further contribute to
the aggregate knowledge of the market.100 Returning to our coffee shop owner,
they are able to increase prices to reflect the scarcity of coffee beans (premised
on the increase of the cost of the raw materials) as a consequence of a drought
that they were completely unaware of. Thus, the price mechanism facilitates ‘the
marvel’101 that information which only a handful of people are aware of can
be utilised by the whole market, simply by watching price fluctuations in the
market and acting accordingly.
C. Polycentric Systems and Market Order
The market facilitates the utilisation of dispersed knowledge in a very specific

way. Once the price mechanism has communicated information to the market,
participants are free to respond in any manner that they choose. It is through
that response that each participant contributes information to the market about
their local environment, potentially triggering further price adjustments. As
prices change, market participants continue to respond, with these responses
themselves further impacting market prices, which adjust accordingly and so
on and so forth. Thus, otherwise unconnected market actors effectively inter-
act freely with each other, through market pricing, quickly adjusting their own
conduct in response to the decisions of others.102 In this way, the market oper-
ates as a polycentric order that facilitates a fluidity of perpetual adjustment
around decentralised loci of decision-making.103 This process of adjustment is
continuous and self-generating; by pursuing individual self-interest in response
to the price system each participant automatically contributes to the collec-
tive knowledge of the market. The order does not arise from ‘a single centre,

99 RH Coase, ‘The Nature of the Firm,’ (1937) 16(4) Economica 386, 387.
101 ibid, 87.
102 This adjustment is, generally, premised on the notion of exchange, namely of buying and selling
goods and services. These exchange transactions are dependent on the rules of contract and prop-
erty ownership that were discussed in Section II and it is here that we see their importance. It is only
by having security of title, and the ability to exchange that title with confidence, that these exchange
relationships can occur.
103 Polanyi, The Logic of Liberty (n 6), 174–5 and 195–6.
but … is produced by the responses of the individual elements to their respective

surroundings’.104 Moreover, this process allows an order to be achieved without
dictating an ultimate outcome, or evaluating and prioritising the interests of one
group over another.105 It allows all participants the equal right or, put another
way, freedom to pursue their own desires and for this to be perpetually aggre-
gated and reflected in the overall knowledge of the market.106
It is this polycentricism that renders the market incapable of central design
and, as a consequence, dependent upon a particular regulatory structure. The
market is comprised of a vast number of constituents (who could never be fully
identified at any given moment in time), each of whom are responding to multi-
ple influences and motivations. As market information changes, so too can their
actions, which can have a corresponding impact on the decisions of others (and
the market as a whole).107 The reality is that more knowledge enters into the
market, which is then reflected in market prices, than can ever be known to a
single authority.108
Ideologically, central market control is undesirable to many. However, such
control raises concerns beyond the purely ideological. Rather, one of the risks
that arises from centralised control is that the constraint of individual free-
dom undermines the core function of the market as a conduit of knowledge
(as participants are unable to respond freely to the price mechanism). It is here
that we see why it is so critical to remind ourselves both of the function of the
market in society and the magnitude of the task that it (and other social systems)
achieve. To create a system that can, through a single price mechanism, reflect
the knowledge of a global market, aggregate dispersed events of which we are
completely unaware, facilitate entrepreneurial growth and support personal
freedom is something that we should be very careful not, through familiarity, to
take for granted. Indeed, the complexity of the task is such that had the market
been specifically designed it would be considered one of the greatest achieve-
ments of mankind.109
It is at this juncture that the relationship between freedom and cooperation
starts to emerge. Specifically, it is the freedom that individuals have to pursue
their self-interest in response to market movements that enables them to contrib-
ute local knowledge to the market.110 If participants were directed to act in a
certain way, or to achieve a certain objective, then this contrived behaviour
would not inform the market of local conditions (other than the existence of a
central diktat). Not only would this distort the accuracy of the information in
104 F Hayek, in B Caldwell (ed) The Collected Works of F. A. Hayek, The Market and Other Orders
(Routledge, 2014), 161.

105 The difficulty of which is discussed in ch 6.
106 This ‘strict’ definition of equality is considered further in ch 6.
108 ibid, 80.
110 ibid, 84.
the market, but it would also undermine trust in the price mechanism. Once this
trust is lost, and participants are no longer able to rely on the price mechanism
with certainty, the coordination that it facilitates can similarly start to dissipate.
Thus, for market participants to operate within this polycentric process of
adjustment and readjustment, it is essential that ‘market order’ be maintained. That
is, for those operating within the market to have a reasonable certainty and expec-
tation of the behaviours of their co-participants.111 It is only through this relative
predictability that individuals can rely, and act, on market information and pursue
their own interests (thereby contributing to the overall knowledge in the system).
Without this reasonable reliance, participants would be engaged in an ongoing and
complex operation akin to the prisoners’ dilemma That is, constantly trying to
guess (and second-guess) the accuracy of information that market prices are predi-
cated upon and the local variables that will influence how their co-participants will
similarly respond (and the factors that might influence this).
It is this functional requirement of predictability that distils the, perhaps
surprising, yet integral role of trust in the proper operation of the market. That
‘trust is, and always has been, at the heart of financial markets’.112 Without trust,
the market is incomplete, as the system has lost an essential element and, as a
consequence, its integrity.113 Indeed, it is this element of trust, achieved in a large
part through the performance of promises and the corresponding meeting of
market participants’ expectations, that helps to delineate the particular regulatory
framework that is needed to support market order. The reality is that this behav-
ioural predictability is only possible if individuals ‘obey such rules as will produce
an order’114 and creative compliance fundamentally undermines this requirement
of legal obedience. Whilst creative compliance does, of course, involve technical
compliance, this is not sufficient to meet the needs of the market. As Section IV
explains, market order requires a level of compliance that ensures the equal appli-
cation of law in practice, a standard that is lost through creative compliance.
IV. COMPLEX SYSTEMS AND SPONTANEOUS ORDER
The significant success of the market should not belie its complexity. Unlike their
physical counterparts, social systems are incredibly complex, and it is a ‘fatal
conceit’115 to think that social order is capable of central (or synthetic) design.
Rather, order emerges spontaneously, derived from compliance with a particu-
lar regulatory architecture that supports the environment necessary for order
to, perhaps counterintuitively, emerge from the pursuit of personal freedom. As
111 Hayek, Law Legislation and Liberty (n 6), 35.

112 Carney, ‘Rebuilding Trust in Global Banking’ (n 5).
113 As defined by Erhard at al, ‘Integrity: A Positive Model’ (n 13).
115 FA Hayek, in WW Bartley (ed) The Fatal Conceit, the Errors of Socialism (first published 1988,
Routledge, 1998), 21.

Complex Systems and Spontaneous Order 119
shall be seen, for this otherwise (and said without hyperbole) impossible task
of social ordering to be successful, it is crucial for such rules to apply equally
to, and be equally observed by, all participants. Thus, it is here that the instru-
mental (as well as normative) importance of the principle of equality before the
law to the market order emerges.116
A. The Architecture of Order
In broad terms, order within a system can be achieved deliberately by design

(the corporation being an example of a planned order) or arise spontaneously,
which, as shall be seen, is the case with the market and other social systems.
Whilst effective, there are two critical features of a planned (or synthetic) order
that distinguish it from a spontaneous one and that render it unsuitable for
complex organisms. First, planned orders often serve a clear purpose of the
‘designer’. For example, in the case of the corporation, the reduction of trans-
action costs.117 Second, by their nature, as they are capable of design, planned
orders generally relate to relatively simple systems (as all variables need to be
known to the designer).118 A planned order is not therefore readily transpos-
able onto a complex system with multiple, unknown variables and an undefined
outcome (characteristics that are typical of social systems such as the market).
In contrast to planned orders, spontaneous orders ‘consist of a system of
abstract relations’.119 Within social systems, decisions are made by individual
actors whose strategies may be influenced by an innumerable number of factors,
influences that neither their co-participants nor a central regulator can possibly
ever know.120 As a result, it is impossible for a central authority to regulate social
systems fully to achieve an intended output, as they are simply not able to antici-
pate all of the decisions that the market participants will make. Returning to the
market order as an example, within a polycentric system, once one participant
acts, others will respond creating a continuous relationship of decision-making
and adjustment. Thus, to legislate for every eventuality, a regulator would need
to know not only all of the variables that contribute to one participant’s decision-
making process but also those that influence how the rest of the market will
respond to that decision and so on and so forth. Whilst this is clearly impossible,
even if we were able to initially ‘design’ a social order, supporting its ongoing oper-
ation would be beyond the capability of regulatory infrastructure and oversight
(as this would need to be able to perpetually respond to new information entering
the system). In contrast, the fundamental benefit of a spontaneous order is that
116 Chapter 6 considers in more detail what is meant by equality in this context.
117 Coase, The Nature of the Firm’ (n 99), 19.
119 ibid.
it is self-sustaining, neither limited by human knowledge, vision nor decree.121 It

is this unique ability to support ever-increasing complex systems that renders the
protection of the spontaneous order so important.
To support the emergence of social order what is needed is the implemen-
tation of general rules of conduct, the so-called ‘rules of the game’,122 which
facilitate a certain predictability of behaviour amongst system constituents. It
is from this framework of rules that spontaneous orders arise as the product of
‘human action, not design’.123 In sum, these are the rules of general behaviour,
explored in Section II, that establish ‘stability of possession, of transference
by consent, and of the performance of promises’.124 If followed, these rules
leave individuals free and able to act with ‘the maximum degree of certainty
according to their individual plans’125 and are integral to economic security
and prosperity.126 Indeed, Scully’s empirical work on the institutional frame-
works that are necessary to support economic growth found that societies that
‘subscribe to the rule of law to private property, and to the market allocation of
resources’,127 grew at three times the rate of those without,128 whilst markets in
particular depend on ‘the establishment of an environment in which legal rights,
especially property and contractual rights, are enforced and protected’.129
Whilst rules of property and contract are fundamental to the market order,
it is crucial that these rules are bound by the rule of law and, in particular,
the principle of equality before the law. Historically, exchange relationships
(and, in particular, the expectation that others would perform their prom-
ises) were premised on interpersonal relationships.130 That is, the parties to a
transaction knew each other and held expectations as to the behaviour of their
counterparty from previous dealings. This is what North described as the first
historical type of exchange, which did not rely upon robust legal institutions
to create the conditions necessary for trade.131 However, in modern society,

122 That is, ‘within the known rules of the game the individual is free to pursue his personal ends
and desires’, see FA Hayek, Road to Serfdom (first published 1944, Routledge Classics, 2001), 73.
123 A Ferguson, An Essay on the History of Civil Society 5th edn (first published 1782 T. Cadell,
Cambridge University Press, 2011) http://lf-oll.s3.amazonaws.com/titles/1428/1229_Bk.pdf

(accessed 10 September 2016). Hayek, drawing on Whately’s earlier work, described this order that
arises from the ‘mutual adjustment of many individual economies in a market’ as a catallaxy from
the Greek ‘kattalattein’ meaning ‘to exchange [and] … admit into the community’. See Hayek, Law,
Legislation and Liberty (n 6), 268–9.
125 Hayek, The Collected Works of F. A. Hayek Volume 15, (n 104), 162.
126 S Pejovich, Law, Informal Rules and Economic Performance: the Case for Common Law
(Edward Elgar, 2008), 41–43.

127 G Scully, ‘The Institutional Framework and Economic Development,’ (1988) 96(3) Journal of
Political Economy 652, 652.

128 ibid, 658.
129 R Posner, ‘Creating a Legal Framework for Economic Development, (1998) 13(1) World Bank
Research Observer 1, 1.
130 Hayek, The Constitution of Liberty (n 49), 193–5.
131 D North, Institutions, Institutional Change and economic Performance (Cambridge University
Press, 1990), 34–5.

Complex Systems and Spontaneous Order 121
exchange now takes place on an impersonal and global stage. In this envi-
ronment, legal institutions are required to ensure that the requisite trust and
predictability of behaviour (considered in the following section) that are integral
to exchange relationships exists.132 One critical way that we achieve this trust
(as well as being fundamental to the legitimacy and integrity of our wider legal
system) is through the maintenance of the rule of law and, specifically, of the
principle of equality before the law.
Thus, for the classical liberal we see the important, and legitimate, role that
regulation plays in achieving economic and social order. Law is seen as the ‘glue
that holds a complex society together’133 whilst the government is required to
‘enforce the rules of the game as an “umpire”’.134 Within this regulatory frame-
work, individuals are free ‘to interact with each other on their own initiate
– subject only to laws which uniformly apply to all of them’.135
B. Predictability, Order and the Rule of Law
The question that remains is to understand how this market analysis contributes
to our analysis of corporate compliance? The answer is this. The challenge with
creative compliance is that it undermines the predictability of behaviour that a
spontaneous order requires. The previous sections explained that for order to
arise in a social system, citizens need the freedom to act whilst knowing that
(within reason) their fellow citizens will act, and react, in a certain way, namely
in response to their local conditions and in accordance with the promises that
they have made. This is achieved by protecting a citizen’s freedom to pursue their
self-interest whilst requiring that they nevertheless adhere to certain general rules
of behaviour. More specifically, that each constituent within the system ‘obey[s]
the same rules’.136 When these rules are not followed, the order is threatened
as behaviour becomes unpredictable, participants no longer share an expecta-
tion of conduct and the natural equilibrium of the polycentric system is lost.
Moreover, and as explained in Chapter 2, when these rules are not followed,
eventually reactionary regulation can be introduced which itself risks disrupting
the particular regulatory framework that otherwise supports order. In contrast,
when rules are applied and followed equally, market order (that is, behavioural
predictability) is supported.
Within a market governed by a regulatory framework, a critical compo-
nent of achieving market order (or behavioural predictability) is ensuring the
equal application of rules to all market participants. This equality, which also
132 ibid, 35.

133 Razeen, Classical Liberalism (n 24), 184–5.
134 ibid.
135 Polanyi, The Logic of Liberty (n 6), 195.
serves to enhance the legitimacy of the market system, is achieved by the main-
tenance of the rule of law and, in particular, the principle of equality before
the law.137 Once the exclusive purview of law and politics, the rule of law is
increasingly recognised as central to the development of economic growth.138
Indeed, it is ‘necessary as a precondition of capitalist society’,139 which requires
a dependability and generality of law. It is this broad requirement of equality
that serves to create a predictable framework of behaviours within the market,
whilst maintaining each citizen’s freedom to act. Needless to say, it does give rise
to the perennial questions (both of which are considered in the next chapter)
of what we mean by ‘equality’ in this context and, moreover, whether a c itizen
(in addition to the state) is under an obligation to maintain it. However, at this
juncture, it is imperative to note that for the proper function of complex social
systems what is required is equality in the actual operation of the law, not simply
its theoretical application.140 Thus, arguments that an entity has technically
complied with the letter of the law (albeit in defeat of its spirit) do little to
satisfy this standard.
One potential challenge to the claim that creative compliance undermines
that trust that the market relies upon is that if all multinationals, subject to
largely similar norms, were motivated to creatively comply then this would, on
one level, create its own sense of order. However, this claim meets two difficul-
ties. First, the practice of creative compliance (no matter how regular) is one
that creates disorder. As the extent of creative compliance adopted by each
corporation is not known (and the ability of each corporation to creatively
comply differs),141 it continues to lead to a level of uncertainty and the prison-
ers’ dilemma outlined in Section III. Second, creative compliance is a practice
that fundamentally and manifestly undermines trust in the corporate, market
and regulatory systems. Once this trust is lost, corporations risk ‘compulsion’142
as direct regulatory intervention is introduced.
V. CONCLUSION
Those that dispute the legitimacy of calls to constrain creative compliance claim,
in part, that creative compliance is lawful behaviour that aligns with the norms
137 It also provides a standard by which to determine legitimate government interference, whilst
the potentially ‘predatory extremes’ of self-interest are kept in check by procedural justice that
proscribes harm to others’ protected sphere of interest, see Razeen, Classical Liberalism (n 24), 26.
138 See, eg, ‘Economics and the Rule of Law, Order in the Jungle,’ The Economist (13 March 2008)
www.economist.com/node/10849115 (accessed 9 August 2020); C May, The Rule of Law, The

Common Sense of Global Politics (Edward Elgar, 2014), xxiv and 108–133.
139 F Neumann, ‘The Change in the Function of Law in a Modern Society,’ in F Neumann and
H Marcuse (eds), The Democratic and Authoritarian State (The Free Press, 1957), 40.
140 Railway Express Agency Inc. v New York, 336 U.S. 106 (1949), 112–3.
141 For example, depending on their resources, geographical presence and risk profile.
Conclusion 123
of the market economy. On this basis, such constraints are seen as nothing more
than the illegitimate coercion of individual freedom contrary to the norms of
market ideology.143 However, this chapter has examined how creative compli-
ance in fact erodes the predictability of behaviour that is essential for the proper
order of society, including the market itself. This erosion of market order risks,
inter alia, reactionary regulatory responses and, ultimately, jeopardises both the
market order and its primary function as a conduit of knowledge. Examined
in this way, we see both the interdependence and ‘mutual reinforcement of the
economic, political and legal orders of society’.144
By understanding the role of compliance in this way, we see it as a func-
tional means to achieve social cooperation, whilst protecting the individualism
that classical liberalism promotes. In doing so, we can start to change corporate
perceptions of the harm caused by creative compliance by demonstrating that,
notwithstanding the potential short-term financial gain, in the long term, it risks
significant systemic harm. In turn, this can lead to the imposition of further ad
hoc reactionary regulation that can undermine the architecture of rules needed
to support the market order. By changing the conception of harm in this way, we
therefore start to engage with the principles explained in Chapter 3, namely that
to effect meaningful behavioural change we need to challenge a person’s percep-
tion of the harm caused by (and social meaning attached to) a particular action.
However, having established the normative basis for change, predicated in part
on the need to protect equality within such a system, this nevertheless raises a
number of difficult questions itself, not least what do we mean by ‘equality’ in
this context?
Chapter 6 explores this question and, in doing so, provides a framework in
which to examine one further outstanding, but crucial, question. That is, whether
corporations (in addition to the state) are under an obligation to uphold the
principle of equality before the law. Conversely, were McBarnet’s interviewees145
(much like Lord Russell)146 correct in their view that it is for the legislature to
achieve the requisite behavioural standard in its citizens? Furthermore, if we
conclude that corporations should uphold the principle of equality before the
law, on what basis is it legitimate for corporations to be held to a different stand-
ard of compliance from their natural counterparts?
143 This chapter is concerned with the primary question of the normative justification of corporate
spirited compliance. However, the question necessarily raises a company law question, namely the
legitimacy of pursuing potentially less profitable strategies (in the direct, short-term understanding
of the word ‘profitable’) to do so. This enquiry requires a consideration of inter alia the proper
application of the Companies Act 2006, s 172 (duty to promote the success of the company), which
is an enquiry undertaken in ch 7.
144 Razeen, Classical Liberalism (n 24), 18.
145 See D McBarnet, ‘Financial Engineering or Legal Engineering? Legal Work, Legal Integrity
and the Banking Crisis,’ in I MacNeil and J O’Brien (eds) The Future of Financial Regulation
(Hart Publishing, 2010), 69.
146 See the discussion of The Commissioners of Inland Revenue v His Grace the Duke of
Westminster [1936] AC 1 in ch 2.
6
The (Ostensible) Equality Paradox:
Privilege and Obligation
Authority is not needed (although much exists) to show that there is no principle
more basic to our system of law than the maintenance of rule of law itself.1
Lord Dyson
While the idea of the rule of law continues to mean the safety of the individual from
big government, it also has come to imply the need for a government that is strong
enough to protect individuals from illegal attacks by their fellow men.2
Gottfried Dietze
C
alls for spirited compliance face one fundamental, some may say
fatal, challenge. On what legitimate basis can we constrain what is,
ostensibly, lawful behaviour? We have seen throughout this book that
there is a commonality of view that creative compliance is an undesirable prac-
tice, giving rise to a wide range of negative externalities. For example, Chapter 1
outlined the substantial fiscal impact that it has, whilst Chapter 5 demonstrated
that, far from advancing the liberal ideology of the market (as many proponents
of the practice would claim), creative compliance in fact runs counter to it.
Nonetheless, without a legal foundation for reform, calls for spirited compli-
ance risk remaining unanswered.
It is perhaps surprising that the answer to the current compliance crisis can
be found in a decidedly traditional place. One that, as the previous chapter
explained, is not only fundamental to the proper functioning of the market
order, but the very fabric of our society. That is, the rule of law and, specifi-
cally, the principle of equality before the law. Whilst increasingly used simply
as a proxy for good governance or an abstract doctrine to determine the legal-
ity of government behaviour,3 this chapter shows that the rule of law in fact
provides a critical framework in which to determine a corporation’s obligations
1R (on the application of Cart) v The Upper Tribunal [2011] UKSC 28, [2011] 3 WLR 107.
2G Dietze, ‘Hayek on the Rule of Law,’ in Machlup (ed) Essays on Hayek (New York University
Press, 1976), 107.
3 This use of the ‘rule of law’ as a proxy for good governance or mere legality has meant that it
has lost its meaning. See FA Hayek, The Constitution of Liberty (first published 1960, Routledge
Classics, 2006), 180.
The (Ostensible) Equality Paradox: Privilege and Obligation 125
towards the legal system itself. Examined in this way, the rule of law not only
provides a justification for restricting behaviour such as creative compliance but
it also serves as a guide to delineate the boundaries of those restraints.4 Impor-
tantly, it is through this lens of equality that we can also consider some of the
more challenging questions that calls for spirited compliance face. For example,
what do we mean by equality in this context? To what extent, if any, should
citizens (rather than states) be under a positive obligation to uphold the rule of
law? Moreover, if a key criticism of creative compliance is that it undermines
the principle of equality before the law, then is it not paradoxical to argue that
corporations should be held to a different standard of account than their natural
counterparts?
In exploring the relationship between the rule of law and corporate compli-
ance obligations, this chapter begins by offering a definition of ‘equality’ before
the law. Beyond providing useful contextual information, an examination of
such an often-used term may seem otiose. However, as this first section explains,
the common acceptance of the rhetoric of equality reflects a critical challenge in
modern debate. Whilst the rule of law, and the principles that it enshrines, is the
product of many hard-fought battles, modern society risks becoming compla-
cent as to both its existence and meaning. As a consequence, the rule of law has
increasingly been engaged simply as shorthand to denote that a ‘legal system is
legally in good shape’.5 Moreover, within that discussion the term ‘equality’ is
itself a challenging concept, with opinion divided as to whether it is, or should
be, defined in strict or material terms. In accepting a strict definition of equal-
ity, this section explains why this does not, as has sometimes been suggested,
preclude concerns of distributive equality being met through other means (even
within a classical liberal framework).
Having defined equality, Section II then examines the role of the rule of law
and, specifically, the principle of equality before the law as a meta-legal principle
of society. That is, an overarching rule that should itself be complied with and
that governs the application of, and compliance with, regulation and other legal
instruments. Seen in this way, equality is both a rule to be complied with and,
as a consequence, a basis on which to constrain behaviour (including that which
technically complies with the underlying substantive legislation in question but
is in breach of the meta-principle of equality). By understanding this function
of the principle of equality, and its positioning within the broader legal frame-
work, we are also able to identify why there was such widespread consternation
in respect of lawful, albeit creative, tax practices. That is, this condemnation
was not directed towards technical compliance with the underlying regulation
per se, but rather an intuitive response to the breach of this overarching principle
of equality.
4 ibid.
5J Finnis, Natural Law and Natural Rights 2nd edn (Oxford University Press 2011), 270.
126 The (Ostensible) Equality Paradox: Privilege and Obligation
Building on this examination of the interplay between equality and substan-

