Diversity and Ethics: Toward an Objective Business

Compliance Function
Steven A. Ramirez*

This Article builds upon prior works which articulate an objective

standard for corporate ethics and compliance that furthers shareholder
wealth maximization: A firm should only engage in conduct that
acclimates itself as optimally as possible to the full range of its
constituencies, including investors, workers, consumers, and regulators.
Further, because of the deep racial and social divisions within the United
States today (and present in most business environments), a firm can
achieve optimal acclimation only if it includes the full range of cultural
diversity within its constituencies, as those diverse voices influence the
behavior of the firm. This allows the firm to import the conscience of
those constituencies due to differences in ethical sensitivities among
discrete segments of the population. This Article argues in favor of an
SEC disclosure guidance release requiring the disclosure of ethical and
compliance governance structures and practices. Such a disclosure
mandate should include: disclosure of governance structures at the board
level and below; the role of cultural diversity in the ethics and compliance
function; the degree to which the ethics and compliance function is
independent of senior management; and how reports of potential
misconduct are encouraged. These facts would be material to a
reasonable investor given the history of shareholder losses (particularly
in recent history) suffered at the hands of unethical and non-compliant
management. This disclosure mandate could trigger a competitive race-
to-the-top as firms search for those ethical and compliance practices that
lead to the highest gains in sustainable financial performance. In short,
competitive capitalism can lead to a race-to-the-top, in terms of ethicality
and compliance practices, as well as a firm’s embrace of cultural
diversity. The Article concludes that financial market competition can
thereby foster superior financial performance, superior management of
ethical and compliance risk, and superior embrace of cultural diversity

* Steven A. Ramirez is a Professor of Law and Director of the Business Law Center at Loyola
University Chicago School of Law.

581
582 Loyola University Chicago Law Journal [Vol. 49

all at once. This would further secure investment within the American
economy.

INTRODUCTION ............................................................................. 582

I. THE MATERIALITY OF ETHICS AND COMPLIANCE ...................... 589
II. DIVERSITY AND ETHICS ........................................................... 595
III. DISCLOSING THE GOVERNANCE OF ETHICALITY AND
COMPLIANCE ......................................................................... 602
CONCLUSION................................................................................. 609

INTRODUCTION
Once again,1 large publicly traded firms, particularly large bank
holding companies, face regulatory sanctions for tolerating criminality
and blatant unethical misconduct within their business. 2 In the fall of
2016, regulators announced that Wells Fargo incentivized its workers to
systematically create fake accounts for bonuses and levied large fines
against the megabank.3 Wells Fargo shareholders ultimately paid
hundreds of millions of dollars to meet claims arising from management’s
wrongdoing.4 Further, in the weeks following the announcement of the
scandal and the settlement with regulators, shareholders lost $25 billion

1. Steven A. Ramirez, Diversity, Compliance, Ethics & In-House Counsel, 48 U. TOL. L. REV.
465, 465–67 (2017) (recounting the silence of the lawyers during massive crises in corporate ethics
and compliance during the savings and loan crisis, the Enron frauds, and the subprime debacle, and
proposing a means for achieving greater diligence of counsel in reporting material legal risks to
senior management and beyond).
2. Consumer Financial Protection Bureau, Consumer Financial Protection Bureau Fines Wells
Fargo $100 Million for Widespread Illegal Practice of Secretly Opening Unauthorized Accounts,
(Sept. 8, 2016), https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-
protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-
unauthorized-accounts/.
3. Id. Later, Wells Fargo revealed it created a total of 3.5 million accounts in order to enhance
its fee income. Matt Egan, Wells Fargo Uncovers up to 1.4 Million More Fake Accounts,
CNNMONEY (Aug. 31, 2017, 12:34 PM), http://money.cnn.com/2017/08/31/investing/wells-fargo-
fake-accounts/index.html.
4. See James Rufus Koren, Wells Fargo’s $142-million Sham Accounts Settlement: What you
Need to Know, L.A. TIMES (July 11, 2017, 2:44 PM), http://www.latimes.com/business/la-fi-wells-
fargo-settlement-20170710-htmlstory.html (addressing the practical ramifications of both the $142
million in shareholder wealth paid to the Consumer Financial Protection Bureau (“CFPB”) and
management’s squandering of more corporate resources to settle claims brought against the firm
by aggrieved customers); see also Patrick Rucker & Dan Freed, Wells Fargo will Pay $190 mln to
Settle Customer Fraud Case, REUTERS (Sept. 8, 2016), https://www.reuters.com/article/wells-
fargo-settlement/wells-fargo-will-pay-190-mln-to-settle-customer-fraud-case-idUSL1N1BK1E8
(detailing the May 2015 allegations against Wells Fargo bank and the subsequent settlement in
which Wells Fargo paid $185 million in penalties and $5 million to customers allegedly pushed
into fee-generating accounts absent a request).
2018] Diversity and Ethics 583

in market capitalization.5 The Chief Executive Officer (“CEO”) of Wells

Fargo, on the other hand, garnered a total of $192 million during his
tenure as CEO.6 The recent ethical and compliance stumbles at Wells
Fargo illustrate a key point regarding business leadership and corporate
governance in the United States.7
Too often the behavior of business leaders in America renders the term
“business ethics” an oxymoron that seems inconsistent with financial
success.8 Classes in business ethics similarly encourage students to think
about ways to maximize short-term windfalls, ethics be damned.9 The

5. Narottam Medhora, Wells Fargo Hit with Class Action Lawsuit over Sales Practices,
REUTERS (Sept. 27, 2016), https://www.reuters.com/article/wells-fargo-accounts-lawsuit/wells-
fargo-hit-with-class-action-lawsuit-over-sales-practices-idUSL2N1C30JS (“[S]hares of the
company have fallen more than 10 percent since Sept. 8 when it reached a settlement with
regulators, wiping off more than $25 billion of market capitalization.”). Ultimately, the Federal
Reserve Board imposed further sanctions (including a major board shakeup), triggering a further 6
percent decline in share value. Evelyn Chang, Wells Fargo Shares Dive after Fed Restricts Bank's
Growth, Citing 'Consumer Abuses,' CNBC (Feb. 2, 2018),
https://www.cnbc.com/2018/02/02/federal-reserve-orders-wells-fargo-to-replace-four-board-
members-restricts-growth-because-consumer-abuses.html.
6. Martha C. White, $41 Million is Chicken Scratch Compared to What Stumpf Earned at Wells
Fargo, NBC NEWS (Sept. 29, 2016, 2:31 PM), https://www.nbcnews.com/business/business-
news/41-million-chicken-scratch-compared-what-stumpf-earned-wells-fargo-n656901.
7. Lucian A. Bebchuk et al., The Wages of Failure: Executive Compensation at Bear Stearns
and Lehman 2000-2008, 27 YALE J. REG. 257, 276 (2010) (finding that the top executives of two
firms where shareholders suffered devastating losses achieved “decidedly positive” net payoffs
from their leadership of the firms during 2000–2008).
8. A young MBA student surveyed about what she learned about business ethics in America
from a business ethics class said it made her “wonder if there is not on [sic] single ethical person
left in corporate America.” Walter Pavlo, An MBA’s View Of The State Of Business Ethics In
America, FORBES (Jan. 14, 2014, 7:31 AM),
https://www.forbes.com/sites/walterpavlo/2014/01/14/an-mbas-view-of-the-state-of-business-
ethics-in-america/#3cf130bf3d48 (“I am concerned that MBAs, like myself, will find new ways to
embezzle, insider trade, and commit crimes to further our own careers. Sadly, applications like
Snapchat, which deletes text messages once they are read, would be an excellent tool for insider
trading.”).
9. We all want to be successful; I am not exempt from the idea of making as much money as
possible in a shortest amount of time. However, I am more interested in finding solutions to
ethical dilemmas rather than crossing an ethical line to better any corporation. At the end of
the day, my perception of the state of ethics in American business is that it is trucking along
in the same fashion as it has for decades and we MBAs are eager to slip into it. While
reducing crimes associated with unethical behavior is a worthwhile goal, I’m not sure that I
will see it reached in my time. Get ready white-collar defense attorneys, you’re bound to
have your hands full. Id.
Such attitudes among students should invite educators to remind their classes that while
accountability for corporate elites faced much dilution under law in the past few years, many
corporate executives nevertheless suffered incarceration and ignominy for such wrongdoing,
including Aaron Beam, the founder and former CEO of Health-South (and Special Presenter at the
2017 Institute for Investor Protection conference). See Quentin Fottrell, Aaron Beam: ‘I think my
dog still loves me,’ MARKETWATCH (2014), https://www.marketwatch.com/story/aaron-beam-he-
fueled-the-scandal-at-healthsouth-2014-07-29 (analyzing the motivations and repercussions of
584 Loyola University Chicago Law Journal [Vol. 49

systematic breakdowns in ethical and compliance standards drove all

aspects10 of the Great Financial Crisis of 200811 and cost society trillions
in lost output, highlighting the dismal state of business ethics in America
today.12 The lack of accountability following the crisis, which
improbably permitted every CEO at every major Wall Street bank to
escape criminal or financial liability, hardly suggests that ethical concerns
are isolated; rather, the pervasive lack of ethical conduct presents a major
threat to the American economy.13

employing questionable ethics in business).

10. According to the Financial Crisis Inquiry Commission:
We conclude there was a systemic breakdown in accountability and ethics. The integrity
of our financial markets and the public’s trust in those markets are essential to the
economic well-being of our nation. The soundness and the sustained prosperity of the
financial system and our economy rely on the notions of fair dealing, responsibility, and
transparency. In our economy, we expect businesses and individuals to pursue profits, at
the same time that they produce products and services of quality and conduct themselves
well. Unfortunately—as has been the case in past speculative booms and busts—we
witnessed an erosion of standards of responsibility and ethics that exacerbated the
financial crisis.
FINANCIAL CRISIS INQUIRY COMMISSION, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL
REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC
CRISIS IN THE UNITED STATES xxii (2011). Perhaps most disturbing, a manifest attitude of making
quick money infected Wall Street in the lead-up to the crisis:
On Wall Street, where many of these loans were packaged into securities and sold to
investors around the globe, a new term was coined: IBGYBG, “I’ll be gone, you’ll be
gone.” It referred to deals that brought in big fees up front while risking much larger
losses in the future. And, for a long time, IBGYBG worked at every level.
Id. at 8.
11. Steven A. Ramirez, The Virtues of Private Securities Litigation: An Historic and
Macroeconomic Perspective, 45 LOY. U. CHI. L.J. 669, 707 n.251 (2014) [hereinafter Ramirez,
Virtues of Private Securities Litigation] (explaining that “the term ‘Great Financial Crisis of 2008’
[denotes] the massive global financial market disruption that commenced with the failure of
Lehman Brothers on September 15, 2008 and ending in the spring of 2009 when the U.S. stock
market hit a low of below 7000 in the Dow Jones Industrial Average” in accordance with the
recognition of two former Federal Reserve chiefs that this crisis inflicted “unprecedented virulence”
on the American financial system).
12. U.S. GOV’T ACCOUNTABILITY OFF., GAO–13–180, FINANCIAL CRISIS LOSSES AND
POTENTIAL IMPACTS OF THE DODD-FRANK ACT 17 (Jan. 2013) (detailing the utility of studies that
estimate output losses to show the rough magnitude of the overall costs associated with the 2007–
2009 financial crisis, which cumulatively could exceed $13 trillion). By any reckoning, the Great
Financial Crisis of 2008–2009 was a multi-trillion-dollar catastrophe. See Tyler Atkinson et al.,
How Bad Was It? The Costs and Consequences of the 2007–09 Financial Crisis, 20 FED. RES.
BANK OF DALL.: STAFF PAPERS 1–2, 19 (2013),
https://dallasfed.org/assets/documents/research/staff/staff1301.pdf (estimating the total cost of the
crisis in the United States alone at up to $14 trillion and suggesting that the trajectory of potential
GDP may be permanently lower).
13. MARY KREINER RAMIREZ & STEVEN A. RAMIREZ, THE CASE FOR THE CORPORATE DEATH
PENALTY 1–27 (2016) (reviewing evidence of fraud and the many laws designed to punish fraud
and concluding that “a new and unprecedented lawlessness emerged at the apex of American
capitalism”).
2018] Diversity and Ethics 585