tive regulation, Section III then considers whether corporations have a positive
obligation to maintain these principles, which are commonly seen as constraints
on government, not individual, power. Traditionally, a citizen’s legal obligation
is premised on the notion of consent. Namely, that a legal subject has, tacitly
at least, consented to be bound by the provisions of the law. This argument is
not without its difficulties, particularly for human citizens. However, whilst it is
challenging to meaningfully maintain that individuals have ‘chosen’ to be bound
by the laws of their jurisdiction (either that of their birth or ongoing domicile)
this section explains why the same cannot be said of corporations. Looking at
factors such as the choice of incorporation and ongoing operation in a particu-
lar jurisdiction this section argues that a corporate citizen can in fact be said to
have chosen to be bound by a particular regulatory framework (including the
rule of law), strengthening claims that there is therefore a corresponding obliga-
tion to maintain the integrity of that system.
Section IV concludes the chapter by addressing the apparent paradox between
a claim to formal equality and the argument that corporations should adopt
a higher compliance standard than non-corporate (and indeed private, closely
held, corporate) citizens. It does so by exploring the concept of legal privilege as
the only legitimate derogation from the principle that all citizens are subject to
the equal application of law. That is, it is only where the law creates a p rivilege
(facilitating a transgression of the rule of law itself) that a departure from
the principle of equality can be permitted (namely, as a mechanism to mitigate
the impact of the privilege in question).
I. DEFINING ‘EQUALITY’ BEFORE THE LAW
A detailed enquiry into the origins, meaning and implications of the rule of
law and, more specifically, the principle of equality before the law would be a
significant exercise to say the least. Therefore, the more modest intentions of
this section should be made clear from the outset. Chapter 5 outlined the impor-
tance that classical liberals placed on the rule of law and the instrumental role
that trust, predicated on the equal application of law, plays in the maintenance
of market order. As such, this section provides some context to these principles
and, in doing so, starts to establish a framework in which we can explore the
more challenging questions (posed in the introduction to this chapter) that calls
for spirited compliance give rise to.
A. The Rule of Law: Precepts and Conceptions
The rule of law is inherently entwined with the development of liberal thinking.
As the previous chapter intimated, it is perhaps surprising that a philosophy
Defining ‘Equality’ before the Law 127
predicated on the protection of individual freedom recognises an important role

for a coercive instrument such as the law (broadly defined).6 However, drawing
on its foundations in social contract ideology,7 classical liberalism accepts the
existence of law as the consideration that an individual pays for the broader
benefits of social cooperation. Understood in this way, citizens are deemed to
have consented to the operation of the law (although Section II explains some of
the challenges of this view) and thus are ‘at once ruler and ruled’.8 Nevertheless,
we must be clear that this agreement to the imposition of law is neither unilat-
eral nor absolute. Rather, as the product of a bargain in exchange for certain
received benefits, it is predicated (and arguably conditional) on the protection
offered by the rule of law as a bulwark against undue government coercion,
operating to constrain the exercise of arbitrary government power.
An early formulation of the rule of law can be found in Locke’s Second
Treatise of Government.9 In his seminal work, Locke recognised that in a state
of nature, whilst freedom and equality may be protected, a difficulty arose when
an individual sought to enforce their rights against a fellow citizen.10 Without
an independent arbiter, the parties to a dispute would favour their own inter-
ests and therefore resolution would be impossible. As such, Locke concluded
that a governing body was required to make and enforce laws for the benefit of
the members of society. However, Locke’s primary concern was that in conced-
ing authority, citizens should not be subject to an ‘arbitrary power … which
men would not quit the freedom of the state of nature for’. It was against these
concerns that Locke offered his concept of the rule of law, which would act to
both facilitate the need for a governing body whilst protecting against the fear
of arbitrary control. That is, individual freedom would be protected, notwith-
standing the grant of power to a central authority, by having ‘a standing rule to
live by, common to every one of that society, and made by the legislative power
erected in it … and not to be subject to the inconstant, uncertain, unknown,
arbitrary will of another man’.11
Missing from Locke’s formulation of the rule of law was the existence of
a separate judiciary. This omission was later recognised by Montesquieu who
prescribed a separation of powers, and in particular an independent judici-
ary, without which he argued ‘there can be no liberty’12 as a citizen would be
6 See ch 5 for the framework of general rules of behaviour that is endorsed.

7 BZ Tamanaha, On the Rule of Law: History, Politics, Theory (Cambridge University Press,
2004), 48.
8 Tamanaha, On the Rule of Law (n 7), 34. This notion of consent is not unproblematic and is
considered further in Section III.

9 J Locke, The Second Treatise of Government and a Letter Concerning Toleration (first
published 1690, Dover Publications, 2002).

10 Tamanaha, On the Rule of Law (n 7), 49.
11 Locke, The Second Treatise of Government (n 9), section 23.
12 CL de Secondat Montesquieu, in AM Cohler, BC Miller and HS Stone (eds) The Spirit of the
Laws (first published 1777, Cambridge University Press, 1989), book XI, section 4.
‘subject to arbitrary control’.13 Of note, is that Montesquieu recognised that

a legitimate function of government, as discussed in Chapter 5, was creating a
protected sphere of conduct in which an individual is free to act. Seen in this way,
Montesquieu also observed that liberty is not a freedom to ‘do whatever one
pleases’14 but a requirement to act within the boundaries of the law, provided
citizens are free from tyranny. Thus, we see that even in these early conceptions
of the rule of law an obligation of legal obedience exists, one that, as Section II
will argue, includes observing the rule of law itself.
It was these early formulations that provided the foundation for Dicey’s clas-
sic exposition of the three pillars of the rule of law.15 First, the supremacy of
the law rather than of the arbitrary authority of man. Second, the principle of
equality before the law,16 and finally that the law is ‘defined and enforced by
the Courts’.17 Inherent within Dicey’s definition was the view that discretion,
in the form of discretionary powers of constraint, was the antithesis to the rule
of law. In this context, Dicey was of course concerned with the discretion of
government. However, in modern society, where large corporations can (and do)
exercise state-like power,18 the question arises as to whether it is necessary (and,
separately, legitimate) to similarly restrain the discretion that now vests in the
corporation? In particular, the discretion that creative compliance vests in the
large corporation to effectively achieve the ‘manipulation of law – no matter
what the intention of legislators or enforcers’.19
More modern formulations of the rule of law have sought to develop Dicey’s
conception (see, for example, Lord Bingham’s eight sub-rules of the rule of
law).20 However, as with Dicey’s predecessors, all share a commitment to the
equal application of law. Indeed, it is of no surprise that in Hayek’s own exposi-
tion of the rule of law he claimed that laws themselves must be ‘general, equal
and certain’.21 By this he meant general, in the sense that laws should be written
in the abstract and not aimed at any particular individual. Of note, is that this
construction of generality is also aligned with the notion of impartiality, namely
that such general rules must refer to ‘unknown cases and containing no refer-
ences to particular persons, places or objects’.22 Equal, in that the law applies
to all, without arbitrary distinction and certain, such that subjects are aware of
13 ibid.
15 AV Dicey, in RE Michener (ed) Introduction to the Study of the Law of the Constitution
(first published 1902, Elibron Classics, 2005), 8.
16 ibid, 114.
17 ibid, 115.
18 See, eg, A Berle and G Means, The Modern Corporation and Private Property
(first published 1932, Transaction Publishers, 2010).

Legal Control’ (1991) 54 Modern Law Review 849, 849.

20 Lord Bingham, ‘The Rule of Law,’ (2007) 66(1) Cambridge Law Journal 67.
21 FA Hayek, The Road to Serfdom (first published 1944, Routledge Classics, 2001), 80.
the content of the rules (thereby facilitating predictability, which itself is funda-
mental to individual freedom). Constructed in this way, Hayek argued that the
law acted as a signpost on a road, allowing citizens the requisite certainty to
plan their own conduct but without telling them which direction to travel in.23
This enables the law to perform the ordering function considered in Chapter 5,
affording individuals the freedom to act whilst providing sufficient constraint on
the conduct of others to protect individual liberty and maintain order.24
To achieve this order, our legal framework needs to comprise of general rules
of behaviour that are equally applied to all (a requirement that is, as we have
seen, at risk from creative compliance).25 However, the difficulty that remains
in considering the true implications of this for corporate compliance (indeed
for legal subjects more generally) is that equality in any context is a subjective
and somewhat nebulous term. In the context of the rule of law, our clarity of
what equality means (or requires) is further undermined as it is a principle that
is often taken for granted, with most people simply accepting the rule of law
as ‘unobjectionable common sense’.26 Whilst this is a view that is indeed hope-
fully shared by many, this nonetheless risks undermining the practical utility
(and protection) of its core principles.27 As a minimum, this complacency renders
the rule of law itself, much less its precepts, an ‘exceedingly elusive notion’.28
To help address this, the following section offers a definition of equality to frame
our understanding of its functional role in modern society and anchor the claim
made later in the chapter that corporations are, and should be, subject to an
obligation to maintain its principles.
B. Equality of Law, not Outcome
As we have seen, from its inception the rule of law has enshrined notions of
equality. Derived from the Greek ‘isonomia’, meaning ‘equality of laws to all
manner of persons’29 even the earliest iterations of the rule of law contained a
commitment to equality in some form. In particular, the doctrine has embod-
ied the principle that it should not be lawful to propose a law unless it applies
equally to all, as ‘every citizen has an equal share in civil rights, so everybody
should have an equal share in the laws’.30
23 Hayek, The Road to Serfdom (n 21), 78.

24 Adopting the negative conception of liberty discussed and defined in ch 5.
25 See, eg, Hayek, The Road to Serfdom (n 21), 197.
26 C May, The Rule of Law, The Common Sense of Global Politics (Edward Elgar, 2014), 9.
27 A Bedner, ‘An Elementary Approach to the Rule of Law’ (2010) 2(1) Hague Journal on the Rule
of Law 48, 50.

29 FA Hayek, ‘The Political Ideal of the Rule of Law,’ in B Caldwell (ed), The Collected Works
of F. A. Hayek Volume 15, The Market and Other Orders (Routledge, 2014), 130.
30 Here, Hayek cites an account given by Demosthenes of an Athenian law, see Hayek, ‘The
Political Ideal’ (n 29), 132.

Nevertheless, and perhaps not surprisingly, the concept of equality is both

normatively challenging and difficult to define. In the context of the rule of
law, ‘equality’ suffers both as an expression, the meaning of which ‘users …
assume to be clear’,31 but also as a prescriptive term that is highly value laden
and susceptible to subjective interpretation. In particular, tension arises when
considering the distinction between, and adoption of, strict and substantive
concepts of equality (both of which are defined below). How we define equal-
ity has significant consequences and, depending on the approach adopted,
there is a risk of externalities arising that therefore rightly demand justification
(it is for this reason that this section addresses some of those challenges even
though they extend beyond the strict confines of the compliance debate). From a
compliance perspective, our construction of equality provides the framework in
which standards are defined and, as Section III explains, deviations potentially
required or permitted. It is essential therefore that we are clear on the definition
we adopt, in particular whether it is a strict or substantive standard of equality
that is endorsed, and the reasons for this.
A strict (or formal) definition of equality before the law requires the equal
application of laws, without the grant of any privileges designed to achieve
‘material’ (that is, distributive or substantive) equality.32 This approach flows
from the premise that the law must be general and achieve equality of objective
opportunity, not of subjective result.33 Applied in this way, the law protects the
equal freedom of citizens to act in the manner that they deem fit, subject only
to pre-determined rules that are known by, and applied to, all. Notwithstanding
the logical elegance of this approach, it raises one immediate and clear difficulty.
Applying a strict definition of equality might provide everybody with the same
right to, for example, purchase a Rolls Royce or to enter the Olympics, but the
reality is that only those with significant wealth or sporting excellence can do
so. In these somewhat extreme examples, the adoption of a principle of strict
equality may not be so unpalatable. However, it can become more difficult when
looking at the ability to purchase a home, provide food for one’s family or satisfy
basic sustenance needs. In short, the challenge with strict legal equality is that
it can lead to material (or substantive) inequality,34 with the law forbidding ‘the
rich as well as the poor to sleep under bridges’.35
To mitigate this problem, an alternative interpretation of equality could be
adopted. Namely, that equality should be defined so as to achieve ‘substantive’
or distributive equality. Applying this approach, equality should, in effect, mean
distributive sameness (or a position as near to sameness as possible). Intuitively,
this substantive definition of equality is attractive and suggests a welcome view
31 U Mattei and L Nader, Plunder: When the Rule of Law is Illegal, (Blackwell Publishing, 2008),
10.
32 Hayek, Road to Serfdom (n 21), 82.
33 ibid.
34 ibid.
35 A France, The Red Lily (first published 1894, Yurica Press, 2015), ch 7.
of society, particularly when looking at wealth distribution. However, it raises a

number of challenges that, as difficult as they may be, cannot and should not be
ignored. Conceptually, requiring a specific allocation of rights (and resources) to
effectively level the social playing field, undermines another tenet of the rule of
law, which mandates that rules should be abstract, agreed in advance and then
applied equally to all.36 We therefore face the problem that allocating rights and
opportunities according to individual need, risks undermining other fundamen-
tal principles of the rule of law, themselves designed to protect, amongst others,
individual freedom from encroachment.
Adopting a substantive standard of equality does of course also raise both
practical and definitional challenges, including what a fair or equal distribution
would entail in any given case. This would be a significant (arguably, impossi-
ble) exercise, namely to evaluate each individual’s entitlement, respective needs
and thereafter agree the values to apply to any such distribution. However, the
greater challenge (and the one that Hayek argued forcibly)37 is that as desirable
as they may be, substantive standards of equality cannot be sustained through
market regulation or by the adoption of a substantive (or distributive) approach
to equality. Aside from the difficulties of determination, once an initial alloca-
tion has been made it would need to be continuously remade as an individual’s
position changes, necessitating constant surveillance, analysis and redistribu-
tion. As we saw in the previous chapter, this level of polycentricism is simply
not possible when looking at the exercise of centralised decision making and
control. In this way, as intuitively attractive as it might seem ‘the use of regula-
tion to re-distribute income [is seen] as a blunt and inefficient instrument. It
distorts prices and incentives, and hence leads to … unintended effects which
often harm those whom it is designed to benefit.’38
Against this, it is a strict (or formal) definition of equality that this book
suggests needs to be maintained. Whilst the focus of this work is on the relation-
ship between compliance and equality, given its importance a comment on the
relationship between a strict definition of equality and the potential for distribu-
tive inequality should be made. In particular, it is important to be clear that
adopting a strict approach to the principle of equality before the law does not
mandate that we ignore social inequality. Rather, and again in contrast to common
misconceptions as to classical liberal policy,39 this should simply be addressed
36 As Hayek, citing Rousseau, observed: ‘the object of laws is always general, I mean that the law
always considers the subject in the round and actions in the abstract and never any individual man
or one particular action’, see Hayek, ‘The Political Ideal’ (n 29), 144. This reflects the genesis of
the doctrine, designed to constrain the arbitrary authority of the party in power or of other elites. See
D Acemoglu and JA Robinson, Why Nations Fail (Profile Books, 2013), 308. Indeed, ch 5 explored
the critical relationship between this principle and the proper function of spontaneous orders.
37 See, eg, Hayek, The Constitution of Liberty (n 3), ch six.
38 C Veljanovski, ‘Economic Approaches to Regulation,’ in R Baldwin, M Cave and M Lodge (eds)
The Oxford Handbook of Regulation (Oxford University Press, 2010), 24.

39 As explained in ch 5, classical liberalism does not eschew the imposition of law or any state
intervention but sets clear boundaries for its legitimate use.

by other means. For example, Hayek, unlike his libertarian counterparts,40 was
cognisant of the need to provide social welfare, noting that ‘there can be no
doubt’41 that a level of support should be assured to all. It cannot be, and it
is not, suggested that such welfare will fully address the inevitable unfairness
that arises from the lottery of opportunity at birth. Whilst no system will ever
perfectly address material inequality (although it should certainly strive to try),
the protection of the rule of law in this way seeks to support the integrity and
function of the institutions that are necessary to maximise (and protect) welfare
and freedom to the fullest extent possible.42
C. The Rule of Law: Between Thick and Thin Conceptions?
There is one final question to consider regarding the general construction of

the rule of law, namely the broad evaluative role or function that the rule of
law should perform in society. Specifically, should the rule of law be conceived
in what has been described as formal (thin) or substantive (thick) terms?43 Put
another way, does the rule of law comprise merely a set of procedural require-
ments to be satisfied (a thin conception of the rule of law), or does it demand
something more (a thick conception)?
In brief, formal (or thin) conceptions of the rule of law concern the ‘manner
in which the law was promulgated’.44 That is, was the law properly authorised?
Is it capable of guiding individual conduct? Is the legislation prospective (rather
than retrospective) and is there an independent judiciary? A formal construc-
tion of the rule of law is not therefore concerned with the substance of the law,
namely whether it is a good or a just law, merely that the law was passed and
is to be applied in the proper manner. Advocates of a thin construction defend
their claim on the basis that to shroud the rule of law in concerns of ‘justice’ or
‘fairness’ is to ‘propound a complete social philosophy’45 and that this would
obfuscate any independent function that the rule of law has. That is, independ-
ent from the political philosophies that would necessarily be engaged to argue
40 For example, R Nozick, Anarchy State and Utopia, (first published 1974, Blackwell Publishing,
2003), 149.
41 Hayek, The Road to Serfdom (n 21), 124–125.
43 Different taxonomy concerning these conceptions of the rule are engaged. Craig utilises the
terms ‘formal’ and ‘substantive,’ Pech expounds the differences between ‘thin’ and ‘thick’, whilst
Fuller suggests ‘procedural’ and ‘substantive’. See P Craig, Select Committee on the Constitution,
Relations Between the Executive, the Judiciary and Parliament: Report With Evidence, 6th Report
of Session 2006-07 (HL 2006, 151-I) 97, 101; L Pech, ‘A Union Founded on the Rule of Law: Meaning
and Reality of the Rule of Law as a Constitutional Principle of EU Law’ (2010) 6 European Consti-
tutional Law Review 359, 369; L Fuller, The Morality of Law, (Yale University Press, 1969), 96.
44 Craig, Relations Between the Executive (n 43), 467.
45 ibid, 468.
for a particular conception of a just or fair law.46 Against this view is the classic
criticism that manifestly unjust or undesirable laws, no matter how offensive,
are capable of technically satisfying a thin construction of the rule of law whilst
those enacted by a democracy could fail to meet the requisite standard.47
In contrast, advocates of a substantive (or thick) conception of the rule of
law suggest that the doctrine should aspire to be more than a set of procedural
requirements. That is, the rule of law should be the foundation to help distinguish
between ‘good’ and ‘bad’ laws (through the recognition of certain individual
rights).48 Seen in this way, an individual’s moral rights should be recognised in
law so that they may then be enforced.49 Thus, in contrast to a purely procedural
or formal perspective, a ‘state which savagely represses or persecutes sections of
its people cannot … be regarded as observing the rule of law’.50 On this view,
proponents of a substantive view do not suggest that the rule of law comprises
the ‘full range of [individual] freedoms’51 but that it should nevertheless protect
certain fundamental rights.
Much like the definition itself, debate abounds not only as to which classifi-
cation should be adopted but as to the approach that any given scholar endorses
(arguably due in part to the challenges of adopting such a binary classification
to a broad continuum of views). This uncertainty is particularly prevalent when
considering a classical liberal view of the rule of law and its role in maintaining
the spontaneous orders examined in Chapter 5. For example, Hayek endorses
the maintenance of the rule of law to both constrain illegitimate government
intrusion but also to protect the stability of behaviours necessary for the spon-
taneous order to emerge. In this regard, it is the equal application of laws that is
important. This definition has caused scholars such as Tamanaha52 to argue that
Hayek endorses a thin conception of the rule of law, using the label in a pejora-
tive sense to claim that Hayek’s approach had no regard to the substantive aims
of the law. Indeed, the critique reflects the commonly held view that a liberal
interpretation of the rule of law is ‘substantially procedural in bent’.53
However, this claim does not fully represent the classical liberal view of
the rule of law, whilst illustrating the difficulty of trying to characterise such a
complex principle into broad, thick or thin, definitions. Indeed, moving from
this stark classification, May acknowledges that Hayek adopts an ‘essentially’
thin conception, whilst nevertheless accepting that he advocated a rule of law
with certain substantive content, including the importance of equality as an
46 On which, see J Raz, ‘The Rule of Law and its Virtue,’ (1977) 93 Law Quarterly Review 195.
47 J Rose, ‘The Rule of Law in the Western World: an Overview,’ (2004) 35(4) Journal of Social
Philosophy 457, 460.
49 R Dworkin, A Matter of Principle, (Harvard University Press, 1985), 12.
50 Bingham, ‘The Rule of Law’ (n 20), 76.
51 ibid.
53 ibid, 41.
essential characteristic.54 Indeed, if we look at what Hayek actually claimed,

he argued that the law should be indifferent to ends, that it operated to guide
behaviour rather than to dictate it.55 This is in stark contrast to commands or
orders, which constrain people’s freedom and tell them how to act. A Hayekian
approach does not therefore endorse a view that the law can impose whatever
it pleases, provided it complies with certain procedural demands. Rather, it
suggests that whilst the rule of law acts as a constraint on government power
it also exists ‘as the governing opinion about the attributes good laws should
possess’.56 Thus, May’s observation was an astute one. The classical liberal
conception of the rule of law belies the traditional binary distinction between
thick and thin conceptions. It goes beyond orthodox interpretations of a ‘thin’
view of the rule of law, demanding as the next section explains, that it performs
a more substantive role in society.
II. CONSTRAINING ‘LAWFUL’ CONDUCT
If calls to constrain creative compliance are to be successful, they need to over-

come one particularly powerful and somewhat fundamental challenge. Put
simply, that creative compliance, whilst undesirable to many, is nonetheless tech-
nically lawful conduct. This necessarily raises the fundamental question asked
at the start of the chapter, namely on what legitimate basis can the practice be
constrained? Chapter 1 outlined the fiscal harm that creative compliance causes.
However, whilst significant, this loss to the public purse has proven to be an
insufficient basis from which to engender meaningful change.57
In contrast, the earlier chapters of this book (and, in particular, Chapters 4
and 5) offer an insight into the institutional harm that creative compliance causes,
providing a more robust foundation for reform. Rather helpfully, it is by recog-
nising how creative compliance erodes the requirement of equality before the law
that we can identify a framework that provides both normative justification for
reform and a lens through which some of the more challenging questions raised
by calls for reform can be considered. For example, by applying this framework,
and as the next section explores, we can understand how the rule of law operates
as a ‘meta-legal principle’ and the implications of this for the ostensible chal-
lenge of constraining creative, yet seemingly lawful, compliance.
54 May, The Rule of Law (n 26), 41.

56 Hayek, ‘The Political Ideal’ (n 29), 155, rejecting the argument that the rule of law meant mere
legality.
57 This section is focussed on the framework for legitimate reform. However, to effect behavioural
change, and as ch 3 explained, we need to change a person’s perception of the harm caused by (and
social meaning attached to) a particular action. Thus, the normative analysis in the previous chapter
is an important corollary to this analysis as a mechanism for implementing the behavioural change
needed for reform.
Constraining ‘Lawful’ Conduct 135
A. Equality as a Meta-Legal Principle
As Section I explained, the rule of law protects the principle that it is only as
a servant of the law, not of people, that a citizen can be free.58 However, to
ensure our ongoing freedom in this way it is crucial that the law (not those in
power from time to time) reigns supreme, not only at the point of royal assent
but also in the manner in which laws are interpreted and applied. That is, we
need to protect against and uphold equality throughout the regulatory life cycle,
from content and adoption (namely protection against lobbying and regulatory
capture) through to enforcement, ensuring that laws are applied equally to all
citizens without discrimination or discretion.59 Thus, the principle of equality
is best understood as an overarching standard that other rules are required to
meet. It is, in effect, a rule about what the law, and the exercise of power, ought
to be,60 that is, it is what Hayek described as a ‘meta-legal principle’61 that binds
other, discrete, legal rules.
Understanding equality in this way is crucial to fully appreciating both its
function and practical application in modern society (whilst helping to miti-
gate some of the complacency concerns discussed earlier in the chapter). If,
as citizens, we see the equal application of laws as an overarching standard to
be achieved, we can start to move away from viewing ‘equality before the law’
as an abstract legal principle that is the sole remit of legal scholars, towards
recognising it as an important social objective that acts as a guide to our own
behaviour. Specifically, this conception of equality as a meta-legal principle (or
meta-norm) informs how we should comply with society’s primary legal prin-
ciples (or primary norms), namely with express regulatory demands (such as
the requirement to pay tax).62 Put a different way, equality is a general rule that
tells us how to comply with specific rules, setting the standard to be applied
when making compliance decisions. Thus, it is here that we can start to see how
the classic exposition of the rule of law, which underpins our liberal democ-
racy, provides the framework from which we can start to address the modern
compliance crisis.
This relationship between primary legal principles and the meta-legal
principle of equality can be better understood by looking at an example.
When considering tax statutes, the primary principle (a statutory provision)
58 Marcus Tullius Cicero, Pro Cluentio 53.146 ‘The Magistrates who administer the law, the jurors
who interpret it – all of us in short – obey the law to the end that we may be free,’ cited in Hayek,
The Constitution of Liberty (n 3), 146.
59 iIbid, 180–181.
60 ibid, 181.
61 Hayek, ‘The Political Ideal’ (n 29), 163.
62 This idea (or a form of it) was introduced by Mitchell Berman in a lecture at University
College London, although any errors or misrepresentations do of course remain my own (and no
endorsement of the ideas set out in this chapter or their expression should be implied). M itchell
Berman, ‘Cheating, Loopholing and Metanorms’ Social and Legal Philosophy Colloquium
University College London (11 March 2015) (unpublished).
might stipulate that a corporation should pay tax on any capital gain. The
meta-principle (equality) stipulates that the subject must comply with the stat-
ute in a way that ensures the equal application of law without discretion or
discrimination (put another way, applying a compliance standard that ensures
all legal subjects are on an equal footing). On the face of it, the meta-principle
seems unnecessary; it is not adding anything to the underlying rule.63 However,
this is not strictly the case. The underlying rule does not prohibit its own viola-
tion; it simply sets out a sanction for so doing (the so-called ‘law-as-price’ theory
of law).64 It is the meta-principle of equality that provides normative force for
complying with the spirit of the primary principle. For example, by precluding
corporate groups from incorporating multiple entities in multiple jurisdictions
to reduce their tax burden (as described more fully in Chapter 2) in a way that
was not intended by the statute and that is not available to other citizens, includ-
ing smaller corporate entities. Recognised in this way, the rule of law also helps
us to understand why we find lawful, yet creative, compliance to be so egregious.
That is, whilst creative compliance might comply with the strict letter of the
law (the primary legislative requirement to pay tax), it clearly contravenes the
requirement of the meta-legal principle that laws be applied equally to all. It is
this latter breach that triggered the widespread public outcry.
This analysis also helps to identify a particular challenge with enforcing the
principle of equality. That is, unlike a breach of the primary statute, a breach of
the equality principle is not always easily identifiable.65 Subject to the perennial
challenge of resource constraints, we are able to identify, and pursue, the breach
of the primary principle (the failure to pay taxes). In contrast, a breach of the
meta-principle (creative compliance) might intuitively feel wrong but can evade
discovery, leading to an actual and perceived enforcement deficit. Beyond the
immediate problem this raises it also serves to exacerbate the prisoners’ dilemma
discussed in respect of the compliance degeneration cycle in Chapter 4. That is,
as other actors anticipate this breach of the meta-principle, they do not know
the extent to which it has been breached. Therefore, in an attempt to put them-
selves on an equal footing with other market participants they must estimate
what others have done, leading to a cycle of approximation and overestimation
as to the normative breach and, as a consequence, the normative wrong.66
This functional role of equality as a meta-legal principle also serves to meet
one ongoing need that single-issue regulatory responses to the compliance crisis
63 ibid.
64 On which, see C Williams, ‘Corporate Compliance with the Law in the Era of Efficiency,’ (1997)
76 North Carolina Law Review 1265.

65 This is also a point that Akerloff and Shiller recognise, that in complex societies ‘sharp’ practice
is not always immediately identified and communicated, see G Akerlof and R Shiller, Animal Spirits:
How Human Psychology Drives the Economy and Why it Matters for Global Capitalism, (Princeton
University Press, 2009), 27–39.
66 In this way, we see similar behaviour to that of the rationalisation, and over-rationalisation
of general ethical breaches discussed in ch 4.

Constraining ‘Lawful’ Conduct 137
are not able to address. That is, it is able to ‘fill the gaps’ that are (as discussed
in Chapter 2) inevitably left by regulation and that therefore fall to legal subjects
and, in the event of dispute, the judiciary to interpret and define. If we are able
to reinforce equality as a meta-norm, to embed it as part of wider corporate
culture, this serves as an overarching reference point, performing a norma-
tive ordering function67 for legal subjects deciding how such gaps should be
filled. For individual corporate officers, it also provides legal justification (and
therefore comfort) for prioritising long-term gains (by supporting the regula-
tory and market systems that corporations depend on) over short-term profit
maximisation.
We have seen how the rule of law, and its core tenet of equality before the law,
developed as a constraint on ‘the uninhibited exercise of government power’,68 a
device to mitigate against the risk of arbitrary authority. As such, it is commonly
viewed as ‘expressive of how the state ought to behave towards individuals’.69
However, this section looked more closely at its implications for individual citi-
zens, derived from its function as a meta-legal principle of society. Having done
so, the immediate question that arises is that whilst there are clear consequences
if state actors act contrary to the rule of law,70 can the same be said of non-state
actors? In particular, does the principle of equality create a political obligation,71
namely a moral duty, for corporations to comply with (or maintain) its principles?
Put another way, does this meta-principle carry with it a right of obedience?
B. A Positive Obligation to Maintain Equality before the Law?
Within liberal ideology, legal obedience is commonly legitimised by reference to

consent-based arguments founded in social contract theory.72 That is, an indi-
vidual citizen is deemed to have agreed to be bound by the law (and coercive
power of the state) as consideration (or in exchange) for their participation
in civil society. Whilst this legal obedience requires the abrogation of certain
individual freedoms, this is simply the rational bargain that has been struck for
broader legal and political protection, together with the maintenance of social
order. Thus, an obligation to obey the law is derived from consent, predicated on
the benefit of (amongst other things) the maintenance of civil society and social
order. Notwithstanding its conceptual clarity, consent-based justifications are,
67 On which, see C O’Reilly, ‘Corporations, Culture, and Commitment: Motivation and Social
Control in Organizations,‘ (1989) California Management review 31(4), 12.

69 ibid.
70 For example, judicial review.
71 Note that political obligation is utilised to reflect the broader, moral obligation, to that of a
legal obligation. One has a legal obligation, that is, an obligation to obey the law only if they
consider themselves under a moral, namely political, obligation to do so.
72 As discussed in Section I.
clearly, not without their difficulties. When can consent be revoked? Are there
limits to what an individual can consent to? What about those deemed unfit or
unable to consent? In particular, and aside from each of these questions, absent
express consent, on what basis can we legitimately assert that an individual has
agreed to be so bound?
Advocates of a consent-based model answer this last question by arguing that
individual consent (or, perhaps more accurately, acquiescence) to this bargain
is evidenced through participation in civil society. For example, by voting73
or, recognising that many individuals do not exercise this right, through tacit
consent either by ongoing residence in a jurisdiction or notions of fair play (by
availing themselves of the benefits of civil society).74 Yet the limitations of these
arguments are similarly clear, most notably the reality that most individuals do
not have the financial means to, realistically, have a choice about their participa-
tion in (and therefore, on this reasoning, consent to), civil society.75 Indeed, it
was this issue that prompted David Hume to observe that claiming a person’s
ongoing residence in their country of birth constituted consent to its system of
laws was akin to saying that a person who had been carried unawares onto a ship
whilst they were sleeping consented to being there if they remained on the vessel
rather than jumping overboard to escape.76
However, when we turn to corporate citizens and, in particular, large
public corporations, this consent-based argument in support of legal obedi-
ence becomes much easier to sustain. In contrast to their natural counterparts
(who have no say over their birth), the decision to incorporate is a conscious
one. Moreover, this choice is not simply limited to the initial decision to bring a
company into existence but, importantly, extends to the jurisdiction of incorpo-
ration. Indeed, the choice of a company’s seat of incorporation is often a very
deliberate one, as can be seen by arguments concerning regulatory arbitrage and
a ‘race to the bottom’ in an effort to attract corporate residents (be it in a specific
sector77 or more generally).78 In making the decision as to where to incorporate,
a company’s original promoters elect (in full knowledge) the legal system that
will apply to both the creation of the corporation and its ongoing operations.
The ability to establish a consent-based argument to corporate legal obliga-
tion extends beyond the initial decision to incorporate the company. Whilst it
is arguably naïve to suggest that individuals are able to move to jurisdictions
73 P Steinberger, The Idea of the State, (Cambridge University Press, 2014), 218–220.
74 HLA Hart, ‘Are There Any Natural Rights?’ (1955) 64(2) Philosophy Review 175, 185.
75 See R Dworkin, Justice for Hedgehogs, (Harvard University Press, 2011) ch 14; J Simmons,
Moral Principles and Political Obligations (Princeton University Press, 1979) chs 3 and 4.
76 D Hume, ‘Of the Original Contract,’ in K Haakonssen (ed) Hume Political Essays (Cambridge
University Press, 2006), 193.

77 Note the recent interest in becoming the Blockchain state: J Brett, ‘“States” Rights to B
lockchain:
the “Liberty Cowboy” that Drove Wyoming to Crypto Paradise,’ Forbes (12 May 2020) www.
forbes.com/sites/jasonbrett/2020/05/12/states-rights-to-blockchain-the-liberty-cowboy-that-drove-
wyoming-to-crypto-paradise/#6efe063e225f (accessed 9 August 2002).
78 Such as Delaware’s well-known position as the incorporation state in the US.
Inequality and Legal Privilege 139
where they feel greater alignment with the domestic legal system (and therefore
choose to be bound by it), corporations have much greater geographical flex-
ibility. This applies both in the ability to effectively move an entity to a new
jurisdiction (through re-registration, an inversion79 or other acquisition) or
by simply incorporating new group subsidiaries in the desired territory (and,
should they so wish, effectively or actually winding down operations in the old
one). In contrast to technical arguments as to the ability of individual citizens
to relocate, these are choices that corporations can and often regularly do avail
themselves of. Moreover, once incorporated (or registered) in a jurisdiction
(decisions that require existing shareholder approval), new shareholders invest
in the organisation knowing the rules that will apply (enabling express consent
to be identified at both a corporate and shareholder level). Thus, when incor-
poration, reincorporation and registration decisions are looked at in the round,
it becomes clear that many of the challenges that a consent-based argument
for individual legal obedience faces can be persuasively addressed when looking
at corporate citizens. For the latter, incorporation and domicile are clear and
express decisions, which are often made in whole or in part on the desirability of
the legal framework of the jurisdiction in question.
The rule of law provides a powerful framework of expectations that underpin
civil society, protecting her fundamental values and the freedoms of her citizens
(corporate and individual). Yet, as this chapter has shown, these are not simply
abstract ideals. The requirement of equality before the law is a fundamental
meta-legal principle that guides and governs how a citizen should comply with
underlying regulatory requirements. When understood in this way, and complied
with accordingly, this meta-principle provides all citizens with the ‘confidence
that the law will underpin both sides’ actions equally’.80 As a core part of our
legal framework, it is this rule, this compliance standard, that corporations elect
to be bound by when choosing to incorporate (and remain) within the jurisdic-
tion. It is this standard that underpins the political obligation to comply with
its terms.
Against this justification, one question remains to be answered. That is, how
do we align this obligation with the earlier, formal, definition of equality? How
can we address the seeming paradox of relying on arguments of equality to call
for a fundamentally unequal (when looking to hold corporations to a higher
compliance account than natural citizens) standard of compliance?
III. INEQUALITY AND LEGAL PRIVILEGE
The first section of this chapter argued that ‘equality’ in the context of the rule
of law should mean formal equality, that the requirement of the rule of law was
79 See ch 2 for a discussion of inversions.

80 May, The Rule of Law (n 26), 130.
that laws should apply equally, regardless of the material outcome. However,
against this, Section II suggested that corporations should be under an obli-
gation to maintain the rule of law by refraining from the creative compliance
practices that undermine it. These two assertions seem to be paradoxical, with
the claim in Section II seemingly endorsing a material or substantive definition
of equality. This section addresses this apparent conflict, by exploring legal priv-
ilege (defined below) as the basis on which an exception to formal equality can
be made.
Throughout its development, advocates of the rule of law have been clear
that one of its objectives is to protect against privilege. In this context, privilege
adopts a very specific definition, meaning a derogation or exception from the
principle of equality such that the law does not apply equally (either in theory
or in effect).81 Indeed, the very genesis of the principle of equality is that all
citizens, regardless of rank or status, are equal before the law, such that the rule
of law and special privilege are irreconcilable.82 It is of little surprise therefore
that not only is legal privilege heavily criticised,83 but that it provides the one
foundation from which we can legitimately justify a deviation from a formal
standard of equality. That is, whilst it is contrary to the rule of law to use arbi-
trary distinctions to deviate from the principle of equality,84 where the law itself
creates a privilege (that enables a citizen to undermine the rule of law) then it
is legitimate to depart from a formal construction of equality to restore equi-
librium. Put another way, the law can treat citizens in a prima facie unequal
manner to ensure ‘that laws [are] equal in operation’.85
Notionally, all legal subjects can creatively comply, suggesting that it does
not constitute a legal privilege as defined. However, as Chapter 2 explained,
it is a practice that is predominantly adopted by large multinationals due to
legally imbued characteristics that are unique to the corporation and that can
encourage (for reasons discussed in the next chapter) and certainly facilitate
such compliance standards.86 To consider the relationship between legal privi-
lege and corporate compliance standards it is instructive to recall the so-called
‘Double Irish Dutch Sandwich’ structure that was outlined in Chapter 2 (and
which is typical of many aggressive tax structures). The structure is dependent
on the existence of multiple subsidiaries in different jurisdictions (three as a
minimum: Ireland, the Netherlands and a ‘tax haven’ such as Bermuda). There-
fore, from a basic structural perspective the scheme necessitates the existence of
multiple entities (each constituting a separate legal personality), which can oper-
81 Hayek, The Road to Serfdom (n 21), 82.

82 ibid.
83 Bingham, ‘The Rule of Law’ (n 20), 73–75.
84 ibid,73.
85 Railway Express Agency Inc v New York 336 US 106, 112–113 (1949).
86 Gammie similarly recognises the inequality of ability to creatively comply within society.
See M Gammie, ‘Moral Taxation, Immoral Avoidance – What Role for the Law,’ (2013) British Tax
Review 577, 581.
Inequality and Legal Privilege 141
ate and exist at the same time in multiple jurisdictions (yet still be controlled,
and the benefits accrue, to the same parent entity). This ability for a single group
to simultaneously comprise of multiple personalities in multiple territories is, of
course, not available to an individual in their individual capacity. It is a uniquely
corporate ability, facilitated by our company law framework, and one that is not
available to natural citizens qua natural citizen.87
Beyond this structural ability to creatively comply, the corporation also
facilitates, in two important ways, the necessary risk profile to implement such
aggressive structures. First, the combination of separate legal personality and
limited liability88 operate to isolate and restrict the level of risk associated with
a particular tax structure, should it subsequently be disallowed. In doing so,
these principles enable a group to limit their exposure in the event a structure
fails (that is, the tax benefit is denied), reducing the risk (and therefore increas-
ing the likelihood) of implementing an ‘abusive’ transaction in the first instance.
In contrast, an individual implementing a high-risk strategy risks their entire
asset base in the event of failure. Second, for reasons explored in more detail
in Chapter 7 the corporate form enables individuals within the corporation to
implement riskier strategies than they may otherwise do if acting in their own
capacity. In essence, an individual is able to distance themselves from the poten-
tial ‘ethical’ questions of their conduct, outsourcing that moral responsibility to
the fact that the conduct in question is in fact that of the corporation (or under-
taken on the direction of their superiors in the corporation) and not of them
personally. Once the decision to implement the structure has been made, and as
Chapter 4 outlined, individuals within the corporation are then likely to engage
in a process of rationalisation to reduce any cognitive dissonance that they may
otherwise feel as a result of the decision to creatively comply in this way. The
importance of this personal disassociation is evident from the responses of high-
profile individuals who were identified as having adopted creative tax strategies
at and around the same time of the 2012 corporate tax scandals. As explained
at the start of Chapter 4, these individuals (in contrast to their corporate coun-
terparts) quickly expressed remorse for the structures in question and, in several
cases, sought to unwind them.
One final, but not insignificant, point is that it is commonly (although
not exclusively) corporate groups that have the requisite resources to obtain
the professional advice need to implement such structures. Tax structuring
requires the implementation of highly complex structures that in turn require
the execution of, often, many hundreds of documents across multiple jurisdic-
tions. This necessitates the advice of tax specialists (to design the structure),
solicitors in each jurisdiction to prepare the necessary documentation and, with
87 Clearly individuals can, and do, incorporate entities to achieve such benefits (see, eg, Philip
Green and the Arcadia group or Richard Branson and Virgin). However, in so doing it is the
corporate form that enables them to do this for the reasons outlined in this section.
88 Discussed in more detail in ch 5.
regard to particularly high-risk transactions, the opinion of counsel. Depend-

ing on the value of the structure to the corporation, these professional fees will
be significant. The ability to pay for these fees is made possible by the corpo-
rate characteristics that are specifically intended to facilitate commerce and
economic prosperity. That is, the principles of separate personality and limited
liability (together with the associated benefits of dispersed ownership, transfer-
able equity and board management that have enabled the corporation to become
such a significant economic actor).89 In contrast, most individuals, even those
with a relatively high net worth, would not have the resources necessary (even
if it were structurally possible) to implement such complex tax arrangements
(beyond, for example, fairly standard family trusts).
We thus see that there are a number of statutory provisions that coalesce
to have the effect of imparting a legal privilege on the corporation, namely the
extraordinary capacity to creatively comply. It is this ability to creatively comply
that undermines the principle of equality and that is unique to the multina-
tional corporation, facilitating creative compliance in a way that their natural
counterparts, and even smaller private corporations, simply cannot do. It is this
legal privilege that brings with it not only the responsibility to uphold the rule
of law, but the corresponding right to demand it of them. As a consequence, this
privilege provides the justification to depart from a formal definition of equal-
ity (set out in Section I) to the extent necessary to mitigate its impact, namely
to uphold the meta-legal principle of equality. That is, to maintain the equal
application of law in operation, not just in theory, by restraining the ability to
creatively comply.
IV. CONCLUSION
The rule of law developed as a constraint on, inter alia, the legal privilege that
had been enjoyed by the government and social elite. In modern civil society
it is now large corporations that benefit from such a privilege, predicated on
the unique structural qualities granted by company law frameworks around the
world. As previous chapters have demonstrated, this privilege facilitates creative
compliance, which undermines the integrity of the legal and market systems
that corporations operate within whilst creating significant fiscal consequences
for wider society.
We are thus met with a claim that corporations should comply with the
spirit, not simply the letter of the law in order to maintain the principle of
89 For example, the corporate characteristics discussed in R Kraakman, J Armour, P Davies,
L Enrique, H Hansmaan, G Hertig, K Hopt, H Kanda, M Pargendler, W Ringe and E Rock, The
Anatomy of Corporate Law, A Comparative and Functional Approach 2nd edn (Oxford University
Press, 2009), 1–18.
Conclusion 143
e quality that they otherwise transgress. However, this is a difficult argument to