Shareholders do not benefit from the ethical and compliance lapses at

their firms.14 On the contrary, shareholders foot the bill at the most
egregiously miscreant firms, to the exclusion of the managers actually
orchestrating unethical and non-compliant misconduct.15 In case after
case, managers walked off with windfall options compensation,16
generous retirement payments,17 and golden parachute payments (if, in
rare circumstances, fired).18 Yet shareholders, particularly at the firms at
the center of the Great Financial Crisis, suffered share price losses and
the burden of paying off regulators for the misconduct of managers.19
This reality holds true even today, ten years after the financial crisis.20
In 2017, I argued for an ethics screening body within firms that
mirrored the ethical sensitivities of the firm’s key constituencies through

14. Id. at 2–3 (noting the payment of $16.65 billion paid to settle fraud allegations against Bank
of America, $13 billion paid to settle such allegations against JP Morgan, and $7 billion paid to
settle claims against Citigroup).
15. Id. at 7 (stating that while the government fined the megabanks for the sale of billions of
toxic mortgages without full disclosure to the investors, “the government simply accepted fines that
essentially punished innocent shareholders instead of senior leaders at the megabanks”).
16. Id. at 122–23 (“[O]verall the senior officers garnered $1 billion in total compensation
between 2000 and 2008. The structure of options compensation meant that Lehman’s senior
managers faced constant incentives to push short-term stock prices as high as possible as their
options vested over time.”). The shareholders that Lehman’s officers duped into thinking the firm
enjoyed high liquidity and financial stability suffered a total loss of their investment when the firm
filed for bankruptcy. Id. at 109–11, 132.
17. Thus, Stanley O’Neal, the former CEO of Merrill Lynch, stepped down and took a $161.5
million retirement package with him. O’Neal left behind a doomed company after the firm reported
a $7.9 billion loss due to aggressive bets in mortgage-backed securities. Tomoeh Murakami Tse,
Merrill CEO Steps Down, Leaves Firm In Crisis, WASH. POST (Oct. 31, 2008),
http://www.washingtonpost.com/wp-dyn/content/article/2007/10/30/AR2007103000565.html.
18. See, e.g., Claire Suddath, Biggest Golden Parachutes, TIME (2016),
http://content.time.com/time/specials/packages/article/0,28804,1848501_1848500_1848461,00.ht
ml (citing to a 2007 emergency board meeting, in which Citigroup Inc.’s Charles Prince announced
his resignation by saying, “Given the size and nature of the recent losses in our mortgage-backed
securities business, the only honorable course for me to take as chief executive officer is to step
down.” He walked away with $99 million in vested stock holdings and a pension, on top of the
$53.1 million salary and bonuses he racked up during his four-year tenure.).
19. Citigroup’s shareholders lost 88 percent of their investment over the past ten years.
Citigroup’s Decade of Agony is Almost Over, ECONOMIST (Mar. 18, 2017),
https://www.economist.com/news/business/21718924-recipient-americas-biggest-bank-bail-out-
has-overhauled-its-capital-base-and-its-profits.
20. JPMorgan alone has paid a total of $36 billion in settlements and fines since 2008. Some
of the highlights: selling securities constructed from “toxic” mortgages, according to the U.S.
Department of Justice ($13 billion); failing to report questionable activity by Ponzi schemer
Bernard Madoff ($1.7 billion); and, most recently, colluding to rig foreign-exchange rates
($1.9 billion to a host of regulators).
Anthony Effinger, The Rise of the Compliance Guru—and Banker Ire, BLOOMBERG (June 25,
2015, 5:00 AM), https://www.bloomberg.com/news/features/2015-06-25/compliance-is-now-
calling-the-shots-and-bankers-are-bristling.
586 Loyola University Chicago Law Journal [Vol. 49

the importation of the full range of cultural diversity21 within these

constituencies.22 I advocated that this would effectively import an
ethicality into the firm that would require more than mere legal
compliance to maximize shareholder wealth.23 Diversity also imports
rigor into the firm in that the firm’s conduct must pass muster with all
culturally diverse perspectives on compliance or ethical issues if diverse
voices hold sway.24 I focused on the role of in-house counsel in fostering
this function.25 I further suggested that in-house counsel could implement
such a screening function to provide additional insulation to counsel
seeking to further the ethical and compliance efforts of the firm

21. Orlando C. Richard et al., The Impact of Racial Diversity on Intermediate and Long-term
Performance: The Moderating Role of Environmental Context, 28 STRATEGIC MGMT. J. 1213, 1229
(2007) (“Cultural diversity exists when people with distinct and different group affiliations of
cultural significance are found within a larger group or organization.”). This implies no
compromise in terms of financial performance. Id. at 1229 (“The delightful discovery is that beyond
moderate levels of diversity we find a positive effect of racial diversity on both our short-term and
long-term measures of performance.”). Of course, diversity must be well-managed and tokenism
must be avoided or diverse perspectives will be squelched. See, e.g., Kimberly M. Ellis & Phyllis
Y. Keys, Workforce Diversity and Shareholder Value: A Multi-Level Perspective, 44 REV.
QUANTITATIVE FIN. & ACCT. 191, 209–10 (2015) (finding enhanced firm value for diverse
workforces in firms that garner Fortune “Diversity Elite” recognition). When properly
implemented, enhanced cultural diversity can enhance creativity. See, e.g., Adam D. Galinsky et
al., Maximizing the Gains and Minimizing the Pains of Diversity, 10 PERSP. ON PSYCHOL. SCI. 742,
745 (2015) (“The practices of inclusive multiculturalism and perspective taking also help catalyze
the innovation and decision-making benefits of diversity. For example, organizational climates that
value diversity increase information processing and exchange and thus produce better decisions.
Similarly, when team members consider one another’s perspectives, diverse teams are more
creative.”).
22. Ramirez, supra note 1, at 466 (“This essay posits that cultural diversity can help in-house
counsel achieve superior ethical, compliance, and reputation risk management outcomes for their
firms, and therefore in-house counsel should seek to maximize cultural diversity within the corps
of corporate counsel representing firms, and throughout the firm.”).
23. [E]nhanced cultural diversity embedded in a screening function within the firm, that is
armed with the tools for a heterogeneous assessment of the most dubious firm practices,
provides the firm with an objective and rigorous basis for determining the ethicality and costs
of a given practice or course of conduct.
Id. at 483.
24. Basing the acclimation of the firm to cultural diversity should also operate to provide
the firm with a standard of ethicality more rigorous than the definition of ethicality that
has too often prevailed in the past.” Cultural diversity would subject a proposed course
of conduct to additional ethics screens based upon “the ethics sensitivities of women and
different ethnic groups.
Id. at 479.
25. Id. at 481 (using a robust and culturally diverse group to vet the “ethicality or compliance
repercussions of a given business practice would . . . shield an in-house attorney from much more
patent risks and career threats in being forced to blow the whistle alone, without the support of
other culturally diverse voices”). Possible termination for whistleblowing may account in part for
the silence of the lawyers with respect to the fraud and unethical behavior underlying corporate
scandals such as the subprime debacle. Id. at 465.
2018] Diversity and Ethics 587

notwithstanding possible managerial resistance.26 Earlier, in 2010, I

posited that optimal legal risk management should not be siloed in the
CEO, and that an independent committee of the board with legal expertise
and an anonymous reporting function would prove superior to the proven
flaws of CEO autonomy regarding legal, compliance, and reputational
(i.e., ethical) risk management.27 This Article extends these proposals and
concepts into the realm of investor protection under the federal securities
laws.28
More specifically, this Article argues that investors deserve to know
the contours of a firm’s compliance and ethical governance when making
investment decisions.29 While courts traditionally deem management
integrity not material under the federal securities laws, and therefore not
subject to mandatory disclosure, telling the truth about ethical governance
systems is not the same as telling the truth about managerial corruption
or ethicality.30 Thus, for example, Congress required disclosure of the

26. Id. at 465–67 (“This essay suggests that in-house counsel interested in protecting
shareholders from the costs of misconduct within their firms, however, can take proactive steps to
protect shareholders from the kind of skullduggery that drove all aspects of the subprime crisis, as
well as the Enron series of frauds.”). The use of a culturally diverse screening function could
operate to short-circuit dubious conduct prior to the need of counsel to consider reporting the
misconduct under the Model Rules of Professional Conduct. MODEL RULES OF PROF’L CONDUCT
r. 1.6, 1.13 (AM. BAR ASS’N 2016).
27. Steven A. Ramirez, Legal Risk Post-SOX and the Subprime Fiasco: Back to the Drawing
Board, in ENTERPRISE RISK MANAGEMENT 351–67 (John Fraser & Betty J. Simkins eds., 2010)
[hereinafter Ramirez, Back to the Drawing Board].
28. This Article will focus upon the mandatory disclosure regime under the Securities Act of
1933 and the Securities Exchange Act of 1934. Securities Act of 1933, Pub. L. No. 73–22, 48 Stat.
74 (codified as amended at 15 U.S.C. §§ 77a–77aa (2012)); Securities Exchange Act of 1934, ch.
404, 48 Stat. 881 (codified as amended at 15 U.S.C. §§ 78a–78mm (2012)).
29. The existence of an ethics code, or an explanation why a firm lacks one, is already disclosed as
a material fact:
Pursuant to [the Sarbanes-Oxley Act of 2002] section 406(a), the Securities and
Exchange Commission (SEC) issued regulations requiring each public company to
disclose whether it has a code of ethics, and if a company has not adopted such a code,
to explain why it has chosen not to do so. SEC rules also require each company that has
a code to disclose any waiver of the code, as applied to corporate officers that the SEC
rules identify, in a timely manner under Item 5.05 of Form 8-K.
Madoka Mori, A Proposal to Revise the SEC Instructions for Reporting Waivers of Corporate
Codes of Ethics for Conflicts of Interest, 24 YALE J. REG. 293, 293 (2007).
30. In 1976, the United States Supreme Court defined a “material” fact as one that would be
“viewed by the reasonable investor as having significantly altered the ‘total mix’ of
information made available.” Despite the definition, there were no pressures from investors
for corporate disclosure of unadjudicated violations of law or antisocial conduct, or for
ethical or moral behavior at the corporate level.
John M. Fedders, Qualitative Materiality: The Birth, Struggles, and Demise of an Unworkable
Standard, 48 CATH. U. L. REV. 41, 42 (1998) (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S.
438, 449 (1976)). See MICHAEL J. KAUFMAN & JOHN M. WUNDERLICH, RULE 10B-5 PRIVATE
SECURITIES FRAUD LITIGATION 869–80 (2015) (citing to numerous cases holding that management
588 Loyola University Chicago Law Journal [Vol. 49