make. On what basis can we claim that a problem of inequality is met with a
similarly unequal application of compliance standards? This chapter has argued
that, notwithstanding the need for a formal definition of law, the existence of
legal privilege justifies a claim that corporations, unlike their fellow citizens who
are not so privileged, should be subject to an obligation to maintain the meta-
norm of equality.
One benefit of this rule of law analysis is that it helps to define where the
boundaries of compliance obligations should fall. Whilst there has been signifi-
cant demand for spirited compliance and a prohibition of abusive or aggressive
tax avoidance there has been no guidance as to ‘where the boundary should
be drawn’.90 Applying the meta-legal principle of equality helps to draw those
boundaries, namely by delineating the obligation by reference to the need to
mitigate this privilege. To ensure equality in the operation of the law and thereby
help to maintain the integrity of the legal and market orders.
This chapter concludes (when taken together with Chapter 5) the normative
argument in favour of spirited compliance (the first four chapters outlining the
current landscape of, and explanations for, the compliance crisis). It did so by
examining the relationship between equality and compliance, suggesting that
the requirement for the equal application of law, properly understood as a meta-
legal principle of society, imposes an obligation on corporations (as well as the
state) to maintain its principles. The following chapters now start to turn to the
question of reform. First, Chapter 7 considers an important question regarding
corporate behaviour, one with significant and wide-reaching effects. That is, if
we accept that creative compliance is an illegitimate standard to pursue and
whilst appreciating that it is a practice driven by powerful corporate norms, why
is it that the individuals who implement corporate decisions fail to assert their
own personal norms and views? That is, if individuals within an organisation
consider the practice to be unacceptable, why don’t they do anything to stop it?
How is it that (as Chapter 4 showed) corporate norms can dominate personal
ones so absolutely? In examining these questions, we are faced with a difficult
realisation, one with potentially far reaching consequences. Namely, to what
extent can the architecture of the firm itself influence individual conduct? Put
another way, to what extent does responsibility lie with the player or the rules
of the game itself?
90 M Levi, ‘Legitimacy, Crimes and Compliance in “the City”: De Maximis Non Curat Lex?’ in
Justice Tankebe and Al Liebling (eds) Legitimacy and Criminal Justice, an International Exploration
(Oxford University Press, 2013), 163.
144
Part III
Barriers to Reform
146
7
A Person without Personality:
The Fiduciary Ladder of Corporate
‘Personhood’
[T]he law has facilitated, and technological developments have motivated, an enor-
mous growth of a new kind of person in society, a person not like you and me, but
one which can and does act and one whose actions have extensive consequences for
natural persons …1
James S Coleman
W
hy is it that corporations, imbued with legal personality and acting
through individuals, nevertheless pursue conduct that is antithetical
to values of personhood?2 Specifically, why do individuals within a
corporation implement creative compliance strategies that are premised on the
corporation’s social norms, even when they are in conflict with their own? As
Chapter 3 explained, creative compliance is driven by a profit maximising norm,
namely the axiom of company law that the overriding objective of a corpora-
tion is shareholder wealth maximisation.3 Nevertheless, this norm, reflected in
directors’ fiduciary duties, is not absolute. Corporate boards have broad mana-
gerial discretion and therefore the question arises as to why directors, who are
otherwise apparently law-abiding citizens, have allowed profit-maximisation to
determine compliance strategies that the public clearly consider to be unethical?
Given significant, and recent, efforts to enhance corporate responsibility, it
is regrettably prudent to note from the outset that such myopic decision making
is not a relic of the past. A sobering case in point is the decision undertaken by Rio
Tinto in 2020 to destroy two ancient caves in Western Australia, solely to gain access
to an additional eight million tonnes of iron ore (its annual exports from Australia
1 JS Coleman, The Asymmetric Society, (Syracuse University Press, 1982), 9.

2 For example, conduct that pursues profit maximisation above values such as fairness, equality
and ‘doing the right thing’. These values are often protected by individuals through non-legal
behavioural constraints, which limit self-interested behaviour that undermines the values of society.
3 This reflects the dominant Anglo-American norm that the corporation ‘is carried on p rimarily
for the profit of the stockholders’ Dodge v Ford Motor Co 170 NW 668, 684. This principle is
reinforced by the suite of shareholder governance rights discussed in ch 3, Section III.
148 A Person without Personality
exceeded 327 tonnes).4 The company decided to proceed n otwithstanding that it

had apparently received a report prior to the excavation that put them on notice
that the caves were of ‘the highest archaeological significance.’5 Scandals such
as these (and the numerous examples that exist before it) necessarily raise the
question of what it is about the corporation and an individual’s relationship with
it that allows this to happen? As Chapter 4 explained, the reason for this seem-
ingly atypical individual decision making is that an individual officer effectively
subsumes any potentially conflicting personal norms to those of the corpora-
tion. However, this still leaves the question of what it is about the corporate
environment that allows this dominance to occur so absolutely, even in the most
egregious of situations? In exploring this question, this chapter considers the
impact that the architecture of the firm itself has on individual behaviour. As
shall be seen, the answers to this enquiry have profound consequences, with
implications for our understanding of personal responsibility that extend far
beyond the realms of tax compliance.
By exploring the interplay between corporate structure and corporate
decision-making this chapter puts forward three, cumulative, hypotheses as
follows. Section I explains how separate personality and limited liability coalesce
to achieve the ‘complete’ separation of shareholders from the corporation.6 This
section emphasises the importance of both the legal and economic separation of
shareholders, which causes them to act as mere ‘functionless rentiers’.7 Thereaf-
ter, Section II suggests that this emancipation leads to significant changes in the
shareholder demographic and increases shareholder passivity; with the result
that shareholder wealth maximisation becomes a proxy for members’ interests.
This proxy then distorts the application of directors’ fiduciary duty to ‘promote
the success of the company for the benefit of its members as a whole’.8 Specifi-
cally, the definition of ‘company’, traditionally taken to encompass the entire
shareholder body9 both present and future,10 is instead interpreted as the inter-
ests of the ‘market’ represented by short-term profit maximising objectives.
Section III draws on empirical research in social psychology (in particular Stanley
Milgram’s famous research in this area) to show how this profit-maximising
objective is then able to pervade corporate strategy, and displace personal
norms, due to the structure of an internal decision-making hierarchy that this
4 BL Sydney, ‘Rio Blew up Aboriginal Caves to “Get More Iron Ore,”’ The Times 8 August 2020
www.thetimes.co.uk/article/rio-tinto-apologises-for-blowing-up-culturally-significant-aboriginal-
caves-5f9gd52xs (accessed 8 August 2020).
5 ibid.
6 It is this requirement for both legal and economic emancipation of shareholders that means
that this book is concerned with public, listed corporations, which can be contrasted with private
companies where shareholders are legally, but not economically, emancipated.
7 See P Ireland, ‘Defending the Rentier: Corporate Theory and the Reprivatization of the Public
Company,’ in J Parkinson, A Gamble and G Kelly (eds) The Political Economy of the Company
(Hart Publishing, 2000) 141, 146.
9 Greenhalgh v Arderne Cinemas Ltd and Others [1951] Ch 286, 291.
10 Gaiman v National Association for Mental Health [1971] Ch 317, 330.
Separate Personality, Limited Liability 149
chapter terms the ‘fiduciary ladder’. This hierarchy has a powerful behavioural
impact, creating a relationship of authority and obedience. The psychological
consequences of this for an individual are significant, their focus is reduced to
one of mere obedience in respect of the tasks given to them and their perceived
liability for those tasks is similarly constrained.11 As a consequence, this serves
to insulate individuals within the firm from the reputational repercussions of
their actions such that ‘normal moral principles become inoperative’.12
The result of these three phenomena is that the corporation, imbued with legal
personality, is bereft of the non-legal behavioural constraints (including values
such as fairness and morality) that are commonly associated with personhood,
whilst insulating individuals from any meaningfully perceived responsibility for
actions undertaken in their corporate capacity. As such, the corporation is able
to pursue creative compliance strategies, driven by a profit maximising norm and
unrestrained by potentially conflicting individual norms. Section IV concludes
the substantive parts of the chapter by explaining why the fiduciary ladder is a
particular phenomenon of the public corporation, in contrast to other actors
such as private companies, partnerships and individuals. In doing so, it provides
further justification for the claims made in the previous chapter that, due to
their unique legal privilege, we can legitimately hold public corporations to a
different standard of compliance than these other actors.
I. SEPARATE PERSONALITY, LIMITED LIABILITY

AND THE REIFICATION OF THE CORPORATION
The paradigms of separate personality and limited liability are well known. Since
the mid-nineteenth century it has been a ‘fundamental principle’13 of company
law that corporations have a personality separate from their members14 and
that shareholder liability is limited to the amount unpaid on any shares held
by them.15 This section is not an exhaustive analysis of these principles, which
have (at times) been divisive and raise many interesting, normative, questions.16
11 R Kelman and L Hamilton Crimes of Obedience (Yale University Press, 1989), 16.
12 ibid.
13 See Owners of Cargo Laden on Board the Albacruz v Owners of the Albazero (The Albazero)
[1977] AC 744, 807; and Adams v Cape Industries Plc [1990] Ch 433, 476.
14 Salomon v Salomon & Co Ltd [1897] AC 22.
15 Companies Act 2006, s 3; Art 2, Sch 3 (Model Articles for Public Companies), The Companies
(Model Articles) Regulations 2008 (SI 2008/3229) (the ‘Model Articles’).

16 See Cataldo. ‘Limited Liability With One Man Companies and Subsidiary Corporations,’ 18
Law & Contemporary Problems (1953) 473–504 (as to ring fencing subsidiary liability); R Posner,
‘The Rights of Creditors of Affiliated Corporations,’ (1975–1976), 43 University of Chicago Law
Review 499–526, 506 (as to the inability of involuntary creditors to privately negotiate limited
liability); RE Meiners, JS Mofsky and RD Tollison, ‘Piercing the Veil of Limited Liability,’ (1978) 4
Delaware Journal of Corporate Law 351, 360 (looking at the relationship between limited liability
and corporate creditors); FH Easterbrook and DR Fischel, The Economic Structure of Corporate
Law, (Harvard University Press, 1996), 41 (as to the technical ability to achieve limited liability
through contract).
Instead, it draws on the historical development of separate personality and

limited liability to demonstrate how these fundamental features of corporate
design caused shareholders to become completely separated from the corpora-
tion, transforming their relationship with it. This historical analysis illustrates
the importance of both the legal and economic separation of ‘ownership’17 and
control,18 such that the corporation became an entity not simply independent
from its members but ‘effectively cleansed of them’.19
Incorporation by registration was first made available to the general public
pursuant to the Joint Stock Companies Act 1844 (the ‘1844 Act’).20 In doing so,
members of the public could avail themselves of the benefits of the corporate
form, although confirmation that incorporation conferred separate personal-
ity was not definitively settled until the seminal case of Salomon v Salomon &
Co.,21 which as Chapter 2 explained is arguably the best known case of creative
compliance in corporate history. The grant of separate legal personality allowed
corporations to exist in perpetuity, free from ‘the burdens of death and ageing’,22
and created a suitable vehicle for limited liability.23 Thus, the 1844 Act started the
process of transforming the corporation from the original, chartered companies
that required special Acts of Parliament or Royal Charters to the transnational
corporations that exist today. It also performed an important ideological func-
tion as separate personality started to disjoin the corporation from its members
and justified the grant of significant benefits to an otherwise artificial entity
17 For ease, this chapter adopts the traditional reference to shareholders as ‘owners’ of the corpo-
ration. However, it is difficult to maintain that modern shareholders can legitimately be classified as
owners. See R Sappideen, ‘Ownership of the Large Corporation: Why Clothe the Emperor,’ (1996) 7
Kings College Law Journal 27; P Ireland, ‘Company Law and the Myth of Shareholder Ownership,’
(1999) 62 Modern Law Review 32; J Hendry, P Sanderson, R Barker and J Roberts, ‘Owners or Trad-
ers? Conceptualizations of Institutional Investors and their Relationship with Corporate Managers,’
(2006) 59 Human Relations 1101.
18 The separation of ownership and control was, of course, a characteristic identified by Berle and
Means in their seminal work: A Berle and G Means, The Modern Corporation and Private Property,
(first published 1932, Transaction Publishers, 2010). Meanwhile, Paddy Ireland has written exten-
sively on the importance of both the legal and economic separation, see Ireland, ‘Defending the
Rentier’ (n 7), 141; PW Ireland, ‘The Rise of the Limited Liability Company,’ (1984) 12 International
Journal of Sociology of Law, 239, 245; P Ireland, ‘Capitalism Without the Capitalist: the Joint Stock
Company Share and the Emergence of the Modern Doctrine of Separate Corporate Personality,’
(1996) 17(1) The Journal of Legal History, 41.
19 Ireland, ‘Capitalism Without the Capitalist’ (n 18), 41.
20 The 1844 Act extended incorporation by registration to joint stock companies, the precursor
to the modern public company. It was the Companies Act 1862 that extended registration to the
equivalent of the modern private company.
21 [1897] AC 22.
22 M Bovens, The Quest for Responsibility, Accountability and Citizenship in Complex Organisa-
tions (Cambridge University Press, 1998), 16.

23 The 1844 Act also aligned the legal form of the corporation with is economic one. Prior to 1844,
the joint stock company was identified by its economic form, typically that it had a large, dispersed
body of investors who had freely transferable shares. The legal form of the joint stock company
largely reflected the modern form of partnership, whilst the speculative nature of shares at this
time also ensured that shareholders performed a significant oversight role. On this, see JB Baskin,
‘The Development of Corporate Financial Markets in Britain and the United States, 1600–1914:
Overcoming Asymmetric Information,’ (1988) 62(2) The Business History Review 199; Ireland,
‘Capitalism Without the Capitalist’ (n 18).
Separate Personality, Limited Liability 151
premised on ‘legal and moral conceptions of the corporate individual’.24 The

corporation thus started to take shape (and become accepted) as an independent
economic actor, detached from both its managers and shareholders.25
Notwithstanding the significant impact of the 1844 Act, its importance
for the separation of ownership and control must be kept in context. Whilst
shareholders continued to be exposed to the debts of the corporation (and
potentially each other) it was clear that they would remain closely involved with
its management, restricting those who were willing (or able) to invest capital.
Therefore, it was the limitation of shareholder liability pursuant to the Limited
Liability Act 1855 that enabled the onset of shareholders’ economic separation,
a development so transformative that it has been described as ‘the greatest single
discovery of modern times’.26 By effectively extending these unique legal char-
acteristics to the general public, external investment could now be made to an
independent entity that was not only able to incur its own liabilities but, impor-
tantly, it also bore sole responsibility for them.27
The true impact of the 1844 and 1855 Acts was realised with the complete,
economic, separation of shareholders from the corporation, which came with
the development of a liquid stock market at the end of the nineteenth century.28
The capital markets gained confidence in the early twentieth century when
the public saw that equities could be ‘investment-grade securities’ and that all
market participants could act as ‘prudent investors’.29 Furthermore, a liquid
stock market enabled corporations to realise their purpose of raising capital
from a large (and diverse) number of investors,30 whilst providing sharehold-
ers with the comfort that they were able to transfer their shares ‘cheaply and
efficiently’.31 The development of the stock market also gave investors the
protection of being able to diversify their investment portfolios to hedge against
the risks of u nderperformance by any one company.
24 S Bowman, The Modern Corporation and American Political Thought: Law, Power, and
Ideology, (Penn State University Press, 1996), 3.

25 Separate personality also facilitates innovative corporate structures that are now utilised to
implement creative tax structures.

26 President Nicholas Murray Butler of Columbia University as cited by Cataldo, ‘Limited
Liability’ (n 16), 473.

27 Save in limited cases where the corporate veil could be pierced. See cases where the corpora-
tion is considered to be a ‘shame or façade’: Gilford Motor Co Ltd v Horne [1933] Ch 935; Jones
v Lipman [1962] 1 WLR 832; Woolfson v Strathclyde DC (1978) 38 P & CR 521; Adams v Cape
Industries plc [1990] BCC 786; Trustor AB v Smallbone & Others (No 2) [2001] 2 BCLC 436; also
exceptional cases where an agency relationship is upheld: Smith, Stone & Knight Ltd v Birmingham
Corporation [1939] 4 All ER 116, Re F. G. (Films) Ltd [1952] 1 WLR 483.
28 The timing of the emancipation of shareholders is reflected in the annual number of incor-
porations, rising from an average of: 500 each year between 1856–1865; 1,500 between 1880–1886;
and 6,700 per annum between 1909–1914. Figures cited by: Ireland ‘The Rise of the Limited Liability
Company’ (n 18), 245.
29 W Werner, ‘Management. Stock Market and Corporate Reform: Berle and Means R econsidered,‘
(1977) 77 Columbia Law Review 388, 400.
30 H Manne, ‘Our Two Corporation Systems: Law and Economics,’ (1967) 53(2) Virginia Law
Review 259, 260.

31 Meiners et al, ‘Piercing the Veil’ (n 16), 364.
The establishment of strong capital markets meant that functionally, share-

holders became separated from the corporation and they were able to invest
in companies ‘qua investor’,32 free from the demands of management and
the burdens of property ownership. It was at this point of complete legal and
economic separation that shareholders transformed from traditional owners to
mere ‘functionless rentiers’.33 Shareholders became fully emancipated from the
corporation; they no longer needed to monitor the firm to mitigate their risks.
Instead, they could simply sell their shares, exercising the right of ‘exit’ (namely,
share sale) over ‘voice’ (that is, governance).34 This separation was also reflected
in the changing nature of the share.35 No longer was the share treated as an
aliquot part of the corporation’s assets but was reconceptualised as a right to
dividends and to assign title.36
The reality is that the general incorporation statutes did, as the court confirmed
in Salomon, create a separate legal entity. However, they did not fully separate
that entity from its members. Rather, it was the economic separation, which
came when shares transformed from an interest in the company to an interest in
profits, which completed the reification of the corporation.37 Shareholders were
abstracted from the firm, no longer closely aligned with corporate management,
rather they were able to diversify their investments, with the objective of simply
increasing financial returns. In doing so, the separation laid the foundations for
directors to act with a relative freedom from shareholder oversight (save for their
ability to exercise the right of exit) and subject only to an overriding objective
to promote the success of the company. As the next section demonstrates, over
time this objective has become supplanted (if not displaced) by a practice of
promoting the potentially more homogenous interests of the ‘market’.
II. REDEFINING THE BENEFICIARY: FROM ‘COMPANY’ TO ‘MARKET’
The complete emancipation of shareholders marked a profound paradigm shift

in the exercise of managerial discretion. In particular, the short-term interests38
32 Manne, ‘Our Two Corporation Systems’ (n 30), 261.

33 Ireland, ‘Defending the Rentier’ (n 7), 146.
34 On this, see A O Hirschman, Exit, Voice and Loyalty (Harvard University Press, 1970).
35 Early cases considered that shareholders had a direct interest in the property: Buckeridge
v Ingram (1795) 2 Ves. Jun 652. This view was challenged in the seminal case of Bligh v Brent
(1837) 2 Y. & C. Ex 268 although mixed judicial treatment following Bligh was eventually settled in
Borland’s Trustee v Steel Brothers & Co Limited [1901] 1 Ch 279, 288 which held that a share is the
‘interest of the shareholder in the company measured by a sum of money, for the purposes of liabil-
ity in the first place, and of interest in the second’.
36 For a comprehensive analysis of the common law development, see Ireland ‘Capitalism without
the Capitalist’ (n 18); D Rice, ‘The Legal Nature of a Share,’ (1957) 21 The Conveyancer 439.
37 P Ireland, I Grigg-Spall and D Kelly, ‘The Conceptual Foundations of Modern Company Law,’
(1987) 14(1) Journal of Law and Society 149, 153.

38 Namely, a focus on short-term results at the sacrifice of concern for long-term value creation,
see CFA Centre for Financial Market Integrity/Business Roundtable Institute for Corporate Ethics,
Redefining the Beneficiary: From ‘Company’ to ‘Market’ 153
of current investors superseded the orthodox focus of directors’ duties, namely

the long-term interests of the company. This section examines how this immedi-
ate interest of the ‘market’39 managed to become an ‘entrenched feature’40 of
corporate decision-making and thus became the prevailing and driving focus of
the ‘corporate fiduciary ladder’, a phenomenon that is discussed in Section III.
A. Shareholder Wealth Maximisation as a Proxy for Rentier Shareholders
The reification of the corporation had a transformative impact on the share-

holder demographic and behaviour. In particular, the changing nature of the
share (from an ownership interest to a financial instrument) saw a rise in the late
twentieth century41 of institutional investors, who had dramatically different
governance perspectives to their predecessors.42 The outcome of this chang-
ing profile is that investors largely evaluate corporations by reference to the
company’s share price (and more specifically earnings per share)43 rather than
the underlying value of the business. In adopting this approach, shareholder
conduct and the concomitant market response is driven, in part, by short-term
fluctuations in share price, with the effect that managerial attention is similarly
focussed.
‘Breaking the Short-Term Cycle: Discussion and Recommendations on How Corporate Leaders, Asset
Managers, Investors and Analysts Can Refocus on Long-Term Value,’ (2006), 3 www.cfainstitute.
org/en/advocacy/policy-positions/breaking-the-short-term-cycle (accessed 9 August 2020).
39 The ‘market’ being the representation of the aggregate opinion of investors. See Department for
Business Innovation and Skills, The Kay Review of UK Equity Markets and Long-Term Decision
Making: Final Report, July 2012, para 2.18 (the ‘Kay Review’).
40 Sir George Cox, ‘Overcoming Short-termism within British Business: The Key to Sustained
Economic Growth,’ 26 February 2013, 6 www.yourbritain.org.uk/uploads/editor/files/

Overcoming_Short-termism.pdf (accessed 9 August 2020) (the ‘Cox Report’).
41 This change largely manifesting from the 1960s and culminating in the 1990s. See the Kay
Review (n 39), 29 and P Myners, ‘Institutional Investment in the United Kingdom: A Review,’ (2001)
(the ‘Myners Review’), ch 1, 27–38.
42 The largest institutional investors are pension funds and insurance companies (see Kay Review
(n 39) ch 3 and the Myners Review (n 41), 5). Mutual funds (companies that issue shares to an indi-
vidual and then invest in a diverse portfolio, enabling smaller investors to participate in a range of
companies) also play an important part in shareholder behaviour and, in particular, the promotion
of short-termism. For a helpful definition of the various types of institutional investors see LV Ryan
and M Schneider, ‘Institutional Investor Power and Heterogeneity,’ (2003) 42 Business & Society 398,
400–404.
43 For a helpful definition of earnings per share (‘EPS’) see M Moore and E Walker-Arnott, ‘A Fresh
Look at Market Short-Termism,’ 2014 (41)(3) Journal of Law and Society 416, 425: ‘As the name
suggests, this figure is essentially calculated by dividing the company’s total earnings or net income
(minus total fixed dividends payable to preference shareholder) over the period by the number of
its ordinary shares that are in circulation. Accordingly, where a company’s net quarterly income is
£10 million, and the company has 2 million ordinary shares in circulation, then its quarterly EPS will
be £5. In the hypothetical example, this £5 figure will (theoretically at least) be representative of the
amount of earnings accruing to each individual ordinary share of the company over the period. In
this way, the EPS figure (theoretically) enables the shares of companies with often radically differing
business characteristics and growth profiles to be compared by investors in a like-for-like manner,
on the basis of a unifying objective criterion of perceived shareholder wealth (or ‘value’) creation.’
Historically, the increase in institutional investors influenced the predomi-

nance of short-termism in three important ways.44 First, institutional investors
are financial intermediaries who owe a duty to their own clients (for example,
the pension fund holder). Thus, the ultimate beneficiary of the investment sits
at the end of a chain of interests, involving fund trustees and managers, each
of whom have their own priorities. This chain of interests creates a system of
‘ownerless capitalism’,45 whereby the corporation and its beneficial owner are
abstracted from one another. Second, but related to this fiduciary position,
the fund managers who make the investment decisions within the chain are
constrained by an obligation to ‘enhance the value of the assets entrusted to
[them] by [their] clients’.46 This is a very distinct, and not always analogous,
duty to that of a director. For fund managers, their primary concern is to increase
the performance of their fund, which has several potential consequences. For
some, it might involve a necessity to sell their holdings and a disincentive to
pursue the costs of active corporate governance (informed by a perspective that
passivity by fund managers is a ‘safer’ option to activism).47 For others, it means
that although institutional investors can, relatively, be more engaged than other
shareholders (due to the size of their holding) they are nonetheless primarily
motivated by maintaining the relative value of their fund.
Finally, this obligation to increase the fund value is evaluated in relative,
not absolute terms; provided a fund outperforms its competitors then the
fund managers have discharged their duties.48 This measurement of success
is often undertaken against short-term timescales, notably financial reporting
deadlines.49 The culmination of these three factors is that institutional inves-
tors operate within an environment that is to a degree pervaded by a short-term
imperative. All that said, when looking at modern market developments, insti-
tutional investors can be seen to hold their positions for a relatively longer term
(and be more invested in management) than a new cohort of traders. Namely, day
traders who, as the name suggests, adopt extremely short-term, intraday, trad-
ing strategies to maximise returns. This emergence of extreme short-termism
is further accommodated by technology that enables high frequency trading,
44 The holdings of institutional investors have reduced in recent years although they still repre-
sent an influential proportion of investors and therefore remain the focus of corporate governance
reform, such as the Financial Reporting Council’s UK Stewardship Code (July 2020) www.frc.org.
uk/investors/uk-stewardship-code (accessed 9 August 2020).
45 Cox Report (n 40), 21.
46 BlackRock, cited in PIRC, ‘Stewardship and the Stakeholder Economy: Perspectives on the Role
of Shareholder Engagement in the UK Economy,’ 18.

47 B Black, ‘Shareholder Passivity Reexamined,’ (1990) 89 Michigan Law Review 520, 533. See also
the Kay Review (n 39), para 6.39.

48 On this see the outcome of the empirical work undertaken by Hendry et al, ‘Owners or
Traders?’ (n 17), 1110, and 1116 identifying the ‘obsession’ of fund managers with ‘relative
performance.’ See also the Cox Report (n 40), 21 and the Kay Review (n 39), para 6.34.
49 Corporate reporting for quoted companies is mandated by the Financial Conduct Authority’s
Disclosure Rules and Transparency Rules. In particular, see DTR 4.1–4.2.

designed to make profit on short-term price fluctuations rather than the substan-
tive value of the firm.50
Taken together, this dispersed and detached cohort of shareholders, many of
whom are now adopting automated trading technologies, gives rise to particu-
lar behavioural consequences. Specifically, it exacerbates collective action issues
and engenders rational apathy. That is, from a governance perspective (and
outside of the influence of a small number of particularly large shareholders),
the influence of any one shareholder’s vote (or even a collection of them) is likely
to be minimal. As a consequence, for most shareholders the cost of actively
engaging with corporate management outweighs the economic benefit, making
‘active’ governance economically irrational. Adopting this economic analysis,
the rational action for disgruntled shareholders is to sell their shares on the now
liquid market rather than exercise their voice through governance mechanisms.51
From a compliance perspective (leaving to one side the general governance
concerns that this gives rise to), the impact of this rational apathy is important.
It means that shareholders generally express their views through market activity;
promoting the response of the market as the primary form of communication
to the board. This pre-eminence of the generic ‘market’ was recognised by
Hendry et al52 whose empirical work found that managerial attention was
not only focussed on investor relations but that in this regard, reference was
consistently to the ‘market in general, rather than to the company’s investors
in particular’.53 The implication for corporate management is clear; the board
becomess less concerned about the (relatively low) risk of shareholder activ-
ism but the more likely threat of exit (share sale) and the concomitant market
response. Thus, shareholder interests (and the focus of directors’ duties) come to
be represented by a homogenous market norm of wealth maximisation, which is
largely determined by reference to an earnings per share calculation.
When looking at managerial behaviour, this market pressure to promote
short-term share valuation is reinforced by a number of direct personal reper-
cussions. Financially, directors’ remuneration structures are increasingly
linked to market performance, either through contingent bonus arrange-
ments or stock options.54 Moreover, significant share sales will eventually
50 Kay Review (n 39), paras 2.22 and 5.15. See also L Dallas, ‘Short-Termism, the Financial Crisis,
and Corporate Governance,’ (2011) 37 Journal of Corporation Law 265, 297–302.

51 F Easterbrook and D Fischel, ‘The Corporate Contract,’ (1989) 89 Columbia Law Review‘ 1416,
1443: ‘investors are rationally uninterested in votes, not only because no investor’s vote will change the
outcome of the election but also because the information necessary to cast an informed vote is not read-
ily available’. See also F Easterbrook and D Fischel, ‘Voting in Corporate Law,’ (1983) 26 Journal of Law
& Economics 395, 402 (on the relationship between collective action issues and shareholder passivity).
52 Hendry et al, ‘Owners or Traders? (n 17).
53 Ibid, 1120.
54 On the relationship between directors’ remuneration and corporate performance, see
M Jensen and K Murphy, ‘Performance Pay and Top-Management Incentives,‘ (1990) 98(2) The Journal
of Political Economy 225. On the relationship between executive remuneration and executive
risk-taking, see L Bebchuk, A Cohen and H Spamann, ‘The Wages of Failure: Executive
Compensation at Bear Stearns and Lehman 2000–2008,’ (2010) 27 Yale Journal on Regulation 257.
engage the market for corporate control, leaving the corporation at risk of a
takeover, which generally puts the incumbent board’s appointments at risk.55
It is not surprising therefore that this relationship between financial incen-
tives and short-termism was found to be prevalent by the Cox Report, which
concluded that management behaviour ‘is focussed on short-term delivery, rein-
forced with remuneration schemes with powerful incentives based on short-term
results’.56 Operationally, this short-termism is also fuelled by the rigorous finan-
cial reporting requirements that a listed company is under. That said, the board
is motivated not only by personal incentives that are tied to market performance
but an understanding that ‘just as managers’ compensation suffers if they miss
their internal targets, CEOs and CFOs know that the capital markets will punish
the entire firm if they miss analysts’ forecasts’.57 Thus powerful, and pervasive,
incentives exist for directors to focus on managing the market, rather than the
long-term value of the corporation, such that ‘earnings management’,58 often
with a focus on short-term results is ‘considered an integral part of every top
manager’s job’.59
B. Distorting Fiduciary Duties; the Changing Status of the

‘Company’ Beneficiary
As we have seen throughout this book, multiple aspects of a corporation’s

normative environment (be it the perceived ideology of the market, incentive
structures or shareholder behaviour) have served to narrow the corporate objec-
tive. It is perhaps not surprising therefore that the empirical work discussed
above showed how managerial intention is increasingly focussed on the singular
needs (or demands) of an amorphous market, interpreted to be the unwavering
and exclusive pursuit of short-term profit maximisation. In this way, a director’s
fiduciary duty to ‘promote the success of the company’60 has become similarly
distorted neglecting, as we shall see, the discretion it vests in directors to consider
a range of interests when discharging their managerial authority.61
55 H Manne, ‘Mergers and the Market for Corporate Control,’ (1965) 73(2) Journal of Political
Economy 110, 113 (see also the description of ‘earnings per share’ based bonus payments in practice
at 266–267).
56 Cox Report (n 40), 23. Job security and reputation are also closely aligned with achieving finan-
cial targets, see J Graham, C Harvey and S Rajgopal, ‘The Economic Implications of Corporate
Financial Reporting,’ (2005) 40 Journal of Accounting and Economics 3, 12.
57 MC Jensen, ‘Agency Costs of Overvalued Equity,’ (2005) 34 Financial Management 5, 7.
58 That is, undertaking actions that ‘smooth’ the financial reports of the company thereby
meeting the expectations of investors. Examples include deferring losses/costs to subsequent report-
ing periods. See Moore and Walker-Arnott, ‘A Fresh Look’ (n 43), 11–12; Dallas, ‘Short-Termism’
(n 50), 278–281.
59 Jensen, ‘Agency Costs’ (n 57), 8.
61 Werner, ‘Management’ (n 29), 389. See the empirical study of David Collison, Stuart Cross,
John Ferguson, David Power and Lorna Stevenson in which the majority of corporate respondents
A director’s duty to promote the success of the company is, as Chapter 3

showed, primarily a duty to increase the long-term value of the corporation for
the benefit of its members (subject to shareholder direction to the contrary).62
This is, unequivocally, a duty to maximise shareholder ‘value’, with the
Companies Act 2006 eschewing a broader pluralist or stakeholder approach.
Nonetheless, it would be wrong to suggest that this precludes directors from
exercising their authority in a way that considers other interests.63 Indeed, as
company law scholars will know, when the Companies Act 2006 codified direc-
tors’ duties it introduced the concept of ‘enlightened shareholder value’. That is,
in discharging this duty directors are required to have ‘regard’ to a non-exclusive
and broad range of stakeholder interests (such as the impact of any decision on
corporate reputation as well as employee and community interests).64
The discretion (indeed duty) to have regard to stakeholder interests (albeit
with no corresponding obligation to take action) is bolstered by judicial deter-
minations that have made it consistently clear that the court will not, in the
absence of mala fides, interfere with directors’ decision making.65 Moreover, it
is important to recall that in the context of this obligation, directors owe their
fiduciary duties to the company,66 which is generally accepted to mean the bene-
fit of all shareholders67 both present and future.68 Thus, contrary to managerial
perception, there is significant scope for the board to take into account a wide
range of factors when setting corporate strategy. It would therefore appear to be
other factors within the corporation’s normative environment (notably percep-
tions, rather than the realities, of company law and market ideology combined
with commercial and market pressures), and not the Act itself that have been the
catalyst for this narrowing of the corporate objective.
This transition of directors’ attention from their legal duty to increase
the long-term value of the company, to the market demands of short-term
earnings per share, has a powerful practical impact. A survey of over 400 US
finance executives found that more than 80 per cent would reduce discretionary
spending to meet targets whilst over 50 per cent would delay starting a new
project, even at a cost to the company, if this would meet earnings expectations.69
felt that Companies Act 2006, s 172 required ‘maximising share price in the short term’. Associa-
tion of Chartered Accountants, Shareholder Primacy in UK Corporate Law: An Exploration of the
Rationale and Evidence, (Research Report 125), 8.
62 Lord Goldsmith, Lords Grand Committee, 6 February 2006, column 255, cited in Ministerial
Statements, Companies Act 2006, Duties of Company Directors, June 2007, 7. https://webarchive.
nationalarchives.gov.uk/20090609024504/http://www.berr.gov.uk/files/file40139.pdf (accessed
9 August 2020).
63 People’s Department Stores v Wise [2004] SCC 68.
64 Companies Act 2006, s 172(1) (a–f).
65 Carlen v Drury (1812) 1 Ves & B 154; Re Smith & Fawcett [1942] Ch 304; Regentcrest plc
v Cohen [2001] BCC 494.

66 Companies Act 2006, s 170; Percival v Wright [1902] 2 Ch 421.
67 Greenhalgh v Arderne Cinemas Ltd and Others [1951] Ch 286, 291.
68 Gaiman v National Association for Mental Health [1971] Ch 317, 330.
69 Dallas, ‘Short-Termism’ (n 50), 280.
Seen in this light, the decision to adopt a wealth maximising, but creative,
approach to compliance is unfortunately unsurprising. An approach embodied
in the, albeit inaccurate, claim that ‘there was probably some law against’70 not
adopting a creative standard of tax compliance.
III. THE CORPORATE FIDUCIARY LADDER
The dominance of a profit maximisation norm within the corporate community

is familiar to many. However, when matters such as this are discussed in the
abstract many of us would like to believe that, notwithstanding psychological
and sociological debates as to the influence of norms (Chapters 3 and 4), the
power of economic incentives (Chapter 4), and the pressure of perceived market
ideology (Chapter 5), that ultimately if we were faced with an ethical challenge
at work that we would do the right thing. That those officers responsible for
corporate scandals are somehow just bad apples (incidentally this would make
for an awful lot of bad apples). That we would have the perspective and presence
to resist those pressures and stand up for our values. Yet, I cannot guarantee that
we would. In fact, to a large degree I would wager that we would not. People,
‘good’ people, do not and have not, sometimes in the most egregious of situa-
tions. The question that this section considers is why.
Chapter 4 explained how the cognitive dissonance that arises when acting
in conflict with our personal norms triggers a psychological reaction that,
conversely, causes us to seek to legitimise the action in question. This section
considers the prior question of why an individual is able to act in that way in
the first place. Specifically, it considers how the architecture of the corporation
facilitates a decision-making hierarchy, which I term the ‘fiduciary ladder’, that
enables the profit-maximising interests of the ‘market’ to displace the personal
norms of individuals working within the corporation. In doing so, it shows how
the architecture of the firm puts an individual in an authority hierarchy where
they perceive the scope of their decision making to be reduced to one of mere
obedience, insulating them from the repercussions of, and responsibility for,
their actions.
A. The Structure of the Fiduciary Ladder
Ronald Coase recognised the hierarchy of power that exists within a corpora-
tion in his seminal work The Nature of the Firm.71 In his article, Coase defines

71 (1937) 4 Economica 386.
The Corporate Fiduciary Ladder 159
the firm as a centralised system of management, governed by an entrepreneur-

coordinator (in a modern corporation, the board of directors) who directs a
subordinate workforce.72 In this regard, Coase drew a distinction between the
internal structure of the firm, characterised by a linear and centralised author-
ity, with that of the wider market that it operates within (which as we saw in
Chapter 5 operates as a polycentric and spontaneous order, utilising the price
system to support relationships of barter and exchange).73
In adopting a ‘real world’74 analysis of the firm, Coase described the inher-
ently subservient role of firm employees. His observation was an important one
at the time, challenging the perception that, much like the market itself, the rela-
tionship between employer and employee was one of parity, based on supply and
demand. In contrast, Coase recognised that the essence of a relationship within
a corporation was one of control, not exchange.75 In doing so, he argued that
a defining characteristic of the firm was that the central entrepreneur (board)
could direct the employees within it, subject only to broad limitations detailed
in the employment contract; that a workman does not change departments
because of relative prices, he transfers ‘because he is ordered to do so’.76
In his analysis, Coase had recognised the internal command and control
structure that the modern corporation operates on (and that supports the fidu-
ciary ladder detailed below). That is, Anglo-American employment relations are
premised on a historical relationship ‘of service’.77 The so-called (and archai-
cally termed) ‘master and servant’ roots of the British employment relationship
are pervasive and profound, notwithstanding their repeal in 1875.78 They inform
both the express and implied duties of the employment contract, granting to the
employer full direction and control over the employee.79 Moreover, this founda-
tion underpins the psychological contract80 between the parties and drives the
72 This can be contrasted with the origins of the firm itself, being a vehicle designed to reduce
the transaction costs that would otherwise arise each time a particular market input was required.
Thus, it has been suggested that a corporation would more accurately be described as a nexus for
contracts, rather than the more popular nexus of contracts. See J Armour et al (eds) The Anatomy
of Corporate Law: A Comparative and Functional Approach 2nd edn (Oxford University Press,
2009), 6.
73 RH Coase, ‘The Nature of the Firm,’ (1937) 16(4) Economica 386, 387.
74 ibid.
75 ibid, 393.
76 ibid, 387.
77 This can be contrasted with the contractual legal origins of employment relationships in
continental Europe, on which, see S Deakin, ‘Legal Origin, Juridical Form and Industrialisation in
Historical Perspective: The Case of the Employment Contract and the Joint-Stock Company,’ (2009)
7 Socio-Economic Review 35.
78 For an analysis of modern authorities on the ‘master and servant’ nature of employment rela-
tionships, see Geys v Société Générale, London Branch [2012] UKSC 63.
79 M Moore, Corporate Governance in the Shadow of the State (Hart Publishing, 2013) 47.
80 That is, the employee’s perception as to their complete obligations to their employer. See
D Rousseau, ‘The “Problem” of the Psychological Contract Considered,’ (1998) 19 Journal of

Organizational Behaviour 665; S Middlemiss, ‘The Psychological Contract and Implied Contrac-
tual Terms: Synchronous or Asynchronous Models?’ (2011) International Journal of Law and
Management 32.
perception that the ‘intent of employment law seems to be to make the employee
as much as possible an extension of the employer’.81
Critics of this analysis (echoing the sentiments that Coase had refuted in the
Nature of the Firm) suggest that employees, like other contracting parties, may
simply withdraw their services; that the worst that an employer can do is litigate
or terminate the employee’s contract.82 However, this is where the importance of
Coase’s ‘real world’ model of the employment relationship arises. Regardless
of technical or legal possibilities, in reality, there is a significant gulf between
the contractual entitlements of the employee/employer relationship and the
reality of the means available to employees. In particular, the entrenchment of
employees both within their employer firm and their industry more generally,
significantly restricts employee mobility. Thus, the employment relationship is
one of high dependency and, as a result, employees have relatively limited career
mobility (likely needing to stay in situ until they secure alternative employment).
As a result, a hierarchical relationship of command and control style authority
exists within the firm, which whilst one of its core characteristics, has signifi-
cant implications for personal responsibility and the ability (or willingness) to
challenge managerial decisions or directions.
A key objective of this hierarchy is that it facilitates what I term the
‘corporate fiduciary ladder’. That is, an internal decision-making ladder (save
for the top rung, which is represented by external shareholders and that is, as
we saw above, now largely supplanted by the amorphous ‘market’). This ladder
operates to effectively push the now artificially narrowed corporate objective of
wealth maximisation, represented by the even narrower metric of earnings per
share, down and through all levels of the corporation. The importance of the
structure of this ladder is the relationship of authority that exists between each
rung, the consequences of which are considered in the next section. However,
to help frame that discussion, it is helpful to first consider the structure of the
ladder in more detail.
A legal entity necessarily has to operate through agents83 and for a large
listed corporation this entails a vast network of individuals, the most senior
of which are the directors; occupying the Coasean position of co-ordinator
entrepreneur.84 As the previous section discussed, directors are bound by their
fiduciary duty to promote the success of the company (a duty that is applied in
81 S Masten, ‘A Legal Basis for the Firm,’ (1988) 4 (1) Journal of Law, Economics and
Organization 181, 188.

82 A Alchian and H Demsetz, ‘Production, Information Costs, and Economic Organization,’
(1972) 63 American Economic Review 777, 777.

83 Aberdeen Railway Co v Blaikie Bros (1954) 1 Macq 461, 471.
84 The modern corporation operates through a complex network of business units, specialisms
and divisions. This chapter considers the normative impact of operating across a corporate
hierarchy more generally and therefore does not engage in a detailed organisational analysis of
managing corporate conglomerates. On this, see J Bower, ‘Planning Within the Firm,’ (1970) 60(2)
The A merican Economic Review 186.
practice to mean the interests of the market), which includes an uncompromising

obligation of loyalty to their beneficiary. In discharging this duty, the board has
primary responsibility for setting corporate strategy,85 which given the distor-
tion of directors’ duties from ‘company’ to ‘market’ interests (often backed by
concomitant personal incentives), is generally set to promote a narrow profit
maximising focus. Thus, the top rung of the ladder is the shareholder body,
represented in most cases by the proxy of, effectively, earnings per share. The
second rung, immediately below it, is the board of directors who set corporate
strategy to meet that singular market objective.
To implement corporate strategy, the board sets broad objectives for senior
management to achieve, although commonly leaves the operational decisions of
how to actually achieve these objectives to the management teams to decide.86
Therefore, senior executives (who are the third rung of the ladder) have the
autonomy to operate as decentralised centres of management (an autonomy
that is important when considering responsibility in the next section).87 In turn,
the senior management teams provide their employees (the fourth rung and
beyond) with more detailed instructions on the work that is needed to meet
the overall corporate strategy. Thus, decision-making within the corporation is
exercised via a hierarchy, starting with the interests of the market and filtering
through the internal levels of the corporation.
This hierarchical structure creates an edifice of fiduciary obligations, a
corporate ‘fiduciary ladder’, supported by the internal, contractual, command
and control structure.88 In this way, directors’ duties (driven by market norms)
become verticalised and are embedded throughout the corporation; that is, from
the board to managers and managers to employees. Action is undertaken by
each rung of the ladder simply because the rung above them directed them to
do so (underpinned by an employment relationship, which is similarly based on
principles of command and control). Thus, the broad fiduciary duty that binds
directors (and has, arguably, been distorted by them) extends down a hierarchi-
cal ladder premised on the internal control structure first identified by Coase.
The beneficiary of the ladder, which effectively dictates the actions of the firm,
is now the faceless ‘market’ interested in one outcome: earnings per share.89
85 Article3 Model Articles (n 15).