existence of codes of ethics in the Sarbanes-Oxley Act after the massive

securities frauds of 2001 and 2003, including the collapse of Enron and
WorldCom.31 Disclosure of ethical and compliance governance systems,
including the role of cultural diversity within those systems, would
encourage firms to compete for capital on the basis of their governance
of compliance and ethics risks.32
Businesses that use cultural diversity to screen their business conduct
within the framework of a well-ordered scheme of shareholder wealth
maximization will better acclimate themselves to all key constituencies,
leading to superior financial performance.33 Given the increased diversity
of consumer, labor, and investor pools, this approach to encouraging
extra-legal standards of conduct draws upon differences in ethical
sensitivities to drive more rigorous ethical and compliance screening of
business conduct.34 Further, to the extent the business enterprise
enhances its financial performance through a more diverse screening

integrity and ethicality cannot form the basis for a private securities fraud action under Rule 10b-5
because such facts are not material).
31. Sarbanes-Oxley Act of 2002, Pub. L. No. 107–204, § 406, 116 Stat. 745 (2002) (codified at
15 U.S.C. § 7264) (requiring the SEC to issue rules requiring publicly traded firms to “disclose
whether or not, and if not, the reason therefor, such issuer has adopted a code of ethics for senior
financial officers, applicable to its principal financial officer and comptroller or principal
accounting officer, or persons performing similar functions”).
32. Joshua A. Newberg, Corporate Codes of Ethics, Mandatory Disclosure, and the Market for
Ethical Conduct, 29 VT. L. REV. 253, 287–94 (2005) (suggesting that firms could “compete on the
basis of ethical commitments” when investors can weigh differing approaches to ethics). The SEC
took a similar approach when it used its power under the Sarbanes-Oxley Act to create the Qualified
Legal Compliance Committee (“QLCC”). Ramirez, Back to the Drawing Board, supra note 27, at
351 (stating that while the QLCC innovation encouraged firms to centralize legal compliance in
the hands of an independent board committee, few public firms took advantage of this innovation).
33. Maretno Harjoto et al., Board Diversity and Corporate Social Responsibility, 132 J. BUS.
ETHICS 641, 642 (2015) (“Firms could suffer both monetary and reputational losses from failing to
align management’s interests with those of their stakeholders. Effective stakeholder management
is a critical requirement for firm success.”). See also id. (indicating that group dynamics and
decisionmaking vary depending on the background of the individuals serving on corporate boards,
and thus, a diverse group of directors brings different knowledge bases, sets of experiences, and
perspectives on society to group decisionmaking; as a result, diversity increases the board’s ability
to recognize the needs and interests of different groups of stakeholders as reflected in CSR
performance).
34. Social scientists theorize that women and ethnic minorities approach ethics and risk
differently based upon cultural socialization. See Leslie Dawson, Ethical Differences Between Men
and Women in the Sales Profession, 16 J. BUS. ETHICS 1143, 1143–44 (1997) (“This theory holds
that general and nearly universal differences that characterize masculine and feminine personalities
are formed in childhood and are incontrovertible; these in turn differentially shape the work-related
interests, concerns, and values of the sexes.”); Melissa L. Finucane et al., Gender, Race, and
Perceived Risk: The “White Male” Effect, 2 HEALTH, RISK & SOC’Y 159, 169 (2000) (reporting
that survey data did not support any biological explanation for diverse risk perceptions because
differences between men and women in risk perception differed across races); id. at 170
(concluding that the differences were likely driven by socialization effects).
2018] Diversity and Ethics 589

mechanism, it should lead to quantifiable gains over those firms that do

not feature such an innovation. Ultimately, the optimal structure for
corporate ethical screening should emerge to give shareholders enhanced
value as the firm achieves greater acclimation among constituencies.
Competitive pressure can thereby enhance firm ethicality and investors
can thereby objectively measure firm ethicality. The U.S. Securities and
Exchange Commission (“SEC”) should facilitate this process of market
discovery of optimal ethical and compliance structures within the firm
through the issuance of disclosure guidance of ethical and compliance
structures within public firms.35 Such structures will prove material to
investors.
Part I will review recent ethical and compliance lapses and will
demonstrate the materiality of such lapses to shareholders who typically
suffer significant investment losses in the wake of disclosure of ethical
and compliance lapses. Part II will suggest keys to achieving superior
ethical and compliance outcomes through the firm-wide embrace of
cultural diversity, and the degree to which that diversity plays a role in
ethical and compliance risk management. Part III will argue that internal
governance mechanisms and structures relating to ethics and compliance
are material, and that the SEC should facilitate market movement toward
more optimal internal firm structures through appropriate disclosure
guidance beyond current ethics-related disclosures. The Article will
conclude that embedding cultural diversity within a well-structured
system of governance will yield objectively measurable positive
outcomes in financial performance. As such, firms will be able to
demonstrate an ethics and compliance advantage, and ultimately compete
to perfect that advantage.

I. THE MATERIALITY OF ETHICS AND COMPLIANCE

In the current political environment, ethics and compliance systems
within public firms likely will take on increased significance. The Trump
administration posits that deregulation will lead to greater economic
growth.36 Nevertheless, the administration’s approach relies upon

35. As such, this proposed reform is a pro-market reform, simply requiring disclosure of facts
that otherwise may not easily be known to market participants but that are nevertheless material.
Simply put, it should enhance market efficiency while at the same time encouraging managers to
attend to ethics and compliance more aggressively than in the past. See Allen Ferrell, The Case for
Mandatory Disclosure in Securities Regulation Around the World, 2 BROOK. J. CORP. FIN. & COM.
L. 81, 125 (2007) (“[T]here are again strong theoretical reasons, backed by an impressive body of
empirical evidence, that mandatory disclosure can have the socially desirable effect of increasing
competition between firms for capital and competition in the product market.”).
36. An Assessment of the White House’s Progress on Deregulation, ECONOMIST (Oct. 17, 2017)
https://www.economist.com/news/business/21730170-donald-trump-has-blocked-new-
590 Loyola University Chicago Law Journal [Vol. 49

irrational and arbitrary factors not conducive to rational regulation, but

instead focused on empowering the corporate class.37 The administration
directed the government to forsake any semblance of rational cost-benefit
analysis in favor of a regulatory approach that completely ignores any
regulatory benefits and focuses only upon costs to business to foreclose
regulation.38 Worse, any rule passing the first irrational requirement can
only become effective upon the irrational requirement that two other
regulations face repeal.39 The government must now disregard massive
economic benefits of rational regulation in vital areas such as
environmental protection, transportation, and energy.40 These
requirements essentially slowed regulatory rulemaking to a crawl not
seen since 2007, immediately preceding the Great Financial Crisis.41
Further, more deregulation appears likely. The U.S. House of
Representatives already voted to partially repeal the Dodd-Frank Wall
Street Reform and Consumer Protection Act (“Dodd-Frank Act”),42 and
the Trump administration released its own plan to repeal parts of the
Dodd-Frank Act in October 2017.43 The Dodd-Frank Act encapsulates

regulations-ease-repealing-old-ones-will-be-harder (“Deregulation, along with tax cuts and trade

reform, is one of the three pillars of President Donald Trump’s economic agenda. Republicans
promise that, freed of red tape, American firms will invest more and unleash faster economic
growth.”).
37. Mr. Trump has slowed rulemaking in two main ways. First, on coming to office, he ordered
government agencies not to impose any net new regulatory costs on companies, regardless
of the benefits of doing so, and said that in order to write any new rules they would have to
repeal two old ones. Because it takes time to unearth and discard dud rules, the practical
effect of this has been to put a brake on new issuance. Id.
38. Exec. Order No. 13771, 82 Fed. Reg. 9339 (Jan. 30, 2017) (“[T]he heads of all agencies are
directed that the total incremental cost of all new regulations . . . to be finalized this year shall be
no greater than zero, unless otherwise required by law or consistent with advice provided in writing
by the Director of the Office of Management and Budget.”).
39. Id. (“Unless prohibited by law, whenever an executive department or agency (agency)
publicly proposes for notice and comment or otherwise promulgates a new regulation, it shall
identify at least two existing regulations to be repealed.”).
40. ECONOMIST, supra note 36, at fig. 2.
41. How to Judge Whether Deregulation is Going Too Far, ECONOMIST (Oct. 12, 2017),
https://www.economist.com/news/leaders/21730148-donald-trumps-regulatory-policy-strange-
mix-thoughtful-and-dangerous-how-judge-whether (“Even diehard libertarians should worry when
the administration weakens rules governing the leaching of coal ash into groundwater, or permits
the use of pesticides that may impair children’s brain development.”).
42. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111–203, 124
Stat. 1376 (2010) (codified at 12 U.S.C. § 5581).
43. U.S. DEPARTMENT OF THE TREASURY, A FINANCIAL SYSTEM THAT CREATES ECONOMIC
OPPORTUNITIES: CAPITAL MARKETS: REPORT TO PRESIDENT DONALD J. TRUMP 205–20 (Oct.
2017) https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-
Capital-Markets-FINAL-FINAL.pdf (“Treasury recommends that Section 1502 (conflict
minerals), Section 1503 (mine safety), Section 1504 (resource extraction), and Section 953(b) (pay
ratio) of Dodd-Frank be repealed and any rules issued pursuant to such provisions be withdrawn.”).
2018] Diversity and Ethics 591

the primary regulatory response of the U.S. government to the massive

wealth destruction investors faced after the Great Financial Crisis of
2008.44 It reaches a range of troublesome and complex regulatory topics,
from derivatives45 to executive compensation,46 and from too-big-to-fail
banks47 to diversity in the financial sector.48 While the Dodd-Frank Act
certainly inspired criticism from across the political spectrum,49 it has
undisputedly prevented a recurrence of the Great Financial Crisis.50
Economic history suggests that sustainable economic growth requires
a sound legal and regulatory infrastructure that lowers the cost of capital
or raises the returns to capital, including the stabilization of the economy
through appropriate regulation, particularly in the financial sector.51 Even
the staunch conservative scholar and jurist Richard Posner admitted in