86 A fiduciary is not able to delegate his responsibility, save with express authority. Directors
have such authority pursuant to Article 5 Model Articles (n 15). See also: Ex parte Belchier (1754)
27 ER 144; Dovey and the Metropolitan Bank (of England and Wales) v John Cory [1901] AC 477.
87 Werner, ‘Management’ (n 29), 399.
88 Herbert Simon describes a hierarchy as ‘a system that is composed of interrelated subsystems,
each of the latter being, in turn, hierarchic in structure until we reach some lowest level of elemen-
tary subsystem’. See H Simon, ‘The Architecture of Complexity,’ (1962) 106(6) Proceedings of the
American Philosophical Society 467, 468.
89 Note that organisations that adopt a more horizontal or decentralised structure still act, ultimately,
within the parameters of an authority structure. Further, the autonomy that such h orizontal,
organisational models grant tends to relate to decisions concerning product or service design
(and delivery) rather than cultural, compliance or fiscal policies.
Notwithstanding the profit focus of the ultimate corporate beneficiary, one

challenge still remains in attributing creative compliance decisions soley to this
dominant metric of success. Namely, that the fiduciary ladder is nevertheless
comprised of individuals. Moreover, individuals who do not seem particularly
predisposed to unethical conduct in the personal lives. On this basis, it would be
reasonable to expect that personal norms would prevail in the event of conflict
with those of the corporation. Yet, regrettably, numerous corporate scandals
exist to demonstrate that this is not the case.90 The next section explores the
psychological impact of the fiduciary ladder to help explain why we continue
to witness these repeated corporate scandals and why personal norms are
seemingly perpetually subsumed to those of the corporation.
B. The Psychological Consequences of the Fiduciary Ladder
The importance of the fiduciary ladder, predicated on relationships of authority

and obedience, is profound. When acting as a constituent part of an author-
ity relationship, a person’s identity (and therefore concept of responsibility)
can, as we shall see, shift significantly. As they are now occupying a position
of obedience, an individual loses their sense of autonomy, effectively becoming
task focussed and limiting their sense of responsibility to simply performing
the task requested of them. In this way, the relationship of authority ‘obviates
the necessity of making judgments or choices’91 such that ‘normal moral prin-
ciples become inoperative’.92 In particular, a person no longer feels the usual
sense of responsibility to evaluate the task before them, simply to implement
it. The consequences of authority relationships are sobering, as evidenced by
Milgram’s famous ‘shock study’, which demonstrated that ‘behaviour that is
unthinkable in an individual who is acting on his own may be executed without
hesitation when carried out under orders’.93
In brief, Stanley Milgram’s study was structured to identify the point at
which people would defy authority given a clear moral imperative. The experi-
ment involved three participants: the subject (referred to as the ‘teacher’ and who
was the only genuinely naive participant in the research), the learner (an actor)
and the administrator/researcher (also an actor). The subject had responded
to an advert asking for volunteers for a study on memory. On the day of the
90 See, eg, the decision of Manville executives to conceal the risk of asbestosis from their employ-
ees, notwithstanding the fatal consequences. On which, see: R Sims, ‘The Challenge of Ethical
Behaviour in Organizations,’ (1992) 99(7) Journal of Business Ethics 505, 506; M Weingarten,
‘Asbestos Litigation from an American Perspective,’ (2009) 4 Journal of Personal Injury Law 253.
91 Kelman and Hamilton, Crimes of Obedience (n 11), 16.
92 ibid.
93 Z Bauman, Modernity and the Holocaust (Polity Press, 1989), 154. Bauman is, of course,
writing in a very different context. However, his insights into the application of the findings of
the Milgram experiment are highly instructive and applicable to individual behaviour within an
organisational setting.
experiment the subject and the learner were met by the researcher (who wore
a white laboratory coat as a symbol of authority) and asked to draw lots to
determine their roles in the experiment. This was, of course, staged so that the
genuine subject would always play the role of the teacher.
Once the roles had been allocated the learner and teacher (subject) were taken
into a second room where the learner was strapped into what was described as
(and physically resembled) an electric shock machine. This was done in full sight
of the subject. The subject was then taken to a different room, from which the
learner was no longer visible, and instructed to ask the learner a series of ques-
tions via an intercom system. Every time the learner got a question wrong the
subject was asked by the researcher to inflict one in a series of electric shocks
of increasing severity. The shocks (which of course were not real) were admin-
istered by the subject engaging a switch from a long row of switches on the
dashboard in front of them. Each switch represented a different voltage and the
switches were clearly labelled to show that they increased to a potentially fatal
voltage of 450 volts. Each time a shock was given the learner would respond with
audible and increasing cries of pain.94 Nevertheless, on the basis of a person in
a white coat instructing them to do so, 65 per cent of participants continued to
inflict the strongest shock of 450 volts.95
Milgram’s work provided sobering evidence of the influence of authority on
a person’s behaviour. Provided an authority figure is seen to be legitimate,96 a
majority of people were willing to comply with their demands, regardless of their
personal norms or the clear harm that they believed was being caused.97 What was
striking about Milgram’s work was the low bar to establish this authority, simply
a white coat in a laboratory setting. In contrast, within the firm, this authority is
established in multiple ways including the voluntary acquiescence by an individual
to the chain of command,98 the express terms of the employment relationship, the
incentive structures that reward adherence to the authority and the social norms
that endorse the roles and hierarchies within the firm structure.
94 See: S Milgram, Obedience to Authority: An Experimental View, (first published 1974, rev edn,
Pinter & Martin, 2010), a detailed explanation of the experiment is at 9–10.

95 S Milgram ‘Behavioral Study of Obedience,’ (1963) 67(4) The Journal of Abnormal and Social
Psychology 371, 376.

96 The legitimacy of authority is important (ibid 140). When Milgram varied the experiments
so that another apparent member of the public (who was in fact an actor) instructed the subject
to administer the shock every participant refused, see Milgram, Obedience to Authority (n 94),
106. Within a corporate structure, the legitimacy of authority is clear and supported by regulatory
norms. Moreover, the corporate authority’s instructions adhere to a legitimate overarching ideol-
ogy of profit maximisation, which is also reflected in corporate regulation. On the importance of a
justifying ideology, see Milgram, Obedience to Authority (n 94), 143.
97 Milgram, Obedience to Authority (n 94), 168. In coming to this conclusion, Milgram rebuked
suggestions that his experiment simply facilitated the realisation of people’s inner (suppressed)
desire to engage in violent conduct, the so-called ‘aggression theory’, see Milgram, Obedience to
Authority (n 94), 166–178. See also Kelman and Hamilton, Crimes of Obedience (n 11), 16.
98 This voluntary participation is psychologically important as it creates a ‘sense of commitment
and obligation which will subsequently play a part in binding the subject to his role’. Milgram,
Obedience to Authority (n 94), 142.
Thus, returning to the fiduciary ladder, the consequences of Milgram’s find-

ing are clear. Once a person steps into a corporate role, regardless of the rung of
the ladder that they occupy, they assume an identity (to different degrees but an
identity nonetheless) of obedience. This position of (relative) subservience to an
authority then profoundly, even if subconsciously, reframes their sense of obliga-
tion. There is no longer a genuine sense of personal responsibility to evaluate
the consequences of their actions, rather the scope of their duty is now one of
obedience and a focus on ‘how smartly and effectively the actor fulfils whatever
he has been told to fulfil by his superiors’.99
In this way, individuals within the fiduciary ladder occupy what Milgram
described as an ‘agentic state’,100 where they effectively become an ‘instrument
for another person’s wishes’.101 In this state an individual, unburdened by moral
responsibility, ‘becomes something different from his former self, with new prop-
erties not easily traced to his usual personality’.102 That is, they are able to adopt
and implement the authority’s norms because they ‘do not see themselves as
personally responsible for the consequences of their actions’103 acting as ‘merely
extensions of the authority’.104 In sum, when occupying an agentic state an indi-
vidual feels ‘responsible to the authority directing him but feels no responsibility
for the content of the actions that the authority prescribes’.105 Regrettably, as we
have seen countless times, this comprehensive outsourcing of moral responsibil-
ity ‘is the most far-reaching consequence of submission to authority’,106 leading
Bauman to conclude that ‘collective perpetuation of cruel acts is made all the
easier by the fact that responsibility is essentially “unpinnable”’.107
Bauman’s hypothesis is supported to a large degree by Milgram’s findings.
When reading the transcripts of the initial tests (Milgram’s research has been
repeated many times over the years, with largely similar outcomes) the question
of personal responsibility was determinative of the subject’s actions. During
the electric shock experiment, individuals who questioned the morality of the
request were easily satiated by the researcher’s response that ‘no permanent harm
would be caused’. Having been reassured by the authority figure, there were no
follow up questions (for example concerning the affliction of pain more gener-
ally). Moreover, the acceptance of personal responsibility (or otherwise) was
determinative as to whether an individual ‘disobeyed’ the researcher by refusing
to continue with the experiment. Generally, ‘disobedient’ subjects accepted full,
personal, responsibility and refused to assign any responsibility to the learner
99 Bauman, Modernity and the Holocaust (n 93), 159.

100 ibid, 162; and Milgram, Obedience to Authority (n 94), 134–136.
101 ibid, xviii.
102 Milgram, Obedience to Authority (n 94), 145.
103 Kelman and Hamilton, Crimes of Obedience (n11), 16.
104 ibid.
106 ibid, 10.
or the researcher.108 This can be contrasted with the ‘obedient’ subjects who
continued the experiment until the end, including one who, when questioning
the ethics of continuing, asked the researcher whether he ‘accepted all respon-
sibility’. On being reassured that this was the case the subject proceeded to
administer the maximum (and potentially lethal) amount of volts.109
Milgram’s work focussed on individuals, where there was the potential for
personal responsibility and a degree of proximity between the subject and the
learner on whom they thought they were inflicting pain. Nonetheless, even
under those conditions the imposition of a temporary authority (and obedience)
relationship was sufficient to have a striking impact on personal behaviour and
the willingness to uncritically follow directions. In the corporate community,
this risk of obeying instructions ‘without question even though the behaviour
they engage in may entail great personal sacrifice or great harm to others’110 is
exacerbated, as the architecture of the firm is such that it creates a social, legal
and cognitive distance between the individual and the subject of any externali-
ties or harm that their conduct might cause.111 This separation helps to insulate
an individual from the impact of their actions, granting them the comfort ‘of
unnoticing the causal link between his action and the victim’s suffering’.112
Perhaps less obviously, this distancing between a subject and the conse-
quences of their actions has a second important consequence. Namely it allows
an individual to have greater alignment with, and loyalty to, the authority
figure above them in the fiduciary ladder. Thus, the hierarchy leads to ‘an ever-
more profound and unbridgeable chasm between the actors (i.e. members of
the organisation) and the objects of action’.113 It is a sombre warning that this
chasm (and alignment) arose in the extreme conditions of Milgrim’s experi-
ment, where the authority relationship was temporary (no subject was present
for more than one hour) and the consequences of the individual’s actions severe.
Translated into a corporate setting, where authority relationships develop over
years, backed by social and financial sanctions that generally reward obedience
over disobedience,114 we start to see the profound impact that these psychological
phenomena can have.
108 See the transcripts of the experiment involving ‘Mr Renseller’ as the subject, Milgram,
Obedience to Authority (n 94), 52 and Gretchen Brandt (at 87), both of whom accepted personal
responsibility for their conduct and both of whom refused to carry on.
109 See Fred Prozi’s transcripts: Milgram, Obedience to Authority (n 94), 77 and those of an
unnamed subject at 162. The majority of ‘defiant’ subjects considered themselves responsible for
their conduct whereas for ‘obedient’ subjects the majority considered the researcher to be responsi-
ble: see Milgram, Obedience to Authority (n 94), 205.
110 Kelman and Hamilton, Crimes of Obedience (n 11), 16.
111 Milgram, Obedience to Authority (n 94), 37–41. Milgram tested this theory by undertaking
a series of modified experiments that varied the proximity between the subject and the ‘victim’.
The original research placed the subject and the victim in different rooms (remote-victim) whereas
variations had them, inter alia, in the same room (proximity) and also required the subject to force
the hand of the victim onto the shock plate (touch-proximity). ibid 33–35.
113 ibid, 156.
114 On the role of rewards more generally, see Milgram, Obedience to Authority (n 94), 139–140.
One final point regarding the operation of the fiduciary ladder should be
made clear. Namely that Milgram’s findings apply, quite worryingly, across all
rungs of the ladder.115 When we discuss authority relationships in this section,
we are not simply concerned with the most junior employees outsourcing
responsibility to their immediate superior. Rather, each rung of the ladder can
‘see themselves as having no choice [but to obey] as long as they accept the legiti-
macy of the orders and of the authorities who give them’,116 including when
those orders are given, implicitly if not expressly, by the market. It is thus that we
see a multinational organisation make the decision to destroy caves first occu-
pied by Aboriginal people 43,000 years ago, all in the pursuit of profit.117
C. Responding to the Fiduciary Ladder
Understanding the behavioural impact of the corporate structure in this way

provides both an ethical imperative for corporate reform together with a deeper
understanding of the changes needed if we are to respond to the problem of
creative compliance. The GAAR seeks to manage corporate compliance by
simply focussing on restricting the compliance strategy itself. However, as this
chapter (together with Chapters 3 and 4) has sought to demonstrate, corporate
compliance strategies are borne from the norms, and unintended protections,
which arise from the broader corporate regulatory framework. Thus, if we are
to achieve any substantive reform in this field, we need to challenge the deeper
causes of the problem.
Milgram drew an analogy between the agentic state and being asleep.118 That
is, an interruption in the authority relationship can reverse the insulation offered
by the hierarchy (as it can wake someone from sleep). Within his experiments
Milgram identified that this interruption can come from, inter alia, peer dissent,
plurality of instructions and distancing the source of authority. Earlier parts of
the book have shown that the most effective ‘interruption’ for responding to the
compliance crisis is likely to be a change in the corporation’s normative environ-
ment. That by changing the social norms that legitimise creative compliance
115 Of note is that this psychological insulation also involves out-sourcing down the ladder. For
example, directors can rely on the fact that specific management decisions are made by the decen-
tralised senior management teams (to whom directors delegate responsibility). J Coffee, ‘“No Soul
to Damn: no Body to Kick”: An Unscandalized Inquiry into the Problem of Corporate Punishment,’
(1980) 79 Michigan Law Review 386, 398. For example, the management of GE, when facing price
fixing charges, pointed to a directive that its executives were required to sign expressly forbidding
violations of anti-trust rules. However, the targets and incentives set by management created an
environment where such collusion was, at best, highly likely. See Bower, ‘Planning Within the Firm’
(n 84), 193.
116 Kelman and Hamilton, Crimes of Obedience (n 11) 16.
117 Sydney, ‘Rio Blew up Aboriginal Caves’ (n 4).
Contrasting Other Actors 167
and, as we have seen in this chapter, the distortion of the corporate objective, we
might then be able to embed more targeted policies that are designed to engage
some (or all) of Milgram’s recommendations. We return to what some of these
policies and approaches might be in the following, and final, chapter.
IV. CONTRASTING OTHER ACTORS
This chapter suggests that public corporations are uniquely predisposed to adopt
creative compliance strategies on the basis that the structure of their decision-
making mechanisms insulates the corporation and their employees from
responsibility. This section responds to one potential objection to this theory,
namely that these corporations are no different to other significant economic
actors or organisations and should not therefore be held to a higher compliance
standard than they are. In particular, it considers the position of high net worth
individuals, private companies and partnerships.
In contrasting these other actors, the key point of distinction is that none of
them are protected by (or subject to) the operation of the fiduciary ladder. That
is, in all cases there is a human decision-maker to ultimately take responsibil-
ity for the act or omission complained of. In the case of an individual acting
in their personal capacity they are, of course, easily identifiable and ordinarily
responsible for their decisions. In the event that they transgress moral norms or
breach regulation, the individual is generally held to be culpable and subject to
both formal and social sanction (or censure).
That said, the case of the individual entrepreneur or high net worth individual
acting in a purely personal capacity is rare. The very necessity of the corporation
arises as its objects ‘are beyond the reach of the members as individuals’,119 and
thus individual capitalists ordinarily act through a corporate vehicle. As such,
creative compliance rarely involves an individual acting qua individual. Moreover,
when acting in a personal capacity (without the protection of the corporation) the
fiduciary latter does not exist as the individual concerned cannot use the corpo-
rate architecture, or decision-making hierarchy, to shield themselves from public
or moral culpability. However, a similar argument applies to private or closely
held companies, which are often ‘owner-managed’ meaning that the shareholder
and director are usually the same person. As a consequence, the shareholders are
legally but not economically emancipated from the corporation. Again, notwith-
standing the insertion of a separate legal entity, this ‘human’ presence (and
alignment) has a dramatic impact on the risk profile of the company. Moreover,
it is critical when considering the sense of individual responsibility for transcend-
ing social norms; the ability to outsource moral responsibility for corporate
decisions simply does not exist.
119 A Chayes, ‘The Modern Corporation and the Rule of Law,’ in E Mason (ed) The Corporation in
Modern Society (Harvard University Press, 1961), 34.

The difference between corporations and partnerships is more nuanced

although premised on the same distinction, namely that the decision-makers
within the partnership remain visible from a reputational perspective. Histori-
cally, only general partnerships were available,120 which meant that all partners
were jointly and severally liable for the obligations of the firm.121 This personal
liability precluded the operation of the fiduciary ladder as ownership and
control remained unified and ensured that partners’ personal risk appetites were
reflected within the decision-making process. The high visibility of individual
partners, both in terms of risk and reputation meant that the firm’s decision-
making process was nevertheless imbued with the personal traits that are often
missing from corporate decision-making. The personal nature of the partner-
ship is powerfully demonstrated by the fact that traditionally the partnership
could be dissolved on notice by one partner122 or upon the exit of a partner
through death or bankruptcy.123
As partnerships developed, they started to emulate the economically desira-
ble characteristics of the corporation, culminating in the creation of the limited
liability partnership (‘LLP’).124 An LLP has separate legal personality125 and the
members’ liability is limited to the extent set out in the LLP deed entered into
between them.126 Section I of this chapter demonstrated the importance of sepa-
rate personality and limited liability on the creation of the corporate fiduciary
ladder and thus it would be a natural conclusion to suggest that the LLP shares
this decision making structure. However, there is one important difference: LLPs
rarely have the concomitant separation of ownership and control. The part-
ners of the LLP are invariably the managers of the LLP (for example, large law
firms).127 Thus the fiduciary ladder does not exist to shield the owner/manag-
ers from reputational damage, either within the firm or from external scrutiny.
In this sense the historical development of partnership principles continues to
influence the use and operation of partnerships and the attempted emulation of
the corporate form is insufficient to define the LLP within the same class as a
corporation.
120 Partnership Act 1890.

121 ibid, s 9.
122 ibid, s 32.
123 ibid, s 33.
124 Limited Liability Partnerships Act 2000.
125 ibid, s 1.
126 ibid, s 5.
127 The traditional requirement that law firms operate as partnerships are premised on the
exact notions of the fiduciary ladder that exists within large corporations. That is, by operating
through a partnership there was an identifiable ownership structure of individuals who were bound
by professional ethics (and regulatory oversight). A discussion of this principle can be found in:
Sir D Clementi, Review of the Regulatory Framework for Legal Services in England and Wales: Final
Report, (December 2004), 113.
Conclusion 169
V. CONCLUSION
This chapter has sought to demonstrate how understanding the existence of

the corporate fiduciary ladder can shed light on why the corporate compliance
crisis has arisen and, moreover, why behavioural change in corporations is so
difficult to achieve. The answer, in high-level terms, is that it helps to explain
why it is that the corporate person lacks the substantive attributes that we expect
of natural ‘personhood’ and why the ethics of individuals within the firm are so
readily displaced.
By understanding the influence of corporate architecture in this way, we are
better positioned to structure a holistic approach to creative compliance; one
that addresses the causes of this behaviour, not simply its effects. Single-issue
regulation that responds to specific concerns will, no doubt, have some impact
on current compliance scandals. However, creative compliance is, by its very
nature, a disregard for the normative value of regulation; it simply views compli-
ance as a pricing exercise. Thus, if we are to achieve any substantive reform
in this field, we need to challenge the deeper causes of the problem. As this
chapter (together with Chapters 3 and 4) have sought to demonstrate, one of
those causes is the powerful normative and psychological impact of corporate
law and architecture, which coalesce to both legitimise creative compliance and
insulate corporate decision-makers from the reputational consequences of their
actions. The result of such impunity is that the dominant shareholder wealth
maximising norm, which also informs personal benefits is able, ultimately, to
determine corporate strategy and shape individual actions in deeply profound and
powerful ways.
170
Part IV
Reform
172
8
It is Called Capitalism:
Towards a New Market Integrity
The conception of freedom under the law that is the chief concern of this book rests
on the contention that when we obey laws, in the sense of general abstract rules laid
down irrespective of their application to us, we are not subject to another man’s will
and are therefore free.1
Friedrich Hayek
Liberty not only means that the individual has both the opportunity and the burden
of choice; it also means that he must bear the consequences of his actions and will
receive praise or blame for them. Liberty and responsibility are inseparable.2
Friedrich Hayek
T
his book is about corporate compliance. But, really, it is about people
and rules (and how they interact). It is about how the rules of capitalism
have been subtly, but importantly, misunderstood and how ‘artificial’
rules can have a powerful impact on personal rules of behaviour, values and
ethics. In short, it is about how people are, in fact, (on the whole) good and
how prosperity (on the whole) does not have to be bad. These are comforting
observations to make but they do then raise slightly less comfortable questions,
namely if this is the case (which I sincerely believe it is) how is it that we live
in a society where these messages seem to be lost, if not entirely distorted?
Moreover, what can we (and should we) do about it? Reassuringly, as Chapter 3
demonstrated, as challenging as these questions are, their current answers are
by no means inevitable and in this final chapter I reflect upon how we might
consider reform moving forward.
By bringing together insights from company law, sociology and social
psychology the book has sought to provide a new perspective on the question of
‘what next?’ Corporate scandals have persisted for too long and, as the recent Rio
Tinto example in Chapter 7 demonstrates, continue to do so. The repeated and,
by now too familiar, cycle of corporate scandal, followed by public outcry, which
is met with a targeted regulatory response only to be followed by another scandal
has proven to be insufficient to address the problem of corporate c ompliance
1 FA Hayek, The Constitution of Liberty (first published 1960, Routledge Classics, 2006), 134.
2 ibid, 63.
174 It is Called Capitalism: Towards a New Market Integrity
(and indeed corporate decision making more generally), highlighting the press-
ing need for a change in approach. One objective of this book is to suggest that
this change should be predicated on the fact that these scandals should not, and
can no longer, be dismissed simply as the pursuit of profit authorised by indi-
vidual ‘bad apples’. Whilst in some instances that might be the case, there are
too many examples of otherwise law-abiding and seemingly ‘ethical’ individuals
becoming embroiled in corporate wrongdoing to suggest that this somewhat
binary explanation is accurate. Rather, what this book has sought to demon-
strate is that the question of corporate decision making is the product of a
complex network of relationships and influences (of which profit maximisation
is undeniably a significant part) that must be understood if we are to achieve
meaningful behavioural change. This final chapter brings those observations
together, reflecting on their implications for both the individual and the state,
whilst offering areas of focus for future reform.
In drawing this book to a close, Section I reflects on the two broad themes
of the earlier chapters. First, it returns to the relationship between compli-
ance and the social orders that civil society depends upon. By appreciating
that responsible compliance and profit maximisation enjoy a symbiotic,
rather than antithetical relationship, we can start to build the foundations
from which to structure reform. As noted earlier in the book, this is not to say
that capitalist market ideology is not without its flaws (indeed no system is).
Rather, it is to recognise that some of the perceived challenges of the market
are not a fair or accurate representation of classical thinking. Moreover, that
this misconception is not simply a point of pedantry but in fact serves to exac-
erbate some of the challenges that characterise the current compliance crisis
(not least the potentially antagonistic relationship between corporations, the
public and the state).
Second, it considers why it is that corporations and, more specifically, their
officers act in the way that they do. That is, notwithstanding widespread public
consternation and condemnation, why do corporations persist in adopting
creative compliance strategies, given the damage that they cause to the public
purse whilst undermining trust in the corporate and market communities. The
corporate objective (and concomitant pressure) of profit maximisation is, of
course, one part of the answer but is arguably too simplistic on its own. In
particular, it fails to provide a satisfactory account of why it is that individuals
are so seemingly willing to eschew their own personal norms, values and ethics,
to implement those of the corporation (even when these do not align with their
own). In recognising the remarkable impact that social norms, company law and
the very architecture of the firm itself has on individual behaviour we are forced
to ask ourselves to what extent is an individual truly free to act? As a corollary,
what does this mean in terms of responsibility, both for the individual and the
state in developing policies for reform?
Against that background, Section II considers what this interplay between
responsibility, freedom and the law has moving forward. Adopting Erhard,
Responsibility, Freedom and the Law 175
Jensen and Zaffron’s definition of ‘integrity’,3 namely the need for both ‘complete-
ness’ and ‘trust’, it suggests that creative compliance undermines the integrity of
social order. That is, by undermining the predictability and order that is derived
from spirited compliance, our social and legal architecture is incomplete, miss-
ing the vital component of trust for it to function properly. Drawing on insights
from social psychology that are explored in earlier chapters, this second section
concludes by reflecting on some of the ways forward for reform.
I. RESPONSIBILITY, FREEDOM AND THE LAW
This book opened with Eric Schmidt’s claim that creative compliance, namely the
pursuit of profit over regulatory intent, was justified within a capitalist market
economy. As the book went on to show, those three words encapsulated not only
deeply held and damaging misconceptions about market ideology but alluded
to the individual need to justify decisions that had been made in line with them.
This section reflects on these two key aspects of the compliance debate namely
the relationship between market ideology and compliance and, thereafter, the
behavioural drivers that allow individuals to adhere to corporate norms even
at the expense of their own. In doing so it considers the consequences of these
themes, most notably the implications that they raise for personal freedom and,
as a corollary, both individual and state responsibility.
A. Market Order, Integrity and Freedom
Ostensibly, creative compliance seems to align perfectly with capitalist ideology.

It is a standard that embodies profit maximisation at the expense of others,
including the public purse at a time of significant austerity, and epitomises the
highly individualistic mentality that is seemingly reflective of liberal think-
ing. Understood in this way, the question is not why do corporations creatively
comply but why are we even talking about it?
The reason, as Chapters 5 and 6 explored, is that this view reflects a damning
and damaging misconception of the classical liberal ideology that the market
economy is in fact predicated on. It adopts an ‘everyday liberalism’ that conflates
libertarian thinking with those of their classical liberal counterparts, obscur-
ing the vital differences between the two schools of thought (and indeed others
on the liberal spectrum). Most notably, it neglects the critical importance that
classical liberals placed on social cooperation and the architecture of support
3 See W Erhard, MC Jensen and S Zaffron, ‘Integrity: A Positive Model that Incorporates the
Normative Phenomena of Morality, Ethics and Legality,’ (March 23, 2009). Harvard Business School
NOM Working Paper No 06-11; Barbados Group Working Paper No 06-03; Simon School Working
Paper No FR 08-05.
that was needed to maintain it. As Chapter 5 explained, the methodological

individualism adopted by classical liberals simply reflects the need to understand
the motivations of the individual as the smallest unit within a larger collective.
It does not advocate an unbridled selfishness as some may believe.
It is this neglect of the importance of cooperation that is critical to the current
debate. Without understanding the centrality of social cooperation, we not only
perpetuate a narrow and reductive norm (the importance of which is consid-
ered in the next section) but this also obscures the very particular structure of
rules that is needed to facilitate it. In particular, the framework of general rules
of behaviour that allow a spontaneous (rather than planned) order to emerge.
Without this spontaneity, coordinating a complex social system is simply not
possible and thus protecting this unique architecture is critical for the success
and prosperity of society as a whole. Whilst this architecture is considered in
more detail in Chapter 5, at its core is the need for the relative predictability of
behaviour within the system itself, derived from the protection and predictabil-
ity afforded by the rule of law and, specifically, the principle of equality before
the law. It is this critical need, and the pivotal role of equality, that helps to distil
the role of compliance and, more importantly spirited compliance, within clas-
sical liberal ideology.
By understanding the true tenets of classical liberalism, we can appreciate its
remarkable function in society (in particular, the coordination of complex social
systems that are beyond deliberate design) and therefore the need (notwith-
standing its challenges) to protect it. This perspective also shows us how creative
compliance, far from aligning with its principles, in fact undermines one of its
central pillars. In this way, we can start to see the harm that creative compliance
causes to the market, undermining trust not only between market participants
inter se but also between the market and the public as a whole. One repercussion
of this is that it triggers the cycles of reactionary regulation outlined at the start
of this book (and explored in Chapter 2). This cycle serves to further undermine
the market architecture as regulation increasingly moves away from general rules
of behaviour (protecting the relative freedom for individuals to act within that
framework) towards the increased use of more targeted legal instruments and
demands.
It is by unpacking these misconceptions of liberal ideology that we can find
normative support for spirited compliance (namely as an important bulwark to
protect the market order), whilst establishing a conceptual framework for reform
(through the rule of law and, specifically, the principle of equality before the
law). Moreover, in so doing, it distils the systemic harm that creative compliance
can cause to the market orders that corporations depend upon (and ironically
rely on in support of creative practices). As the next section shows, changing this
perception of the harm generated by creative compliance is a critical component
in the process of changing the normative landscape, itself a crucial first step in
achieving effective and sustainable reform.
Responsibility, Freedom and the Law 177
B. Freedom, Choice and Responsibility
Whilst it is clear that corporate ideology (albeit predicated on misconceived

foundations) is perceived to support creative compliance, what is less clear cut is
why the individuals who implement decisions on a corporation’s behalf would
do so. As Chapters 3 and 4 explained, our behaviour is largely a product of our
social norms and it is these norms that provide the baseline for social meaning
(and, as a consequence, social sanction in the event that we diverge from them).
Indeed, the power of norms is such that Bicchieri described them as the rules we
live by (rather than those that we are asked to live by).4
Yet given this power of norms, and the clear public dissatisfaction with
the 2012 scandals (and others), why do individuals when acting in their corpo-
rate capacity seem so willing to favour corporate norms over their own? There
are, of course, personal incentives that will help motivate this behaviour (such as
bonus and promotion arrangements that serve to align personal and corporate
interests) but when looking at the egregious nature of some of the acts under-
taken by corporate officers, this is too simplistic an answer. Therefore, what is it
about stepping into the corporate world that allows its norms to dominate ours
as individuals so absolutely?
In exploring this question, the book offers two key insights. First, and as
discussed in Chapter 7, the architecture of the firm creates an internal hierarchy
(the fiduciary ladder) that embeds a relationship of authority and obedience. It is
this relationship of obedience that has a profound impact on personal behaviour
(which has been repeatedly shown to be the case in the worst of circumstances)5
and that transforms an individual’s sense of responsibility. In particular, a
person can become task-focussed, with their sole remit being interpreted as
implementing (or obeying) the instructions they are given, not evaluating and
challenging them. In this way, an individual is able to undertake (and indeed feels
obligated to undertake) a task, even if it doesn’t align with their personal views.
Moreover, this task is performed without any sense of personal responsibility.
The nature of the fiduciary ladder is such that the tasks that are transmit-
ted through it represent the norms of the top rung of the ladder. In the modern
public corporation that is the shareholder body. As Chapter 7 explains, this
cohort is now largely represented by the somewhat amorphous market, itself
represented by the proxy of earnings per share. Thus, objectives and norms that
are conveyed down the fiduciary ladder are, generally, myopically short term and
profit focussed. As each rung of the ladder is, effectively, able to outsource moral
responsibility for their specific conduct at no point does any level of the firm take
complete moral responsibility for the consequences of the decision in question.

5 R Kelman and L Hamilton Crimes of Obedience (Yale University Press, 1989).
Of note, is that this includes the board of directors who themselves are able to
look to their shareholders as justification, explaining that creative compliance
is simply called capitalism and that there is ‘probably some law against’6 doing
anything else.
However, once a person has acted in accordance with the instructions of
their authority, this does not mean that they can entirely avoid the consequences
of contravening personal norms. Rather, as Chapter 4 explains, this creates
a cognitive dissonance that in turns triggers a specific range of psychological
responses. In particular, there is a need (as we have seen) to either justify the
behaviour in question or ignore (or challenge) any conflicting evidence. These
responses, somewhat ironically, serve to embed and rationalise creative compli-
ance, strengthening the norm and contributing to the habitualisation of the
standard both within an individual corporation and, more worryingly from a
systemic perspective, across the wider corporate community.
It is by understanding the influence of norms that a critical question
emerges, namely the extent to which a person can be said to be truly free to
act. If compliance is, as Chapter 3 discusses, the product of norms (and indeed
we see how norms can operate to effectively automate certain behaviours) to
what extent does someone have genuine autonomy over their decision-making?
If an individual lacks freedom of action, if their choice is a technical one rather
than something more meaningful, to what extent are they or should they be
responsible? Moreover, when looking at structuring policies for reform, what
responsibility does the state have to manage these unintended consequences,
some of which stem from the law itself (for example, we see the impact of the
Companies Act 2006, section 172 throughout the book).
II. RADICAL INTEGRITY
Whilst regulation is a critical component of any toolkit for reform, including

for its expressive function (that is, its normative proclamation of what is consid-
ered right or wrong), we have seen, repeatedly, that on its own it is not enough
to move corporate behaviours towards more spirited standards of compliance.
One of the reasons for this is that a legal instrument will never be able to address
all issues or eventualities and the regulatory gaps that will inevitably remain
need to be filled by the legal subject themselves. Moreover, without changing the
construction of compliance (discussed in Chapter 3), even the express terms of
any regulatory instrument are likely to be construed in a creative manner.
Thus, what is needed (and this was outlined in Chapter 3) is a change to
the normative environment that corporations operate within. This environment

Radical Integrity 179
currently serves not only to legitimise creative compliance but inhibit the intro-
duction of any new injunctive norms (such as calls for spirited compliance),
creating a powerful barrier to reform. To be clear, this book is not suggesting that
we transform the profit maximising focus of the firm. Rather, that we consider
ways in which the normative ordering7 adopted by the corporate community can
(or should) be reconsidered. With such normative change, we are able to create
an environment where targeted efforts at reform are likely to be more effective.
What is needed, is a commitment to ‘radical8 integrity’.
A. Towards a More Radical Integrity
We saw in Chapter 5 how trust (namely the reasonable predictability of market

participants’ behaviour) was fundamental to the success of the market order,
indeed of any complex, social system. However, creative compliance, which as we
have seen effectively allows corporations to ‘manipulate’ the law regardless of the
intention of regulators, fundamentally undermines this predictability as we are
no longer able to look to the rules of the market as a guide to our expectations
of others. In this way, one important aspect of the system is lost, threatening the
integrity9 of the market (and other social) orders that society depends upon.
The importance of integrity is not simply as an ideal to achieve but it is funda-
mental to the proper functioning of the market, a point that can be helpfully
visualised if we look to the definition offered by Erhard et al. That is, integ-
rity is ‘a state or condition of being whole, complete, unbroken, unimpaired’.10
Thus for a system such as the market to have integrity, all of the components of
that system need to be present and complete.11 By way of analogy Erhard et al
draw on the example of a bicycle wheel, to show that if you remove spokes from
the wheel it is no longer whole and the integrity of the wheel is diminished.12
Without integrity, the system is no longer capable of producing the desired
outcome, resulting in a diminution of performance and, in the case of a social
7 C O’Reilly, ‘Corporations, culture and commitment: Motivation and social control in organiza-
tions,’ (1989) 31(4) California Management Review 12.

8 Drawing on Posner and Weyl’s reflections of the use of the term as going back to the roots
of a matter (in the case of this book, to the roots of classical liberalism and the rule of law). See
EA Posner and EG Weyl, Radical Markets, Uprooting Capitalism and Democracy for a Just Society
(Princeton University Press, 2018), xiii.
9 Integrity is used here in both definitions of the term. Both as to the ‘honesty’ or ‘morality’ of the
system but also as to it being ‘complete’ or ‘whole’. As to the latter, the assertion of this book is that
without spirited compliance the system is incomplete and, as is discussed in ch 5, is liable to failure.
On the integrity of a system more generally, see W Erhard, MC Jensen and S Zaffron, ‘Integrity:
A Positive Model that Incorporates the Normative Phenomena of Morality, Ethics and Legality,’
(March 23, 2009). Harvard Business School NOM Working Paper No 06-11; Barbados Group
Working Paper No 06-03; Simon School Working Paper No FR 08-05.
10 Erhard et al, ‘Integrity: A Positive Model’ (n 9), 2.
11 ibid, 21.
12 ibid, 40.
system (and depending on the severity of the issue), the likelihood of regulatory
intervention.13 Moreover, the less effective the system, the less trust there is in it
and, in the case of the market, the less trust the less effective it is, thus creating a
self-perpetuating cycle of behaviour.14
Yet, we cannot mandate trust. Not in the sense that is needed here. The very
challenge of creative compliance (as seen in Chapter 2) is not only the manner
in which corporation’s comply with the law but how they also fill the inevitable
gaps that are left by it. Rather, what is needed is a higher-level understanding of
an individual’s legal obligation, one that acts as an overlay to regulatory require-
ments to set the standard of compliance that applies in each and every situation.
Fortunately, as Chapter 6 explains, this overlay exists, namely in the rule of law
and, more specifically, the principle of equality before the law. Thus, whilst there
is an existing obligation to ensure that the operation of the law is such that it
applies equally to all, the clear challenge that we currently face is embedding it
within corporations’ normative environment.
B. A Roadmap for Reform
It is when looking at a potential framework for reform that our understand-

ing of the behavioural drivers that influence compliance decisions, particularly
those undertaken by individuals whilst acting in their corporate capacity
(a distinction explored in Chapter 4) becomes critical. We have seen, repeatedly,
that simply trying to mandate the desired behaviour (for example by penalising
the adoption of abusive tax structures) is unlikely to achieve the holistic change
that is needed. Rather, we need to engage the wider corporate landscape to
manage the normative environment that corporations operate within and that
currently promotes wealth maximisation so absolutely.
As a first step, and as Sunstein’s work demonstrated, we need to challenge the
perception of the harm caused by creative compliance. Currently, it is clear that
creative compliance is seen to be in perfect alignment with the corporate objec-
tive, indeed by some it is seen as a practice to be proud of. Very few perceive that
it risks causing damage to the market and other social orders, notwithstanding
that it has already triggered significant reform efforts. However, the importance
of challenging this perspective has been demonstrated in other sectors, which
have shown how quickly behavioural change can occur (what Sunstein describes
as norm cascades),15 once our belief in the harm caused by a particular practice
(and therefore the social meaning attached to it) has changed. For example, we
saw a rapid and global change in smoking in public places once the risks of
passive smoking were accepted as a reality.
13 ibid,
42 and 44.
14 ibid,
30.
15 CR Sunstein, ‘Social Norms and Social Roles’ (1996) 96(4) Columbia Law Review 903, 909.
Radical Integrity 181
Chapters 1 and 5 demonstrated (respectively) the fiscal and systemic harm

caused by creative compliance and there is a significant amount that can be done
around education in this space. To help inform the approach taken, it is instructive
to draw upon the substantial amount of evidence that suggests that people overesti-
mate the conduct of others, in this context16 namely the view that ‘everyone is doing
it,’ which exacerbates both the feeling of inequality that exists as well as the sense
of ‘missing out’ if a corporation doesn’t follow suit.17 Accordingly, information
campaigns would do well to challenge the accepted norm of creative compliance
by publicising the number of people that appear to pay their taxes in full. It is by
promoting this information (and building on Cialdini’s findings discussed in Chap-
ter 3), that we draw attention to positive descriptive norms, helping to increase the
salience of the norm of spirited compliance over that of the current dominant norm
of creative compliance. As to content, education and information strategies that
focus on sharing not only the harm of creative compliance but also the positives
of spirited compliance, could go a long way to changing the normative landscape.
For example, notifying corporations (and, importantly, their employees) of the
real impact of creative compliance, such as how many hospitals could be built if
people adopted more spirited compliance practices. These types of campaigns help
to reduce the distance between action and effect, which bolsters the agentic state
that Milgram identified. It is by bringing the consequences of corporate action into
an individual’s focus, that we can start to challenge the ease with which personal
responsibility is effectively deferred to those on other rungs of the fiduciary ladder.
Indeed, the importance of ensuring individuals are included within any reform
proposals is critical if we are to ‘interrupt’ the agentic state that leads to a reduc-
tive view of personal responsibility, namely one of mere obedience.18 Milgram’s
work suggests that the existence of peer dissent would help encourage others
within the firm to act in a similar way. Yet without significant change this can
become a circular problem in a corporate setting. Therefore, it is critical that we
help create the space and confidence for such dissent to act as a catalyst for future
change. One way of doing this is to ensure that the normative change based on
perceived harm is structured to speak to all levels of the fiduciary ladder. Going
back to the earlier examples in the book, we wouldn’t feel constrained to speak
out if someone started smoking in the office because we are clear it is a shared
norm (and that we would be supported by others). Similarly, we need to instil this
level of confidence around compliance and providing evidence as to the (spirited)
conduct of others is one way of doing this.
16 R Thaler and C Sunstein, Nudge (first published 2008, Penguin Books, 2009), 72.
17 The potential impact of this approach was seen in Australia, albeit in reverse, where a number of
corporate tax avoidance schemes were highly publicised. In response, the greater the awareness that
corporations were not paying ‘their share, the more non-compliance increased’. See B Torgler, Tax
Morale and Compliance, Review of Evidence and Case Studies for Europe (2011) The World Bank
Policy Research Working Paper No 5922, 22.
18 S Milgram, Obedience to Authority: An Experimental View, (first published Tavistock
Publications, 1974, rev edn, Pinter & Martin, 2010), 157.

We have seen that norms and social meaning are both context and role
dependent. Recall the example in Chapter 3 about whether a person has a glass
of wine with friends on a Saturday night in contrast to the same person having
a drink in their capacity as a school teacher whilst on a school trip. Both context
and role are, on one level, fixed identities. Either you work for a corporation
or you do not, you are a finance director, or you are not. However, this insight
gives us an important perspective on narrative, which attaches meaning to those
‘fixed’ roles (as Chapter 4 considered, this is also important when looking at the
regulatory relationship). In this regard, we start to see the imperative (including
at a policy level) for changing the narrative around the market, the corpora-
tion and those acting on their behalf. If we continue to adopt the language of
the ‘evils’ of capitalism, corporations and corporate officers, this is likely to be
a hinderance not only to a cooperative regulatory relationship but also to the
sense of identity that corporations and their officers start to embody.
One final observation should be made regarding the architecture of the firm.
As discussed in Chapter 7, the hierarchy of the firm is one of its core functions
and reform of the hierarchy per se is neither suggested nor necessarily desir-
able. However, what is clear is that we need to create opportunities to break the
psychology of obedience and the lack of responsibility that this gives rise to. As
set out above, narrative and education are core features of this, but it is likely
that procedural tools could be surprisingly effective. For example, Milgram’s
work found that the presence of a third party and the expression of dissent (as
noted above) were factors that helped to disrupt the link between authority and
action. Therefore, introducing more opportunities for independent review, access
to independent advisors and creating circumstances for reflection on the conse-
quences of an action (removing the distance between cause and effect discussed
in Chapter 7) are all matters for consideration. For example, accounting decla-
rations (using similar principles to those introduced by Sarbanes-Oxley),
multi-party decision retrospectives and review processes outside of a particular
department all provide opportunities to interrupt an agentic state.
III. CONCLUSION
Capitalism is facing a compliance crisis, but it does not have to be. The current
creative approach adopted by the corporate community is not inevitable and,
as this book has shown, it is capable of change. Whilst the social norms and
perceptions that underpin the perceived legitimacy of creative compliance are
understandable, aligning with a dominant rhetoric of market ideology, they are
nonetheless the product of social construction and are therefore reassuringly
capable of social reconstruction.
In exploring the corporate compliance crisis, this book had two broad aims.
First, to reflect upon some of the widely held views of the market and ask
whether these were correct. Accepting that no system of governing a large-scale
Conclusion 183
economy will be perfect, is our market economy as flawed as people suggest?