44. Steven A. Ramirez, Dodd-Frank as Maginot Line, 15 CHAP. L. REV. 109, 110 (2011)
(assessing the Dodd-Frank Act as the primary government response to the Great Financial Crisis
and concluding that “while Dodd-Frank may prevent another subprime crisis, it will prove unable
to prevent a future, more serious debt crisis”).
45. Timothy E. Lynch, Coming Up Short: The United States’ Second-Best Strategies for
Corralling Purely Speculative Derivatives, 36 CARDOZO L. REV. 545, 549 (2014) (arguing that
purely speculative derivative trades are still permitted under Dodd-Frank despite their negative
externalities and the fact that they constitute negative sum transactions and serve no rational
purpose).
46. Securities Regulation – Dodd-Frank Wall Street Reform and Consumer Protection Act, 129
HARV. L. REV. 1144, 1145–46 (2016) (assessing possible attack on SEC rule mandating disclosure
of executive pay ratio which took effect on January 1, 2017, in the following regulation: 80 Fed.
Reg. 50, 104 (Aug. 18, 2015) (to be codified at 17 C.F.R. pts. 229, 240, 249)).
47. H. Rodgin Cohen, Preventing the Fire Next Time: Too Big to Fail, 90 TEX. L. REV. 1717,
1722 (2012) (“TBTF [Too Big to Fail] is an unacceptable policy that must be ended by legislative
reform. This policy creates moral hazard; it produces marketplace distortions; it is inequitable; and,
of most importance, it represents a potential call option on the taxpayer.”).
48. See Kristin Johnson et al., Diversifying to Mitigate Risk: Can Dodd-Frank Section 342 Help
Stabilize the Financial Sector?, 73 WASH. & LEE L. REV. 1795, 1867 (2016) (concluding that
Congress acted appropriately in seeking to diversify the financial sector).
49. See Ben Portiss, Is Dodd-Frank Overdue or Overkill? 2 Dueling Views, N.Y. TIMES (Aug.
3, 2011, 4:20 PM), https://dealbook.nytimes.com/2011/08/03/is-dodd-frank-overdue-or-overkill-2-
dueling-views/ (quoting Nobel laureate Joseph Stiglitz for the proposition that Dodd-Frank “went
nowhere far enough” and quoting former Comptroller of the Currency Edward Ludwig for the
proposition that the Act is “a deleterious drag on capital formation and meaningful job opportunities
for our people”).
50. See Ben McLannahan, Did Dodd-Frank Really Hurt the US Economy?, FIN. TIMES (Feb.
13, 2017) https://www.ft.com/content/dd4a6698-efe7-11e6-930f-061b01e23655 (showing that
bank lending expanded, and banks increased capital and profits, since the enactment of Dodd-
Frank); John W. Schoen, Despite Critics’ Claims, Dodd-Frank Hasn’t Slowed Lending to Business
or Consumers, CNBC (Feb. 6, 2017, 2:13 PM), https://www.cnbc.com/2017/02/06/despite-critics-
claims-dodd-frank-hasnt-slowed-lending-to-business-or-consumers.html (showing that bank
lending increased after the enactment of Dodd-Frank).
51. Steven A. Ramirez, The Law and Macroeconomics of the New Deal at 70, 62 MD. L. REV.
515, 546 (2003) (showing that the Great Depression necessitated new financial regulations such as
the federal securities laws and inaugurated a search “to endow our economy with . . . an optimized
regulatory infrastructure”).
592 Loyola University Chicago Law Journal [Vol. 49

2009 that,
the depression [following the Great Financial Crisis] has shown that we
need a more active and intelligent government to keep our model of a
capitalist economy from running off the rails. The movement to
deregulate the financial industry went too far by exaggerating the
resilience—the self-healing powers—of laissez-faire capitalism.52
The pre-Dodd-Frank regulatory environment hardly offered adequate
investor protection to shareholders and other securities investors.53
Worldwide, equity markets got hammered when all of the losses
underlying the subprime debacle came to light.54 All of this suggests that
further deregulation enhances the risks of another calamity like the Great
Financial Crisis stemming from unethical and unlawful misconduct.
The staggering shareholder losses associated with egregious failures in
ethics and compliance risk management also manifest themselves at the
firm level. The shareholders of Wells Fargo certainly can attest to the
devastating consequences of systematically sanctioned ethical and
compliance breaches.55 Indeed, the entire megabank sector worldwide,
which suffers from a pervasive lack of accountability and the most
promiscuous government subsidies,56 spends billions in shareholder

52. Robert M. Solow, How to Understand the Disaster, N.Y. REV. BOOKS (May 14, 2009)
http://www.nybooks.com/articles/2009/05/14/how-to-understand-the-disaster/ (book review of
RICHARD A. POSNER, A FAILURE OF CAPITALISM: THE CRISIS OF ‘08 AND THE DESCENT INTO
DEPRESSION 75 (2009)) (stating that Posner is an independent thinker but “his independent thoughts
have usually led him to a position well to the right of the political economy spectrum” and “his
thought exhibits an affinity to Chicago school economics: libertarian, monetarist, sensitive to even
small matters of economic efficiency, dismissive of large matters of equity, and therefore protective
of property rights even at the expense of larger and softer ‘human’ rights”).
53. Ramirez, Virtues of Private Securities Litigation, supra note 11, at 735 (demonstrating that
the Great Financial Crisis arose from massive securities fraud against investors in mortgage-backed
securities and firms exposed to such securities). Due to sustained attacks on the rights of investors
to privately enforce the federal securities laws, the law failed to adequately deter securities fraud.
Id. at 736–37.
54. Söhnke M. Bartram & Gordon M. Bodnar, No Place to Hide: The Global Crisis in Equity
Markets in 2008/2009, 28 J. INT'L MONEY & FIN. 1246, 1246 (2009) (“[L]ooking at return
performance across an array of regions, countries, and sectors, broad [equity] market averages are
down approximately 40% on their end of 2006 levels.”).
55. See supra notes 2–5.
56. Arthur E. Wilmarth Jr., There’s No Such Thing as a ‘Good’ Megabank, AM. BANKER (Nov.
22, 2016, 8:30 AM), https://www.americanbanker.com/opinion/theres-no-such-thing-as-a-good-
megabank (“Giant financial conglomerates were at the epicenter of the global financial crisis. The
U.S., United Kingdom and European Union provided more than $10 trillion of capital infusions,
guarantees and emergency loans to stabilize their financial systems and rescue failing
megabanks. . . .”). Professor Wilmarth suggests that the huge subsidies behind the megabanks fuel
an inherent moral hazard that arises when risky conduct enjoys government funding:
“megabanks . . . finance their speculative activities in the capital markets by exploiting explicit and
implicit federal safety net subsidies. To expect managers and regulators to produce ‘good’
megabanks is to ignore the lessons of history and fundamental laws of human nature.” Id.
2018] Diversity and Ethics 593

wealth to pay regulatory fines in a way that simply reflects that systematic
unethical and unlawful conduct remains a part of the megabank business
model.57 Even beyond the megabanks, however, public firms regularly
destroy massive amounts of shareholder wealth from ethically dubious
conduct.
Consider the recent data breach uncovered at Equifax that affected up
to 143 million Americans.58 Hackers gained access to consumer
information, including names, addresses, dates of birth, and Social
Security numbers.59 After Equifax announced the breach, on September
7, 2017, its stock plunged 30 percent, wiping out $6 billion in shareholder
wealth in just ten days.60 Management first heard hints of trouble on
March 8, 2017, and definitely knew they faced serious problems on
August 22, 2017.61 Yet, the company allowed the security problems to
fester, and, as always, shareholders were the last to learn of
management’s recklessness.62 The CEO of Equifax resigned after the
breach with a reported total payout of over $90 million.63
Or, consider the so-called “Dieselgate” scandal that rocked
shareholders of Volkswagen across the world in 2015.64 In fact, investors
are calling for the firm’s break-up to unlock the value that is currently
mired in scandal.65 The company installed software on its diesel engines
that could sense an emissions test and reduce emissions to pass the test
even while spewing unlawful pollution otherwise.66 The company
expended over $26 billion to meet liabilities arising from the scam.67

57. Gavin Finch, World’s Biggest Banks Fined $321 Billion Since Financial Crisis,
BLOOMBERG (Mar. 1, 2017, 11:01 PM), https://www.bloomberg.com/news/articles/2017-03-
02/world-s-biggest-banks-fined-321-billion-since-financial-crisis (“Banks globally have paid $321
billion in fines since 2008 for an abundance of regulatory failings from money laundering to market
manipulation and terrorist financing, according to data from Boston Consulting Group.”). In 2015,
the entire megabank sector worldwide consisting of over 300 large banks posted an economic profit
of $167 billion. Id. During the entire period of 2009–2015 the sector posted negative economic
profit. Id.
58. AnnaMaria Andriotis et al., ‘We’ve Been Breached’: Inside the Equifax Hack, WALL
STREET J. (Sept. 18, 2017, 8:04 AM), https://www.wsj.com/articles/weve-been-breached-inside-
the-equifax-hack-1505693318?mg=prod/accounts-wsj.
59. Id.
60. Id.
61. Id.
62. See id.
63. Jen Wieczner, Equifax CEO Richard Smith Who Oversaw Breach to Collect $90 Million,
FORTUNE (Sept. 26, 2017), http://fortune.com/2017/09/26/equifax-ceo-richard-smith-net-worth/.
64. Andrew Bary, Volkswagen’s Road to Recovery, BARRON’S (Aug. 12, 2017, 1:08 AM),
https://www.barrons.com/articles/volkswagens-road-to-recovery-1502513470 (noting that
Volkswagen shares trade in the U.S. and Germany).
65. Id.
66. Id.
67. Id.
594 Loyola University Chicago Law Journal [Vol. 49

Shareholders suffered deep losses as a result of the scandal and shares

still trade at a deep discount to their value prior to the disclosure of the
scandal.68
The next great wave of corporate scandals may well dwarf the above
scandals and even the subprime debacle. ExxonMobil and other carbon
producers appear to have undertaken a concerted effort to hide the truth
about climate change in the name of short-term profits from underpriced
carbon.69 The pharmaceutical industry may well face legal and regulatory
sanctions from their role in hyper-peddling addictive opioids.70
Eventually, shareholders face the costs of these undisclosed risks even if
the short-term profits may initially fatten shareholder wallets. 71 By

68. Gilbert Kreijger, How VW Rose So High and Fell So Low, HANDELSBLATT GLOBAL (June
23, 2017, 2:59 PM), https://global.handelsblatt.com/companies-markets/how-vw-rose-so-high-
and-fell-so-low-volkswagen-history-dieselgate-emissions-fraud-porsche-hitler-784792
(“‘Dieselgate’ is now the biggest case of fraud in automotive history. It has cost VW €21.6 billion
so far, triggered hundreds of lawsuits and wiped out a fifth of VW’s preference stock value.”).
69. For example, scholars studied ExxonMobile’s scientific knowledge of the dangers of
climate change cannot square with their public pronouncements:
We conclude that ExxonMobil contributed to advancing climate science—by way of its
scientists’ academic publications—but promoted doubt about it in advertorials. Given
this discrepancy, we conclude that ExxonMobil misled the public. Our content analysis
also examines ExxonMobil’s discussion of the risks of stranded fossil fuel assets. We
find the topic discussed and sometimes quantified in 24 documents of various types, but
absent from advertorials.
Geoffrey Supran & Naomi Oreskes, Assessing ExxonMobil’s Climate Change Communications
(1977–2014), 12 ENVTL. RES. LETTERS 1 (2017).
70. According to 60 Minutes:
In the midst of the worst drug epidemic in American history, the U.S. Drug Enforcement
Administration’s ability to keep addictive opioids off U.S. streets was derailed—that
according to Joe Rannazzisi, one of the most important whistleblowers ever interviewed
by 60 Minutes. Rannazzisi ran the DEA’s Office of Diversion Control, the division that
regulates and investigates the pharmaceutical industry. Now in a joint investigation by
60 Minutes and The Washington Post, Rannazzisi tells the inside story of how, he says,
the opioid crisis was allowed to spread—aided by Congress, lobbyists, and a drug
distribution industry that shipped, almost unchecked, hundreds of millions of pills to
rogue pharmacies and pain clinics providing the rocket fuel for a crisis that, over the last
two decades, has claimed 200,000 lives.
Bill Whitaker, Ex-DEA Agent: Opioid Crisis Fueled by Drug Industry and Congress, CBS NEWS
(Oct. 17, 2017, 10:12 AM), https://www.cbsnews.com/news/ex-dea-agent-opioid-crisis-fueled-by-
drug-industry-and-congress/.
71. Disclosure of the systems in place to assure ethical and compliant conduct would address a
fundamental information asymmetry with respect to misconduct: management will always know
about such misconduct before shareholders. See supra notes 62 and 68. Economists Michael
Spence, Joseph Stiglitz, and George Akerlof won the Nobel Prize in 2001 for showing that under
conditions of asymmetric information markets cannot reach efficient outcomes. Press Release,
Nobel Prize, The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2001
(Oct. 10, 2001), https://www.nobelprize.org/nobel_prizes/economic-
sciences/laureates/2001/press.html. Here the reality of asymmetric information means shareholders
randomly partake in involuntary profits from often reprehensible behavior and randomly face losses
they cannot avoid.
2018] Diversity and Ethics 595

definition, shareholders suffer from inherently asymmetric information

regarding managerial misconduct at their firms, as management alone
knows of their own misconduct and trades accordingly.
Disclosure of ethics and compliance risk-management systems in and
of itself is not likely to end corporate scandals.72 Much costly, irrational,
and socially pernicious corporate misconduct appears inherent to the
corporate form, at least as currently structured.73 Nevertheless, full
disclosure will at least bring future costs, sanctions, and liabilities
forward into the present value of firms, and thereby cause firms to reckon
with their ethical and compliance transparency from a cost of capital
point of view.74 The next Section will explore the possibility that a fully
diversified ethics and compliance function may actually curtail such
wrongdoing.

II. DIVERSITY AND ETHICS

Scholars and other thought leaders have long strived to create objective
and normative notions of ethicality.75 At the same time, while some level
of universality pertains to behavioral norms, scholars also generally
recognize that ethicality carries with it some level of culture-bound notion

72. Unlawful securities fraud seemed under control from a macroeconomic perspective under
the legal and regulatory infrastructure that existed prior to the enactment of the Private Securities
Litigation Reform Act and the Securities Litigation Uniform Standards Act in the 1990s, as well as
prior to judicial hostility to private securities litigation. Ramirez, Virtues of Private Securities
Litigation, supra note 11, at 677–710 (exploring the effects of modern capitalism, in view of market
efficiency theory, in which a superior informational foundation to drive investment gives rise to a
fertile ground for panics leading to major financial panic and collapse).
73. For example, the effective abolition of liability for damages for breaches of the duty of care
for directors does not encourage boards that care much about shareholders. See DEL. CODE ANN.
tit. 8, § 102(b)(7) (2001) (enabling a corporation to amend its articles of incorporation to include
“[a] provision eliminating or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as director . . .”); see also Steven
A. Ramirez, The Chaos of Smith, 45 WASHBURN L.J. 343, 362 (2006) (“It is difficult to justify the
obliteration of the duty of care or a CEO-primacy model of corporate governance on economic
grounds; no empirical evidence suggests that permitting directors to be infinitely negligent is
economically sound.”).
74. Appropriate disclosure would force firms to compete for capital through superior ethics and
compliance systems.
75. PETER SINGER, ETHICS 3 (1994) (surveying answers offered by great thinkers regarding the
search for objective norms and concluding that the “ancient quest” if fulfilled would be more
valuable than any “sacred relic”). Insofar as business ethics is concerned, this Article is premised
on the notion that firms should strive to optimize their acclimation to all important constituents,
and that cultural diversity with the firm affords the firm the ability to maximize shareholder through
such acclimation. See Ramirez, supra note 1, at 479–80 (articulating an approach based upon the
firm’s manifest need to acclimate itself as positively as possible to the varying perspectives of its
key constituencies as a means for enabling in-house counsel to guide their firms to superior ethical
and compliance outcomes).
596 Loyola University Chicago Law Journal [Vol. 49

of appropriate conduct.76 In a globalizing economy, business leaders

must navigate different cultural visions of morality itself. 77 This Section
will argue that, in a paradigm of true shareholder primacy, managers
should seek to implement and abide by a process that includes and
empowers the same cultural diversity present in the business’ key
constituencies (labor, investors, consumers, and regulators) to acclimate
the firm as optimally as possible to those constituencies for the purpose
of maximizing shareholder wealth.78
In the U.S., for example, scholars have shown that different
acculturation experiences (based, for example, upon gender or ethnic
differences) lead to different ethical sensitivities.79 In one study, the
authors found statistically significant differences between men and
women as well as between the four major ethnic groups present in the
U.S. regarding responses to a number of ethics-related survey
questions.80 No group held a monopoly on virtue; instead, different
groups scored higher on the ethics survey depending on the nature of the

76. Mohamed S. Msoroka & Diana Amundsen, One Size Fits not Quite All: Universal Research
Ethics with Diversity, RES. ETHICS (forthcoming 2018) (manuscript at 2) (stating that extreme
cultural relativism would hold that culture is the sole source of a moral right or rule and that extreme
universalism would hold that culture is irrelevant to morality, but opting for a mediating approach
between those two radical approaches). Msoroka and Amundsen advocate a fusion of universality
combined with cultural diversity in the specific context of research involving human subjects:
“Universality with diversity requires making room within a universal one-size-fits-all ethics
approach for a deeper consideration of how cultural values and beliefs bear influence on the process
of ethical deliberation.” Id. at 14.
77. Domènec Melé & Carlos Sánchez-Runde, Cultural Diversity and Universal Ethics in a
Global World, 116 J. BUS. ETHICS 681, 682 (2013) (“[T]he statement ‘Polygamy is morally
wrong,’ . . . may be true relative to one society, but false relative to another. Similar examples could
include cutting off a hand when someone is caught stealing, the mutilation of female genitals, or in
a business context, tolerating bribery and harming the environment.”).
78. Id. (“Moral diversity among cultures is not a novelty. Among the ancient Greek
philosophers, moral diversity was widely acknowledged, as it was with Medieval thinkers, like
Thomas Aquinas. Modern cultural anthropologists have also empirically shown that moral diversity
is a matter of fact.”) (citations omitted).
79. See, e.g., Costas Hadjicharalambous & Lynn Walsh, Ethnicity/Race and Gender Effects on
Ethical Sensitivity in Four Sub-Cultures, 15 J. LEGAL ETHICAL & REG. ISSUES 119, 128 (2012)
(offering an empirical analysis of ethical variations across different racial/ethnic and gender
groups).
80. Id. at 128 (“While gender differences were found in 26 of the 30 scenarios, ethnicity/race
differences, significant at p < 0.05, are observed in only 10 of the 30 scenarios.”). The authors of
the study noted that the most pronounced differences between African Americans and Caucasians
were in the area of caring for others, consistent with prior research. Id. (citing Linda A. Jackson et
al., Gender, Race and Morality in the Virtual World and its Relationship to Morality in the Real
World, 60 SEX ROLES 859 (2009)). The authors also noted that the finding of statistically significant
differences between Asian Americans and Caucasians was also consistent with prior research. Id.
(citing Louis P. White & Melanie J. Rhodeback, Ethical Dilemmas in Organization Development:
A Cross-Cultural Analysis, 11 J. BUS. ETHICS 663 (1992)).
2018] Diversity and Ethics 597

ethics inquiry or scenario.81

Moreover, in considering the differences in ethical sensitivities, the
differences in risk perceptions across gender and ethnicity play an equally
important role for business ethics and compliance risk management.82
Both women and ethnic minorities perceive risk differently from white
males.83 In fact, social scientists have long studied the “white male
effect” of risk insensitivity.84 This socially constructed effect appears to
turn on cultural privilege.85 In the U.S. that translates into higher risk
aversion in women, ethnic minorities, and more vulnerable white
males.86 Thus, including women in leadership positions appears to give
firms an edge in terms of managing financial risks.87 Firms with both

81. See Hadjicharalambous & Walsh, supra note 79, at 127, tbl.6 (illustrating that while no
single demographic dominated the ethics survey, disparate ethical sensitivities arose between
different gender and/or ethnic groups). This too is consistent with prior research. See John Tsalikis
& Osita Nwachukuru, Cross-Cultural Business Ethics: Ethical Beliefs Differences Between Blacks
and Whites, 7 J. BUS. ETHICS 745, 746, 751, 753 (1988) (investigating the differences in ethical
beliefs between blacks and whites in the United States in a study involving 234 white students and
255 black students who exhibited similar ethical beliefs despite reaching different “probability of
making the same decision” in two ethical scenarios).
82. See Dan M. Kahan et al., Culture and Identity-Protective Cognition: Explaining the White-
Male Effect in Risk Perception, 4 J. EMPIRICAL LEGAL STUD. 465, 465–66 (2007) (“Numerous
studies show that risk perceptions are skewed across gender and race: women worry more than
men, and minorities more than whites, about myriad dangers—from environmental pollution to
hand guns, from blood transfusions to red meat.”); Irwin P. Levin et al., The Interaction of
Experiential and Situational Factors and Gender in a Simulated Risky Decision-Making Task, 122
J. PSYCHOL. 173, 180 (1988) (finding that women students were more risk averse than male students
in an experimental setting).
83. James Farrell, Demographic and Socioeconomic Factors of Investors, in INVESTOR
BEHAVIOR: THE PSYCHOLOGY OF FINANCIAL PLANNING AND INVESTING 117 (H. Kent Baker &
Victor Ricciardi eds., 2014) (compiling and reviewing empirical studies focusing on the differences
in investment behavior across race and gender groups).
84. E.g., James Flynn et al., Gender, Race, and Perception of Environmental Health Risks, 14
RISK ANALYSIS 1101, 1107 (1994) (“There are two new and important results in these data. First,
nonwhite males and females are much more similar in their perceptions of risk than are white males
and females. Second, white males stand out from everyone else in their perceptions and attitudes
regarding risk.”).
85. Anna Olofsson & Saman Rashid, The White (Male) Effect and Risk Perception: Can
Equality Make a Difference?, 31 RISK ANALYSIS 1016, 1029 (2011) (finding that in Sweden (which
scores high on gender equality) “there is no pure ‘white male effect’ . . . it is just a ‘white effect,’
since the white majority shows low risk perception regardless of gender”) (emphasis in original);
Shahar Sansani, Ethnicity and Risk: A Field Test of the White-Male Effect, 25 ECON. LETTERS 74,
74 (2018) (finding that dominant social group in Israel took more risk than outgroups consistent
with the “White-Male Effect,” the notion that white males in the U.S. perceive lower risks than
females and non-whites).
86. Terre A. Satterfield et al., Discrimination, Vulnerability, and Justice in the Face of Risk, 24
RISK ANALYSIS 114, 127 (2004) (“[S]trong (affirmative) feelings of discrimination and
vulnerability and evaluative judgments of justice, as well as strong support for environmental
injustice claims, are closely linked to high perceptions of environmental health risks.”).
87. See Thorsten Beck et al., Gender and Banking: Are Women Better Loan Officers?, 17 REV.
FIN. 1279, 1317 (2013) (finding female loan officers have fewer problematic loans); Maureen I.
598 Loyola University Chicago Law Journal [Vol. 49

women and minorities on board also score higher ratings in corporate

transparency.88 Higher risk aversion and transparency naturally translate
into greater compliance and ethicality.
The predatory lending that underlaid the Great Financial Crisis created
a natural experiment to test these principles. For example, Professors
Muller-Kahle and Lewellyn found that financial firms with more female
representation at the board level engaged in less subprime lending.89
Utilizing a database of subprime lenders from the U.S. Department of
Housing and Urban Development, they matched subprime lenders with
non-subprime lenders by size and industry and found that board
configuration in the two sets of firms differed in statistically significant
ways.90 Specifically, the non-subprime lenders had boards with more
gender diversity, longer board tenure, and were less busy with other board
seats at other firms.91 Furthermore, “[t]he greater the percentage of
women on the board, the less likely a firm was to specialize in subprime
lending.”92 In short, the exploitative mortgage lending underlying the
subprime debacle may have been preventable had there been greater
diversity on financial institution boards.93
Another study found that gender-diverse boards navigated the risks of
the financial crisis better. In a study of U.S. bank holding company