Does it simply produce ‘amoral calculators’19 (in the form of the multinational
corporation) necessitating nothing short of a wholesale change? Or, is there
something else at play? In looking at this question this book suggests that our
familiarity with the market order has (without denying its challenges) allowed
us to take for granted its nonetheless remarkable contribution to society, not
least the ability to order a global and dispersed community. That said, these
benefits are not enough, on their own, to justify unacceptable externalities such
as creative compliance. However, in Chapter 5 we see that the norms relied upon
in justification of reductive compliance strategies are, in fact, misconceptions
of the ideology that the market is predicated upon. Rather, if we return to the
true roots of classical liberalism, we find a system that far from advocating an
unbridled individualism, promotes (and depends upon) social cooperation, trust
and the rule of law.
Second, the book explored the question of why it was that people seemed to
adopt such atypical behaviours within a corporation and what the repercussions
of this are. When we look at the sheer number of corporate scandals it cannot
be that they are all simply the product of, to use earlier terminology, ‘amoral’
individuals. In which case, this necessitates that we ask ourselves what is, to my
mind, a deeply troubling and pressing question. That is, what is it about the
corporation as an artificial legal entity that can have such a profound impact on
the judgment and behaviours of the very real humans that operate on its behalf.
As this book has shown, the very architecture of the firm itself, operating within
a powerful normative environment, has the capability to result in individuals
engaging in behaviour even though it ‘may entail great personal sacrifice or great
harm to others’.20 This consequence, in part the product of the rules that we
operate within (legal and normative) is profound and of the utmost importance.
It raises fundamental questions of freedom and therefore responsibility, both of
the individual and of the state (when considering the need for, and scope of, law
reform).
However, as this book has shown, there is a way forward. One that can be
found if we return to first principles of classical liberal ideology, which has
freedom and cooperation at its core, demonstrating how these are coterminous,
not mutually exclusive. It is a system that values the rule of law and equality, not
as rules to be avoided or creatively complied with, but as fundamental principles
that support individual freedom and market cooperation. It is from this respect
for, and subsequent spirited compliance with, the law that true freedom and
therefore responsibility can ultimately emerge.
Understood in this way, compliance is called capitalism after all.
19 R Kagan and Scholz, ‘The “Criminology of the Corporation” and Regulatory Enforcement
Strategies’ in Blankenburg and Lenk (eds) Organisation und Recht. Jahrbuch für Rechtssoziologie
und Rechtstheorie vol 7 (VE Verlag für Sozialwissenschaften), 357.
20 Kelman and Hamilton, Crimes of Obedience (n 5) 16.
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Index
‘agentic state’ (Milgram), 164 Coase, Ronald:
Asch conformity experiments, 86–7, 88 corporate fiduciary ladder, on, 158–60
authority: employment relationship, 160
duality of, 82–3 firms’ employees, on, 159
individual citizens’ compliance with, cognitive dissonance, 89–92
82–3 concept of, 89–90
legitimacy of, legitimacy-based compliance, Festinger on, 89
for, 76–7 reduction of, 90–1
legitimate, exercise of, 78–82 companies, directors consider short-term
non-state, acquiescence to, 82 value of, 157
obedience to, (Milgram’s study), 162–3 Companies Act 2006:
‘respect for people’s rights’, 80 maximising shareholder value under,
sources of, 82 157
state’s exercise of, 77–8 section 172 and shareholder wealth
authority relationship: maximisation norm, 59–60
individuals and, 165 compliance, 41–64
interruption in (Milgram), 166 corporations’ creative approach to,
personality identity and, 162 93–4
creative see creative compliance
behaviour: decisions, individuals’ implementation of, 77
corporate see corporate behaviour definition, 43–4
corporate compliance, 66–7 degeneration cycle, 92–4
creative compliance and, 121 deterrence-based see deterrence-based
individual see individual behaviour compliance
norms and, 51–4, 55–6, 63–4 factors affecting, 66
predictability of, 76, 81, 110, 118, 120–3 interpretation of, latitude for, 41
shareholders’, 155 legitimacy-based see legitimacy-based
taxpayers see taxpayer behaviour compliance
board of directors, 160–1 legitimacy-based theory of motivation and,
duties of, 160–1 73–4
moral responsibility, 178 motivation of, 65–95
Bribery Act 2010, 36 narrative and, 5–8
process, trust, in, 81
‘capital loss scheme’ (Ramsey), 27–8 social construct as, 48–9
(case law) social order and, 174
Cialdini, Robert, on littering, 55–6, 64 spirited see spirited compliance
citizens: strict, is not ‘discharge of the duties of good
individual see individuals citizenship’, 26
state and citizens and spirited compliance, 9 technical, responsibility for controlling,
classical liberalism, 102–6 22–3
freedom and, 106–8 conformity experiments (Asch), 86–7, 88
freedom of the individual and, 107–8 consent:
ideology, 175–6 civil society, participation in,
society, in, 176 and, 138
thinking and order in society, 112 corporate citizens and, 138
196 Index
cooperation, 176 creative compliance, 6, 22–3, 26

freedom and, relationship between, 117–18 behavioural predictability and, 121
individualism and, 111–12 causes and consequences of, 10–11
corporate: centrality of the person and, 44
decisions and deterrence-based consequences of, 8–10
compliance, 69 corporate, norms’ influence, 54
groups, tax structuring by, 141–2 drivers, in compliance degeneration cycle,
management, shareholders’ communication 92–3
with, 155 environmental norms and, 6–7
‘personhood’, 147–69 financial perspective of, 8–9
responsibility, individuals’ discharge of, GAAR on, 38–9
84–5 Google and, 3–4
roles, people’s identity of obedience in, 164 harm caused by, 180–1
corporate citizens: illegitimacy and, 94–5
consent and, 138 legitimisation of, 83–92
corporate compliance and, 9–10 market order eroded by, 123
corporate decision-making, 84–5 regulatory responses to, 7
corporate fiduciary ladder, 16, 158–67, 177 restraint of, 27–8 (case law)
Coase on, 158–60 rule of law and, 124–5
importance of, 167 social construction of, 43–9
psychological consequences of, 162–6 social meaning, interpretation of, 45
rungs of, 161 social norms as product of, 45–6
structure of, 158–60 spirited compliance and, 15
wealth maximisation and, 160 strategies, individuals’ implementation of,
corporate norms, 53–4, 177 88–9
homogeneity of, 57–62 trust and, 122
individuals’ acceptance of, 85–6 creative compliance practice, 19–40
salience of, 85–92 case law, 20–3
corporate structure, GAAR on, 36, 37 development of, 20–5
corporations, 61–2
creative approach to compliance, 93–4 decision-makers:
decision-making see corporate fiduciary neutrality of, 79–80
ladder self-interested and deterrence-based
‘Double Irish Dutch Sandwich’ and, 140–1 compliance, 68–9
enforcement authority, relationship decision-making:
between, 71–2 corporate see corporate decision-making
individuals, relationships with, 148 corporations, in see corporate fiduciary
jurisdictions, choice of, 139 ladder
multiple legal personalities and, 140–1 directors’ and judicial determination,
norms, influence of, 54 157
partnerships and, differences between, 168 deterrence and compliance and motivation,
risk management and, 141 73–4
separate personality and limited liability of, deterrence-based compliance, 67–71, 73–4
149–52 approaches to, 67–8
shareholder wealth maximisation norm, capitalism and, 68–9
role under, 61 corporate decisions and, 69
spirited compliance and, 10–13, 54, 63, lack of resources, effect of, 72
102 legal obedience and, 69
see also firms self-interested decision-maker and,
corporations and compliance degeneration 68–9
cycle, 92–5 social order and, 72–3
Cox Report (2013) on short-termism, 156 taxpayer behaviour and, 69–71
Index 197
Dicey, AV, on rule of law, 128 hierarchy of, 182

directors: see also corporations
company short-term value considered by, free market economy characteristics, 4–5,
157 113–22
decision-making, factors in, 157 freedom:
remuneration of linked to market citizens’ freedom to act, 100 (case law)
performance, 155 classical liberalism tradition, in, 106–12
directors’ fiduciary duties, 156–8 cooperation and, relationship between,
maximising shareholder value, 157 117–18
‘discharge of the duties of good citizenship’, freedom of choice:
strict compliance is not, 26 norms and see norms and freedom of choice
Double Irish Dutch Sandwich (tax scandals), Sunstein on, 62
30, 31–2, 35, 140–1 freedom of the individual, 107–9
corporations and, 141 citizen’s equal right and, 109
double reasonableness test, 34, 35 classical liberalism and, 107–8
Dwenger, N, on taxpayer behaviour, 70 Friedman, M, on increase of profits, 106
fund managers’ duties, 154–5
electric shock experiment (Milgram), 162–3,
164–5 General Anti-Abuse Rule (GAAR), 7, 33–9
employees: ‘abusive’ tax arrangements, treatment of,
employer, extension of, as, 159–60 34–5
withdrawal of services, 160 corporate compliance and, 166
employer, employees as extension of, 159–60 corporate structures, on, 36, 37
employment: creative compliance, on, 38–9
relations, American and British, 159 creative tax structures, on, 35–6
relationship (Coase), 160 implementation of in UK (2013), 33
enforcement authorities and corporations, language used in, 57–8
relationship between, 71–2 panel rulings, effect of, 34
Enron scandal, 23–4 regulatory design, on, 37–8
equal right, citizen’s, and freedom of the Google, PAC inquiry and response, 3–4, 65–6
individual, 109 government:
equality, 125, 129 intervention, libertarians’ view of, 103–4
definition, 130 personal freedom, role in, 110
distributive, 130–1 group conformity and individuals, 87–8
law and, 126–34, 137–9
meta-principle as force for compliance, 136 habitualisation in communities, 46–7
overarching standard, as, 135 harm, creative compliance causes (Sunstein),
paradox, 124–43 123, 180–1
rule of law and, 129–32 Hayek, Friedrich, 15, 100, 102, 108–24,
rules of and market participants, 121–2 128–40
substantive, 130–1 rule of law, on, 128–9, 133–4
equality as a meta-legal principle, 135–7 social welfare provision, on, 132
‘gap-filling’ ability, 136–7 ‘high norm salience’ (litter), 55
primary legal principles and, 135–6
‘expressive dimension’ of actions, 44–5 idea-constructionism, 48–9
identity of obedience, people’s, in corporate
Festinger, L, on cognitive dissonance, 89 roles, 164
financial incentives and short-termism illegitimacy, creative compliance and, 94–5
(Cox Report), 156 incorporation by registration, 150–1
firms: individual behaviour:
definition (Coase), 158–9 norms’ impact on, 56–7
employees of, Coase on, 159 rationalisation of, 90
198 Index
individualism, 112 lawful conduct, constraining, 134–9

cooperation and, 111–12 legal obedience, 137–8
methodological, 176 deterrence-based compliance and, 69
spirited compliance and, 112 see also legitimacy-based compliance
individuals: legal privilege:
actions of, and rules and structures, 7–8 definition, 140
authority relationships of, 165 inequality of, 139–42
centrality of the person and creative legitimacy:
compliance, 44 spirited compliance and, 73, 75, 84, 95,
compliance decisions, implementation of, 77 103
compliance degeneration cycle and, 92 undermining (compliance degeneration cycle),
compliance with authority, 82–3 93–4
conflicting information, avoidance of, 90–1 legitimacy-based compliance, 74–6
corporate norms, acceptance of, 85–6 decisions, motivation for, 75–6
corporate responsibility, discharging, 84–5 legitimacy of authority, 76–7
corporations, relationship with, 148 procedural justice and, 76
creative compliance strategies, stages of, 76–7
implementation of, 88–9 voluntary, 75
freedom of see freedom of the individual legitimacy-based theory of motivation and
group conformity and, 87–8 compliance, 73–4
over-rationalisation by, 91 liberalism:
PAC investigation, response to, 66 concept of, 99–100
personal responsibility and, 165 ‘everyday’, 105–6
right to be heard, 79 philosophies of, 105, 105n
tax structuring not possible by, 141–2 rule of law, classical liberal view of, 133–4
Inland Revenue’s taxation of transactions, 28 libertarians’ view of government intervention,
(case law) 103–4
institutional investors, 154–5 limited liability:
institutionalisation of constructs, 47–8 partnerships (LLP), 168
integrity: separate personality of the corporation and,
functioning of the market and, 179–80 149–52
new market, 173–83 littering (Cialdini), 55–6, 64
radical, 178–82 Locke, J, on rule of law, 127
interests, short and long-term, 152–3
intra-group convergence, 46–8 market:
‘inversions’ (tax avoidance scheme), 30–1, 32 central control of, 117
economy and self interest, 108–9
Joint Stock Companies Act 1844 functioning of and integrity, 179–80
(the 1844 Act), 150–1 knowledge collation and communication
judicial anti-avoidance doctrine, 25–30 role of, 113–15
participants, equality of rules for, 121–2
knowledge: self-interest, pursuit of, 104
collation and communication, market’s market order, 113–18
role of, 113–15 creative compliance erodes, 123
price mechanism conveys through, polycentric systems and, 116–18
115–16 rules for, 120–1
May, C, on classical and liberal rule of law,
law: 133–4
corporations’ compliance with, 180 meta-principle, breach of (creative
equality and, 126–34, 137–9 compliance), 136
expressive function of, 57–9 Milgram, Stanley, electric shock experiment,
social and undesirable norms and, 58 162–3, 164–5
Index 199
Montesquieu, CL de Secondat, on rule of law, price mechanism, knowledge conveyed

127–8 through, 115–16
moral responsibility, outsourcing of, 164 primary legal principles and equality as
motivation and deterrence, 73–4 meta-legal principle, 135–6
procedural justice:
narrative and compliance, 5–8 concept of, 78
norms, 49–57, 178 legitimacy-based compliance and, 76
behaviour and, 51–4, 55–6, 63–4 person’s right to be heard, 79
cascades (Sunstein), 48 pillars of, 78–82
context and role, dependence on, 182 profits, increase of (Friedman), 106
corporate see corporate norms property rights and liberal society, 110–11
corporate compliance, influence on, 54 Public Accounts Committee (PAC) (UK),
corporations influence on, 54 Google inquiry and response,
definitions, 50 3–4, 65–6
descriptive, 50
duality of, 84–5 Ramsay construction, 7n, 22, 26, 27, 28, 29–30
environmental, and creative compliance, 67 (case law)
freedom of choice and taxes and subsidies, regulatory:
62–3 design, GAAR on, 37–8
individual behaviour, impact on, 56–7 relationships, 71
influence of, 178 ‘respect for people’s rights’, authority’s, 80
injunctive, 50–1 Rio Tinto, corporate responsibility example
interaction between descriptive and (2020), 147–8
injunctive norms, 54–7 rule of law, 126–9
norm-based social sanctions, 52 classical liberal view of (May), 133–4
personal, 84, 178 creative compliance and, 124–5
shareholder wealth maximisation see Dicey on, 128
shareholder wealth maximisation equality and, 129–32
norm formal (thin) conception of, 132–3
social see social norms Hayek on, 128–9, 133–4
Sunstein on, 62 Locke’s formulation of, 127
types of, 50 Montiesquieu on, 127–8
undesirable and law, 58 pillars of (Dicey), 128
state and non-state actors, 137
order: substantive (thick) conception of, 133
architecture of, 119–21 rules:
planned, features of, 119 conduct, of, social order, for, 120
spontaneous see spontaneous order equality of and market participants, 121–2
over-rationalisation, 89–92 structures, and, individuals’ actions,
individuals, by, 91 impact on, 7–8
partnerships: sanctions:
corporations and, difference between, 168 shaming, 53
limited liability (LLP), 168 social, 54
personal freedom, government’s role in, 110 value of, 73–4
personal identity and authority relationship, Sarbanes-Oxley Act 2002 (US), 7
162 creative compliance escalates after, 24–5
personal responsibility: criticism by industry of, 24
electric shock experiment, in, 164–5 self interest, 103–4
individuals and, 165 market economy and, 108–9
polycentric systems and market order, market’s pursuit of, 104
116–18 societal development and, 108
200 Index
senior executives’ objectives (corporate special purpose vehicles (SPVs), 23

fiduciary ladder), 161 spirited compliance, 100, 124–6
separate personality and limited liability citizen and state and, 9
of the corporation, 149–52 corporations and, 10–13, 54, 63, 102
share, nature changes, 153 creative compliance and, 15
shareholder value maximising: individualism and, 112
Companies Act 2006, under, 157 legitimacy and, 73, 75, 84, 95, 103
directors’ fiduciary duties and, 157 social norms and, 38
shareholder wealth maximisation, 153–6 spontaneous order, 119–20
shareholder wealth maximisation norm, 56, complex systems and, 118–22
59–62 state:
Companies Act 2006, section 172, and, citizen and state and spirited compliance, 9
59–60 exercise of authority by, 77–8
corporations’ role under, 61 interference limited, 109–11
shareholders: stock markets, development of, 151
changing behaviour of, 155 Sunstein, CR, 41–2, 85, 87
corporate management, communication freedom of choice, on, 62
with, 155 harm, on, 181–2
emancipation of, 151–2 norms, on, 62
nominee, use of, 21 (case law) systems, complex, and spontaneous order,
short-termism, 154 118–22
Cox Report (2013) on, 156
financial incentives and, 156 tax:
social: deductible annuity paid as salary, 21–2
constructionism, 43–9 (case law)
meaning, creative compliance’s evasion, 70, 84
interpretation of, 45 planning solutions, artificial, 29–30
welfare, provision of (Hayek), 132 (case law)
social constructs, 49 scandals, 30–2
compliance as, 48–9 structures, creative, GAAR on, 35–6
social judgment, 52–3 subsidies and taxes, 62–3
corporate behaviour and, 53 tax arrangements:
social norms, 177 ‘abusive’, GAAR’s treatment of, 34–5
creative compliance as product of, 45–6 definition, 33–4
law and, 58 tax avoidance, 22, 25–32
spirited compliance and, 38 corporation’s, as incidental right, 100n
social order: (case law)
compliance and, 174 definition, 25
deterrence-based compliance and, ‘inversions’, 30–1, 32
72–3 legislation, 33–9
rules of conduct for, 120 permissible and impermissible, 28
voluntary, 112 (case law)
social sanctions: tax regulation:
corporate behaviour and, 53 courts’ approach to, 26
norm-based, 52 technical compliance with, 25–30 (case law)
society: tax structuring:
civil, participation in, and consent, 138 corporate groups, by, 141–2
classic liberalism in, 176 individuals, by, 141–2
development of and self-interest, 108 taxpayer behaviour:
liberal and property rights, 110–11 deterrence-based model of compliance,
order in society and classical liberal 69–71
thinking, 112 Dwenger on, 70
Index 201
Thaler, R, 85, 87 truth, 5–6

transactions: Tyler, Tom, 14–15
‘commercial’ concept of, 28–9 (case law) legimacy-based compliance, on, 74–5
Inland Revenue’s taxation of, 28 (case law)
trust, 180 wealth maximisation and corporate fiduciary
compliance process, in, 81 ladder, 160
creative compliance and, 122 WorldCom scandal, 23, 24
202

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RECONCEPTUALISING CORPORATE COMPLIANCE

This book offers a comprehensive examination of the issues surrounding

It is becoming increasingly apparent that, far from being a solitary affair,

2. Creative Compliance in Practice�������������������������������������������������������������19

3. Constructing Compliance: Freedom to Choose?�������������������������������������41

IV. The Function of Norms: Free to Choose?���������������������������������������62

4. Motivating Compliance: Freedom to Act?����������������������������������������������65

III. In Defence of the Market Order��������������������������������������������������� 113

6. The (Ostensible) Equality Paradox: Privilege and Obligation���������������� 124

Essays of William Graham Sumner, (Liberty Fund Inc, 1992), 186.

(12 December 2012).

(10 December 2012) https://www.bloomberg.com/news/articles/2012-12-10/google-revenues-sheltered-

tax,’ Independent (17 May 2013) www.independent.co.uk/news/uk/politics/hmrc-are-being-

(13 December 2012) www.independent.co.uk/news/uk/home-news/google-boss-im-very-proud-of-

Magazine (13 September 1970), 1.

I. WHY NARRATIVE MATTERS

An immediate, and entirely valid, question is whether posturing as to the norms

Society (Princeton University Press, 2018), 19.

Explaining Compliance Business Responses to Regulation (Edward Elgar, 2011), 6–7.

Construction of Reality, A Treatise in the Sociology of Knowledge, (Anchor Books, 1966).

Second, by recognising compliance as a social construct that is shaped

II. THE CONSEQUENCES OF CREATIVITY: WHAT HARM IS IT REALLY?

20 McBarnet,‘After Enron’ (n 4), 1091.

www.hospitalmanagement.net/projects/uclh/ (accessed 8 August 2020).

(2005) 26 Journal of Economic Psychology 862, 863.

of corporate law more generally. Understood in this way, it is much harder to

III. RECONTEXTUALISING COMPLIANCE: FROM SUBJECT TO SYSTEM

Traditionally, creative compliance is tackled as a ‘corporate’ problem or, as a

IV. SCOPE OF THE BOOK

In broad terms, this book is concerned with understanding whether there is a

­ therwise apply in response to the implementation of abusive tax structures.30

V. STRUCTURE OF THE BOOK

on Tom Tyler’s work to demonstrate how a manifest belief in the legitimacy

One challenge to the claim that corporations are driven by a regulatory

The problem of corporate compliance is profound and pressing. Its complexity

(27 May 2013) www.theguardian.com/technology/2013/may/27/google-eric-schmidt-change-law-tax

The New York Times (12 December 2018) www.nytimes.com/2018/12/12/opinion/facebook-data-

Corporate creative compliance is not simply a problem of regulation, or of

35 Inland Revenue Commissioners v Willoughby [1997] 1 WLR 1071, 1079.

This chapter begins by exploring the increasingly endemic practice of corpo-

I. THE RISE AND RISE OF CREATIVE COMPLIANCE

5 Discussed further in Section II.B.

UK company law is itself characterised by a decision that legitimised a literal

8 As Edelman recognises, compliance is defined by industry norms that become institutionalised

20 McBarnet, ‘Financial Engineering’ (n 4), 80.

(2002) 70 University of Cincinnati Law Review 1309, 1310.

University of Pittsburgh Law Review 1, 14.

Economic Perspectives 91, 92.

attempts to introduce broader compliance standards), we saw an escalation in

II. LOOPHOLES IN THE LAW: A FOCUS ON TAX AVOIDANCE

The paradigm case of creative compliance, particularly in recent times, is tax

A. Towards a Judicial Anti-Avoidance Doctrine?37

As we saw in Section I, notwithstanding the recognition that many tax avoidance

35 A Seely, Tax Avoidance: a General Anti-Avoidance Rule – Background History (1997–2010)

Commons Briefing Paper Number 2956 (16 January 2020), 3.

Modern Law Review 209, 209.

Ltd v R. [1946] AC 119, per Lord Simon at 140.

subsequently endorsed in I.R.C. v Barclays Bank [1951] AC 421, 439.

no moral censure’40 if they adopt a technical, rather than spirited standard of

40 Levene v I.R.C. [1928] AC 217, per Lord Sumner at 227.

Westminster principle,’ see J Freedman, ‘Defining Taxpayer Responsibility: in Support of a General

General for Scotland [2017] UKSC 45.

B. The 2012 Tax Scandals

2. Creative Compliance in Practice��19

3. Constructing Compliance: Freedom to Choose?��41

IV. The Function of Norms: Free to Choose?��62

4. Motivating Compliance: Freedom to Act?��65

III. In Defence of the Market Order�� 113

6. The (Ostensible) Equality Paradox: Privilege and Obligation�� 124

therwise apply in response to the implementation of abusive tax structures.30

construction process. Doing so allows us to structure more tailored policies for

Michigan Law Review 1155, 1177.