Muller-Kahle & Krista B. Lewellyn, Did Board Configuration Matter? The Case of US Subprime
Lenders, 19 CORP. GOVERNANCE: AN INT’L REV. 405, 405 (2011) (finding that firms with diverse
leadership did not engage in as much subprime lending as firms with homogeneous leadership);
Ajay Palvia et al., Are Female CEOs and Chairwomen More Conservative and Risk Averse?
Evidence from the Banking Industry During the Financial Crisis, 131 J. BUS. ETHICS 577, 592
(2015) (finding that banks with female CEOs posed lower risk of bank failure).
88. See, e.g., Arun Upadhyay & Hongchao Zeng, Gender and Ethnic Diversity on Boards and
Corporate Information Environment, 67 J. BUS. RES. 2456, 2460 (2014) (finding that board
diversity is negatively associated with corporate opacity).
89. Muller-Kahle & Lewellyn, supra note 87, at 405.
90. The design of the study effectively addresses the problem of the direction of causation, as
subprime lending a year in the future cannot explain board configuration in the prior year. The
authors explain:
[R]everse causality is less plausible, given our research design. In our empirical tests, all
of our independent variables are collected in the year preceding the firm identified on
the subprime list. Thus, measures for our explanatory [variables] in the earlier period
could not have resulted from being identified as a subprime specialist in the subsequent
period.
Id. at 409.
91. Id. at 412–13 (using the group decisionmaking perspective in the context of subprime
lending to examine board of directors configuration and its influence on decisionmaking processes
around the issue of risky subprime lending); see also id. at 409 (defining busyness as the number
of outside board seats held by each outside director divided by the number of outside directors).
92. Id. at 413.
93. Id. at 405. While the study focused on U.S. lenders, another study involving European banks
found that boards with more women incurred lower risks too. See generally Ruth Mateos de Cabo
et al., Gender Diversity on European Banks’ Boards of Directors, 109 J. BUS. ETHICS 145 (2012).
2018] Diversity and Ethics 599

performance during the financial crisis, a group of scholars at the U.S.

Office of the Comptroller of the Currency (the primary federal regulator
of national banks) found that when bank holding companies reached a
“critical mass” of three female directors,94 they enjoyed superior
financial performance during the crisis.95 Notably, during less stressful
times the performance advantage dissipated.96 This suggests that gender-
diverse firms manage risk better than homogeneous firms.97 Other studies
reach similar conclusions.98
Importing heterogeneous perspectives into the firm allows businesses
access to richer and more elaborate information which can be
operationalized as a break on “groupthink.”99 That can thwart behavior,
such as unethical or non-compliant behavior, that tacitly enjoys cultural
approval based upon affinity bias.100 With respect to ethnic diversity, this
dynamic manifestly disrupted the “groupthink” behind bubbles in

94. Laura St. Claire et al., Braving the Financial Crisis: An Empirical Analysis of the Effect of
Female Board Directors on Bank Holding Company Performance 1 (Office of the Comptroller of
the Currency, Economics Working Paper No. 2016-1, June 2016),
https://www.occ.gov/publications/publications-by-type/occ-working-papers/2016-2013/wp2016-
1.pdf. By focusing on performance of those firms that include a critical mass of diversity, the
authors effectively controlled for firms that pursue tokenism rather than empower diverse
perspectives. Id. at 22 (“The magic number 3 is the tipping point at which women are taken
seriously as board members, while a fewer number of female directors is not sufficient to overcome
tokenism.”). To address the possibility of reverse causation, the authors lagged performance
measurement one year after the critical mass level was reached. Id. at 16 (“This partially addresses
reverse causality because future [performance] cannot retroactively affect the past number of
women.”).
95. Id. at 1 (“We conclude that during the financial crisis, controlling for financial and board
governance characteristics, BHCs with at least three female directors braved the crisis better,
significantly outperforming BHCs with fewer female directors, as measured by Tobin’s Q.”).
96. Id. at 6.
97. Id. at 24.
98. See Hisham Farag & Chris Mallin, Board Diversity and Financial Fragility: Evidence from
European Banks, 49 INT’L REV. FIN. ANALYSIS 98 (2017) (finding that European banks with a
critical mass of female directors displayed less financial vulnerability during the financial crisis).
99. Diversity has been shown to enhance cognitive functioning of groups and to disrupt
groupthink, a dynamic characterized by mindless adherence to group norms and assumptions. See
Daniel P. Forbes & Frances J. Milliken, Cognition and Corporate Governance: Understanding
Boards of Directors as Strategic Decision-Making Groups, 24 ACAD. MGMT. REV. 489, 494–97
(1999) (stating that heterogeneous boards benefit from cognitive conflict that results in a more
thorough consideration of problems and solutions); Marlene A. O’Connor, The Enron Board: The
Perils of Groupthink, 71 U. CIN. L. REV. 1233, 1306 (2003) (stating that “social homogeneity on
corporate boards harms critical deliberation” and that “the best way to avoid groupthink is to
prevent enclaves of like-minded people from making group decisions”; therefore, “reform
proposals should discourage groupthink by promoting more diversity on boards in terms of gender,
race, class, ethnicity, age, national origin, sexual orientation, and socioeconomic background, as
well as expertise and temperament”).
100. See Sheen S. Levine et al., Ethnic Diversity Deflates Price Bubbles, 111 PROC. NAT’L
ACAD. SCI. 18524, 18524 (2014) (“Our results suggest that bubbles are affected by a property of
the collectivity of market traders—ethnic homogeneity.”).
600 Loyola University Chicago Law Journal [Vol. 49

experimental markets.101 According to the authors:

We find that price bubbles are fueled by the ethnic homogeneity of
traders. Homogeneity, we suggest, imbues people with false confidence
in the judgment of coethnics, discouraging them from scrutinizing
behavior. In contrast, traders in diverse markets reliably price assets
closer to true values. They are less likely to accept inflated offers and
more likely to accept offers that are closer to true value, thereby
thwarting bubbles. This pattern is similar in Southeast Asia and North
America, even if the two sites differ greatly in culture and ethnic
composition, in what is implied by “ethnic diversity” and how it is
operationalized.102
This is the central element in the diversity advantage: it disrupts the
“groupthink” dynamic that drives all systemic unethical and non-
compliant behavior.103 This disruption of “groupthink” supplements the
efforts of the firm to acclimate to diverse key constituencies.104
In the end, business is not so concerned about always reaching the
objectively right answer in terms of some universally accepted truth.105
Instead, business seeks merely to maximize shareholder wealth through

101. Id. at 18527 (“[T]raders in diverse markets reliably price assets closer to true values. They
are less likely to accept inflated offers and more likely to accept offers closer to true value, thereby
thwarting bubbles.”).
102. Id. The results are based upon 2,022 transactions by 180 traders in thirty different
markets—fourteen diverse and sixteen homogeneous. Id. The market with the lowest accuracy was
the homogeneous market in North America—i.e., the market with all white traders. Id.
103. E.g., supra notes 3, 13 and 20.
104. E.g., supra notes 79–88.
105. From a business perspective, the deep uncertainty regarding objectively verifiable ethical
norms must give way to the putative mission of the business corporation to maximize shareholder
wealth. Corporate law only rarely, at best, enforces the norm that the business corporation be
operated for the purpose of shareholder wealth maximization. See LYNN A. STOUT, THE
SHAREHOLDER VALUE MYTH: HOW PUTTING SHAREHOLDERS FIRST HARMS INVESTORS,
CORPORATIONS, AND THE PUBLIC 10 (2012) (demonstrating that the law fails to back up
shareholder primacy). Instead, as discussed above, the law has taken decisively anti-shareholder
and pro-management turns. See supra notes 30 and 53. Restoration of shareholder primacy, in terms
of public corporations where legal protections are needed to assure shareholder prerogatives are
preserved notwithstanding diffused ownership, would fully vindicate the federal purpose for
regulation of public firms. See 15 U.S.C. § 78(b) (2014). More specifically, Congress enacted the
federal securities laws because trading in shares could create “[n]ational emergencies, which
produce widespread unemployment and the dislocation of trade, transportation, and industry, and
which burden interstate commerce and adversely affect the general welfare.” Id. Such emergencies
are “precipitated, intensified, and prolonged by manipulation and sudden and unreasonable
fluctuations of security prices and by excessive speculation on such exchanges and markets, and to
meet such emergencies the Federal Government is put to such great expense as to burden the
national credit.” Id. This amounts to a federal mandate to protect investors, not speculators who are
ancillary to the primary purpose of the federal securities laws. In short, shareholder primacy may
be assumed for private firms and assumed as part of the investor protection mandate under the
federal securities laws for public firms. State corporate law, particularly in Delaware, and the war
against private securities litigation is the genesis of CEO primacy and all the problems that entails.
2018] Diversity and Ethics 601

optimal acclimation to all important constituents.106 Observing ethical

standards beyond law that achieves such acclimation depends upon
principles of sound risk management.107 Risk management entails
mechanisms and systems within the firm to assure that all risks are
identified and assessed across the enterprise, rather than allowing risks to
fester in any risk silo.108 Once a firm achieves that goal, the firm can
rationalize its risks in accordance with its risk policy and its disclosures
to shareholders.109 This approach to risk management paid off during the
subprime debacle.110
These same principles support the concept that there should be no
ethics or compliance silo. Thus, a culturally diverse ethical and
compliance screening function or team can either conceptualize ethics
and compliance outcomes better than a homogeneous team or assess the
varying risks associated with such conceptualization in a superior way to
achieve an advantage over a homogeneous screening mechanism.
Culturally diverse teams both conceptualize ethics better and manage risk
better. The combined effect of these two elements yields positive
outcomes with respect to ethical and compliance outcomes.111

106. See Amy J. Hillman & Gerald D. Keim, Shareholder Value, Stakeholder Management,
and Social Issues: What’s the Bottom Line?, 22 STRATEGIC MGMT. J. 125, 125 (2001) (suggesting
that “[b]uilding better relations with primary stakeholders like employees, customers, suppliers,
and communities could lead to increased shareholder wealth by helping firms develop intangible,
valuable assets which can be sources of competitive advantage” and testing this proposition with
data from the performance of S&P 500 firms and concluding that “stakeholder management leads
to improved shareholder value, while [mere] social issue participation is negatively associated with
shareholder value”).
107. See Betty Simkins & Steven A. Ramirez, American Corporate Governance and Enterprise
Risk Management, 39 LOY. U. CHI. L.J. 571, 572 (2008) (concluding that “enterprise-wide risk
management [ERM] can enhance the functioning of the corporation as well as the ability of capital
markets to respond to risk, but that the current legal framework fails to facilitate this process” and
suggesting that “disclosure requirements with respect to risk management would encourage
superior transparency and management within the public corporation”).
108. Id. at 581 (“Currently, many organizations still continue to address risk in ‘silos,’ with the
management of . . . risks each conducted as narrowly focused and fragmented activities,” but
enterprise-wide risk management views “all risk areas . . . as parts of an integrated, strategic, and
enterprise-wide system. While risk management is coordinated with senior-level oversight,
employees at all levels of the organization using ERM are encouraged to view risk management as
an integral and ongoing part of their jobs.”).
109. Id. at 581–82 (quoting COMMITTEE OF SPONSORING ORGANIZATIONS OF THE TREADWAY
COMMISSION, ENTERPRISE RISK MANAGEMENT–INTEGRATED FRAMEWORK 2 (2004),
http://www.coso.org/Publications/ERM/COSOERMExecutiveSummary.pdf).
110. Vincent Aebi et al., Risk Management, Corporate Governance, and Bank Performance in
the Financial Crisis, 36 J. BANKING & FIN. 3213 (2012) (finding that banks with a more
independent risk management function outperformed other banks during the financial crisis).
111. For example, scholars found that firms with female leadership suffered fewer allegations
of fraud and more conservative accounting. See generally Lawrence J. Abbott et al., Female Board
Presence and the Likelihood of Financial Restatement, 26 ACCT. HORIZONS 607, 626 (2012)
(“Using a matched-pair sample of restatement and control firms, we conducted conditional logistic
602 Loyola University Chicago Law Journal [Vol. 49

III. DISCLOSING THE GOVERNANCE OF ETHICALITY AND COMPLIANCE

In the past, I urged public firms that took ethics and compliance
seriously to form independent committees of the board with legal
expertise to manage compliance and legal and reputational risk.112 More
specifically, I proposed an independent committee of the board composed
entirely of lawyers that would function to receive reports of wrongdoing
within the firm (including anonymous reports) and to conduct an annual
legal compliance audit.113 Much of my proposal found its roots in the
SEC’s innovation of the Qualified Legal Compliance Committee
(“QLCC”). The SEC created the concept of the QLCC based upon the
directions of Congress to promulgate regulations implementing new rules
governing the professional responsibility of counsel appearing before the
Commission in the Sarbanes-Oxley Act of 2002 (“SOX”).114 SOX itself
embodied Congress’ response to the failure of Enron, WorldCom, and a
series of similar corporate governance and accounting failures in 2001–
2002, and the legislative determination that ethics mattered.115
The whole point of the SEC in creating the QLCC (and Congress in
passing the Sarbanes-Oxley Act) was that ethics and compliance mattered
to the investing public.116 In addition, Congress mandated that publicly
traded firms adopt an ethics code or explain to their investors why they
declined to impose ethical mandates upon their firm’s business
conduct.117 This constituted a clear indication that both Congress and the
SEC found ethics and compliance material subject to mandatory

regressions comparing the characteristics of restatement and control firms. Briefly, we find a
significant reduction in the likelihood of financial restatement and the presence of at least one
female board director.”); Douglas Cumming et al., Gender Diversity and Securities Fraud, 58
ACAD. MGMT. J. 1572, 1573 (2015) (“Our evidence shows that gender diversity reduces the
likelihood of being in our fraud sample and reduces the severity of the fraud.”); Simon S.M. Ho et
al., CEO Gender, Ethical Leadership, and Accounting Conservatism, 127 J. BUS. ETHICS 351, 366
(2015) (“[R]egardless of the measure of . . . conservatism, we find consistent evidence that
companies led by female CEOs report earnings more conservatively.”); Mary Jane Lenard et al.,
Female Business Leaders and the Incidence of Fraud Litigation, 43 MANAGERIAL FIN. 59 (2017).
112. Ramirez, Back to the Drawing Board, supra note 27, at 351–67.
113. Id. at 362–63.
114. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 307, 116 Stat. 745, 784 (codified as
amended at scattered provisions of 15 U.S.C. (2012)). The Sarbanes-Oxley Act of 2002 is often
referred to as “SOX.”
115. The Good, the Bad and Their Corporate Codes of Ethics: Enron, Sarbanes-Oxley, and the
Problems with Legislating Good Behavior, 116 HARV. L. REV. 2123, 2126–27 (2003) (“Arguably
the most far-reaching corporate reform legislation since the [federal securities laws of 1933 and
1934], [SOX] was designed to increase the transparency, integrity, and accountability of public
companies and, in turn, to combat the kind of corporate deceit that had given rise to the scandals
and financial breakdowns.”).
116. See supra notes 29, 31 and 32.
117. See supra notes 29 and 31.
2018] Diversity and Ethics 603

disclosure under the federal securities laws after the Enron series of
corporate scandals.
The SEC exemplified the kind of disclosure guidance needed with the
guidance it furnished with respect to the costs of climate change.118 It
essentially requires every publicly traded firm to disclose material facts
regarding the impact of climate change (including potential governmental
action) upon its business.119 The SEC noted that some industries, such as
the insurance industry, already seek to adjust to climate change and the
financial exposures it may entail.120 By encouraging firms to disclose
such matters, the SEC uses financial markets to force publicly traded
firms to reckon with, and rationalize their approach to, all future costs
and benefits121 that firms may face from this source of risk.122 Simply
stated, market competition for a lower cost of capital (an item which
affects CEO compensation through options compensation)123 will cause

118. Commission Guidance Regarding Disclosure Related to Climate Change, 75 Fed. Reg.
6290 (Feb. 8, 2010) (to be codified at 17 C.F.R. pts. 211, 231, and 241) (“This release outlines our
views with respect to our existing disclosure requirements as they apply to climate change matters.
This guidance is intended to assist companies in satisfying their disclosure obligations under the
federal securities laws and regulations.”).
119. Id.
120. As the SEC stated:
The insurance industry is already adjusting to these developments. A 2008 study listed
climate change as the number one risk facing the insurance industry. Reflecting this
assessment, the National Association of Insurance Commissioners recently promulgated
a uniform standard for mandatory disclosure by insurance companies to state regulators
of financial risks due to climate change and actions taken to mitigate them. We
understand that insurance companies are developing new actuarial models and designing
new products to reshape coverage for green buildings, renewable energy, carbon risk
management and directors’ and officers’ liability, among other actions.
Id. at 6291.
121. Overall, climate change entails risk, but like all risks some may intelligently manage it for
profit:
New trading markets for emission credits related to ‘‘cap and trade’’ programs that might
be established under pending legislation, if adopted, could present new opportunities for
investment. These markets also could allow companies that have more allowances than
they need, or that can earn offset credits through their businesses, to raise revenue
through selling these instruments into those markets. Some companies might suffer
financially if these or similar bills are enacted by the Congress while others could benefit
by taking advantage of new business opportunities.
Id.
122. See generally Steven A. Ramirez, The Law and the Economics of a Carbon Tax
(forthcoming 2018) (showing that climate change will prove to be the most dramatic economic
disruption in human history).
123. In considering sound corporate governance proposals, scholars must consider the impact
of any proposal upon CEOs first and foremost since corporate governance grants CEOs a very high
level of autonomy to further their own interests at the expense of shareholders. See Steven A.
Ramirez, The End of Corporate Governance Law: Optimizing Regulatory Structures for a Race to
the Top, 24 YALE J. REG. 314 (2007).
604 Loyola University Chicago Law Journal [Vol. 49

firms to reduce climate-change costs and maximize climate-change

opportunities.124
Another instance of the SEC clarifying disclosure obligations under
the federal securities laws came in the immediate aftermath of the Great
Financial Crisis.125 The SEC acted because shareholders demanded more
information about the leadership of public firms, and the SEC’s action
seemed tailored to emerging management lapses from the subprime
debacle.126 Significantly, the SEC imposed disclosure obligations
relating to the governance of risk management for every public firm and
the degree to which the risk management function operated
independently of the CEO and other managerial officers.127 Similarly, the
SEC imposed disclosure obligations upon publicly traded firms to inform
shareholders of the role diversity plays in the selection of directors,
whether the firm applies any policy to the issue of diversity in the
boardroom, and to describe any such policy.128 The SEC thus already

124. See supra notes 118–122.

125. Proxy Disclosure Enhancements, 74 Fed. Reg. 68,334 (Dec. 23, 2009) (to be codified at
17 C.F.R. pts. 229, 239, 240, 249, and 274) (requiring registrants to disclose, inter alia:
“compensation policies and practices that present material risks to the company; stock and option
awards of executives and directors; director and nominee qualifications and legal proceedings;
board leadership structure; [and] the board’s role in risk oversight”).
126. Id. (“[I]nvestors have increasingly focused on corporate accountability and have expressed
the desire for additional information that would enhance their ability to make informed voting and
investment decisions.”). By late 2009, manifest managerial lapses played a leading role in
understanding all phases of the subprime debacle and scholars set out to prove that corporate
governance law and regulation failed to adequately reign in CEO autonomy in particular. See
Steven A. Ramirez, Lessons from the Subprime Debacle: Stress Testing CEO Autonomy, 54 ST.
LOUIS U. L.J. 1, 53–54 (2009) (“CEOs are the new potentates, with power to crash global capitalism
and rake in millions for the favor. The rule of law must reassert itself. CEO power to . . . manipulate
risk, to stack the board with their own clones, and to skirt legal compliance must be diminished.”).
127. The SEC suggested:
[D]isclosure about the board’s involvement in the oversight of the risk management
process should provide important information to investors about how a company
perceives the role of its board and the relationship between the board and senior
management in managing the material risks facing the company. This disclosure
requirement gives companies the flexibility to describe how the board administers its
risk oversight function, such as through the whole board, or through a separate risk
committee or the audit committee, for example. Where relevant, companies may want to
address whether the individuals who supervise the day-to-day risk management
responsibilities report directly to the board as a whole or to a board committee or how
the board or committee otherwise receives information from such individuals.
Proxy Disclosure Enhancements, 74 Fed. Reg. at 68,345. The foregoing discussion operates
effectively as disclosure guidance, as the final rule only states: “disclose the extent of the board’s
role in the risk oversight of the registrant, such as how the board administers its oversight function,
and the effect that this has on the board’s leadership structure.” Id. at 38,635 (quoting 17 C.F.R. §
229.407(h) (2010)).
128. The Commission did not even attempt to define diversity, opting instead to allow firms
and financial markets to sort it out:
2018] Diversity and Ethics 605

holds experience and expertise with respect to mandating the disclosure

of corporate governance structures and the role diversity plays in those
structures.
This all applies to the governing structures of ethicality, reputational
risk management, and compliance risk management within publicly
traded firms. The degree to which the firm deploys cultural diversity to
vet such issues should be disclosed to investors given the evidence in Part
II of this Article regarding the important role diversity can play in
compliance and ethical outcomes.129 The independence from
management that the firm uses to address such issues, the expertise the
firm brings to a given issue, and the degree to which the firm enlists
outside consultants or attorneys to advise it with respect to such issues
may all play a material role in a reasonable investor’s investment
decision, particularly in light of the manifest costs of mismanaging such
risks as recounted in Part I of this Article.130 Similarly, whether the firm
allows compliance issues to fester in risk silos or takes affirmative action
to assure such risks come out of the shadows of the firm (by, for example,
implementing anonymous hotlines or incentives for whistleblowing) can
also play a role in investment decisions.131 Finally, forcing firms to either

We recognize that companies may define diversity in various ways, reflecting different
perspectives. For instance, some companies may conceptualize diversity expansively to
include differences of viewpoint, professional experience, education, skill and other
individual qualities and attributes that contribute to board heterogeneity, while others
may focus on diversity concepts such as race, gender and national origin. We believe
that for purposes of this disclosure requirement, companies should be allowed to define
diversity in ways that they consider appropriate. As a result we have not defined diversity
in the amendments.
Id. at 68,344. The new rule provides only that firms describe the role of diversity: “Describe the
nominating committee’s process for identifying and evaluating nominees for director . . . and
whether, and if so how, the nominating committee (or the board) considers diversity in identifying
nominees for director.” Id. at 68,364 (quoting 17 C.F.R.§ 229.407(c)(ii)(7) (2010)). The rule also
requires disclosure of any policy governing this process. Id.
129. Supra Part II.
130. Professor Langevoort summarizes the learning on the basic contours of a sound
compliance function, which can be extended to include an ethics function:
The common structural framework includes (1) a commitment from senior leadership to
the task, setting a right “tone at the top;” (2) delegation of authority to officials with
distinct compliance responsibilities and the resources to do their task; (3) firm-wide
education and training about both the substance and process of compliance; (4)
informational mechanisms to alert as to suspicious activity (e.g., whistleblowing
procedures); (5) audit and surveillance tactics to detect compliance failures or risks; and
(6) internal investigation, response, discipline and remediation so as to learn and adjust
when failures occur. By most accounts, the right mix of these is firm-specific, a
customization that recognizes the great range of motives, opportunities and types of
violations most likely to be a problem at a given firm.
Donald C. Langevoort, Cultures of Compliance, 54 AM. CRIM. L. REV. 933, 939–40 (2017).
131. Id.
606 Loyola University Chicago Law Journal [Vol. 49

adopt QLCCs or explain the lack of such a compliance function also can
furnish material information to the investing public.132 Those firms adept
at managing ethicality, reputational, and compliance risk can and should
enjoy a lower cost of capital because shareholders would be equipped to
avert at least some of the most catastrophic losses.133 Taking these steps
could truly align the interests of management enjoying options
compensation arrangements with equity investors, as Congress intended
the federal securities laws to operate.
The scope of this Article does not include the precise contours of the
disclosure guidance the SEC should issue. Instead, this Article focuses
on establishing the materiality of ethicality and compliance governance
structure and the critical and more rigorous role cultural diversity may
play in a well-ordered system of ethics and compliance risk
management.134 Moreover, different firms in different sectors may find
that different governing structures make sense given their operating
environment and other institutional structures, such as compensation
practices.135 Indeed, encouraging experimentation with the most
efficacious governing structures could well emerge as a major benefit of
deeming ethics, compliance, and reputation risk management structures
material.136 Investors simply enjoy an entitlement to disclosure of
manifestly material facts, such as how the firms govern and control (or
do not control) the manifest risks of unethical and non-compliant
behavior.
The SEC should keep in mind, moreover, that a failure to issue
disclosure guidance (as argued above) will only operate to shift the issues
to the courts. Such a process could create decades of uncertainty among
public firms and impose large litigation costs as courts wrestle with issues
relating to the precise contours of the disclosure obligations firms face.137
While the possibility that the courts will address the issue in a decidedly
pro-CEO way definitely looms, if the courts simply discount the
importance of ethics and compliance, they will essentially assume
complicity with CEOs in the continuing unethical and fraudulent

132. No such disclosure obligation currently exists. See 17 C.F.R. §§ 205.2(k) and 205.3(c)
(2017).
133. See supra notes 5, 14 and 19.
134. See supra notes 27 and 32.
135. Langevoort, supra note 130, at 939–40.
136. Id.
137. See JOHN W. CIOFFI, PUBLIC LAW AND PRIVATE POWER: CORPORATE GOVERNANCE
REFORM IN THE AGE OF FINANCE CAPITALISM 61 (2010) (discussing the complex topic of
corporate officers’ fiduciary duties to their shareholders and how the court historically struggled to
evaluate these claims, leading to a significant waste of judicial resources).
2018] Diversity and Ethics 607

practices that plague the U.S. business sector.138 Furthermore, many

courts may well comprehend the social benefits for all, and for all
shareholders in particular, of a more ethical and compliant corporate
sector. Very few judges benefited from the historic collapse of capitalism
during the Great Financial Crisis and the trillions expended by the
government to rescue the corrupt financial sector.139 Even today, the
emergence of a new precariat arising from the ashes of the Great
Financial Crisis threatens core American values and seemingly tolerates
even the most virulent degrees of corruption.140 The unbridled conduct
occurring within the corporate sector threatens the rule of law and social
stability.
Private securities litigation could, in other words, impose
accountability on the corporate sector as well as CEOs notwithstanding
the recalcitrance of the SEC.141 Private securities litigation constitutes a
depoliticized form of law and regulation that typically cannot suffer
corruption from high economic inequality and the campaign
contributions, lobbying efforts, and job offers that invariably follow in its
wake.142 Moreover, private securities litigation makes no claim on
taxpayer resources nor entails any new government bureaucracy. 143
Private enforcement for securities fraud squares with even the most
austere notions of libertarian ideals for the role of government.144 It also
serves the interests of the investing public by forcing fraudfeasors to
repay their victims.145 For all the reasons above, in favor of the SEC
deeming material and thus mandating disclosure of ethics, compliance,
and reputational risk management structures within the firm, courts
should also not hesitate to impose such disclosure requirements upon
public firms in the absence of SEC guidance.146 Indeed, by deeming
ethics and compliance systems material, the courts would essentially
vindicate all underlying legal and regulatory policies favoring a sound
system of regulated capitalism.

138. See Charles W. Murdock, Corporate Corruption and the Complicity of Congress and the
Supreme Court – The Tortuous Path from Central Bank to Stoneridge Investment Partners, 6
BERKELEY BUS. L.J. 131 (2009) (stating “[t]his article asserts that Congress and the federal courts
are complicit in the widespread corporate corruption that has come to light this past decade”).
139. Steven A. Ramirez, The Economic Threat of Economic and Racial Hierarchy (forthcoming
2018).
140. GUY STANDING, THE PRECARIAT: THE NEW DANGEROUS CLASS 68–81 (2011).
141. Ramirez, Virtues of Private Securities Litigation, supra note 11, at 722–23.
142. Id. at 723–24.
143. Id. at 724.
144. Id. at 725–26.
145. Id. at 725.
146. See supra Part I.
608 Loyola University Chicago Law Journal [Vol. 49

Whether accomplished through the SEC or the judiciary, the disclosure

of the precise contours of how a firm manages ethical and compliance
risk plays a material factor not just in shareholder returns, but in
macroeconomic performance too.147 The essential purpose of the federal
securities laws is to stabilize and secure credit markets and, by extension,
investment, as demonstrated in Section 2 of the Securities Exchange Act
of 1934.148 It is axiomatic that plunging investment drove the Great

147. Joseph P. Kennedy attributed the Great Depression to pervasive unethical behavior.
ARTHUR M. SCHLESINGER, JR., THE COMING OF THE NEW DEAL 423 (1958) (implicating
“practically all the important names in the financial community in practices which, to say the least,
were highly unethical”).
148. For the reasons hereinafter enumerated, transactions in securities as commonly conducted
upon securities exchanges and over-the-counter markets are effected with a national public
interest which makes it necessary to provide for regulation and control of such transactions
and of practices and matters related thereto, including transactions by officers, directors, and
principal security holders, to require appropriate reports, to remove impediments to and
perfect the mechanisms of a national market system for securities and a national system for
the clearance and settlement of securities transactions and the safeguarding of securities and
funds related thereto, and to impose requirements necessary to make such regulation and
control reasonably complete and effective, in order to protect interstate commerce, the
national credit, the Federal taxing power, to protect and make more effective the national
banking system and Federal Reserve System, and to insure the maintenance of fair and
honest markets in such transactions: (1) Such transactions (a) are carried on in large volume
by the public generally and in large part originate outside the States in which the exchanges
and over-the-counter markets are located and/or are effected by means of the mails and
instrumentalities of interstate commerce; (b) constitute an important part of the current of
interstate commerce; (c) involve in large part the securities of issuers engaged in interstate
commerce; (d) involve the use of credit, directly affect the financing of trade, industry, and
transportation in interstate commerce, and directly affect and influence the volume of
interstate commerce; and affect the national credit. (2) The prices established and offered in
such transactions are generally disseminated and quoted throughout the United States and
foreign countries and constitute a basis for determining and establishing the prices at which
securities are bought and sold, the amount of certain taxes owing to the United States and to
the several States by owners, buyers, and sellers of securities, and the value of collateral for
bank loans. (3) Frequently the prices of securities on such exchanges and markets are
susceptible to manipulation and control, and the dissemination of such prices gives rise to
excessive speculation, resulting in sudden and unreasonable fluctuations in the prices of
securities which (a) cause alternately unreasonable expansion and unreasonable contraction
of the volume of credit available for trade, transportation, and industry in interstate
commerce, (b) hinder the proper appraisal of the value of securities and thus prevent a fair
calculation of taxes owing to the United States and to the several States by owners, buyers,
and sellers of securities, and (c) prevent the fair valuation of collateral for bank loans and/or
obstruct the effective operation of the national banking system and Federal Reserve System.
(4) National emergencies, which produce widespread unemployment and the dislocation of
trade, transportation, and industry, and which burden interstate commerce and adversely
affect the general welfare, are precipitated, intensified, and prolonged by manipulation and
sudden and unreasonable fluctuations of security prices and by excessive speculation on such
exchanges and markets, and to meet such emergencies the Federal Government is put to such
great expense as to burden the national credit.
Securities Exchange Act of 1934, ch. 404, tit. I, § 2, 48 Stat. 881; Pub. L. 94–29, § 2 (codified as
amended 15 U.S.C. § 78(b)). See also SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180,
2018] Diversity and Ethics 609

Depression as well as the recession of 2008.149 In both instances, deep

and fundamental lapses in basic ethics and legal compliance drove the
economic contraction. Securing a stable credit and investment
environment through enhanced disclosure of ethics and compliance is
therefore consistent with the longstanding goals of the federal securities
laws.

CONCLUSION
Enhanced ethics and compliance will serve shareholders well,
particularly in an era of diminished regulation. Demanding that ethical
and compliance governance systems be deemed material will create
market pressure and accountability on firm managers for superior extra-
legal outcomes and compliance outcomes. Businesses that use cultural
diversity to screen their business conduct within the framework of
shareholder primacy will better acclimate themselves to all key
constituencies and achieve objective ethical and compliance results.
Given the increased diversity of consumer, labor, and investor pools, this
approach to encouraging extra-legal standards of conduct draws upon
differences in ethical sensitivities to drive more rigorous ethical screening
of business conduct. Further, to the extent that the business enterprise
enhances its financial performance through a more diverse screening
mechanism, it should lead to quantifiable gains over those firms that do
not feature such an innovation. Firms will attract persons spanning the
breadth of cultural diversity to do business with the firm, and pay less in
fines. Ultimately, the optimal structure for corporate ethical and
compliance screening should emerge to give shareholders enhanced
value as the firm achieves greater acclimation among constituencies.
Competitive pressure can thereby enhance firm ethicality and investors
can thereby objectively measure firm ethicality. The SEC should
facilitate this process of discovery of optimal ethical and compliance
structures within the firm through the issuance of disclosure guidance of
ethical and compliance structures within public firms. Such structures
will prove material to investors, and the disclosure of such material facts
vindicate the underlying macroeconomic purpose of the federal securities
laws.

186 (1963) (“A fundamental purpose [of the federal securities laws] was to substitute a philosophy
of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business
ethics in the securities industry.”).
149. Ramirez, Virtues of Private Securities Litigation, supra note 11, at 678–80. Investment
similarly plunged during the 2008 recession. Federal Reserve Bank of St. Louis, GROSS DOMESTIC
INVESTMENT, https://fred.stlouisfed.org/series/GPDIA (last visited Mar. 7, 2018).