Transparency is Medicine to Marketplace Chaos, Says UB Law Scholar

Release Date: September 18, 2008 This content is archived.


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UB legal scholar David A. Westbrook says transparency is the best way to deal with the credit crises and financial collapses on Wall Street.

BUFFALO, N.Y. -- University at Buffalo Law School Professor David A. Westbrook specializes in "invisibles" that translate into rights that structure what Americans consider the pursuit of happiness. An expert on transparency in the marketplace, Westbrook has been in demand around the world and, in particular, in South America, where his message of greater accountability and public disclosure among financial markets and corporations has consistently struck a resonant chord with his audiences.

The author of "Between Citizen and State: An Introduction to the Corporation," Westbrook believes in giving the rest of the world a realistic and accurate glimpse of the modern American economy, careful to point out its strengths while not ignoring the flaws.

Westbrook's doctrine of transparency is "treatment, if not a perfect antidote," for the marketplace chaos rampant in so many countries --from those struggling to establish new governments to the ones with centuries-long track records. He says it's especially relevant amidst the burgeoning credit crises and financial collapses on Wall Street, a crisis Westbrook has been discussing in class and lectures for over a year.

"In a capitalist society like the United States, what has been called 'invisibles' secure much of the social order, for example people's homes, their health care, their retirement, the endowments of their schools and places of worship," says Westbrook, a Floyd H. and Hilda L. Hurst Faculty Scholar. "Transparency is important because it helps reassure us that our lives are resting on something invisible, but solid."

A question and answer with Westbrook follows:

Q: You've just returned from a State Department-sponsored trip to Brazil, where you spoke to a number of important audiences about transparency, law and the construction of a market society, topics on which you've written for some years now. Can you explain what "transparency" means for those who might not be familiar with the concept, and why it matters?

Westbrook: Very broadly, transparency is the idea that the public ought to have information on what public actors -- elected or appointed public officials -- are doing. We might say that transparency is the animating concept behind ideas as diverse as freedom of the press and Freedom of Information Act (FOIA) requests. And it's especially relevant in the business context, where securities regulations are founded on disclosure.

Understanding "transparency" in these terms should suggest why transparency matters: If we do not know what public actors are doing, we cannot know if they are abusing their powers, or less dramatically, simply not doing a good job. Transparency is thus a virtue that characterizes an open society.

It should also be said that transparency is hardly the only virtue, even in an open society. Sometimes privacy, even secrecy, is appropriate, not only in personal matters, but in business as well. Consider, for example, trade secrets or other proprietary information.

And, as I discussed at some length in Brazil, and with special attention to the current credit crisis in the United States, transparency is a regulative ideal, like "truth" or "democracy." As recent events such as the credit crisis have once again demonstrated, we have never achieved transparency in the United States, even though our capital markets are very sophisticated. Indeed, we should understand that transparency cannot be finally achieved, because representations are always partial.

Those things said, transparency is an indispensable idea for the governance of any open society, in which corporations and other relatively autonomous institutions wield considerable power.

Q: Your latest book, "Between Citizen and State: An Introduction to the Corporation," has been warmly received by audiences in Brazil and in other countries. Would it be fair to say that the people and institutions you have been addressing are ripe for your message?

Westbrook: I've been delighted, but honestly a bit surprised, by the reception of "Between Citizen and State." My wife told me to write this book, that maybe somebody would read this, instead of publishing something else obscure. So I wrote "Between" for U.S. law students and, secondarily, for other Americans who wanted a more nuanced view of this rather important institution, and lastly, perhaps, to tweak my colleagues who take corporation law far too earnestly. But sociologists in the United States, and law and business people abroad, have been very excited about the book: lots of people want an introduction to the corporation.

I think a lot of people in a lot of countries realize that corporations are going to play important roles in their economy; corporate governance is complicated, like any form of politics; and the United States has been thinking about some of these questions for longer than most any other country. It is not like we know all the answers. We don't. But we have done a lot of thinking about these matters.

Q: You've said that, in many places, the barriers to development are psychological, and that a better understanding of transparency can help overcome these barriers. Can you tell us what you mean by that, and why that is the case?

Westbrook: In developing countries, particularly in countries that understand its history in terms of an anti-colonial narrative of liberation, the state is often seen as the dominant social actor. The colonial state was oppressive; the revolution seized control of the state and gave it to the people; a bright future beckons. Thus the state is both villain and hero; the state is the most important figure in the social imagination.

And for all its power, this narrative presents profound and familiar problems. Winning the war is not the same thing as coming together, despite local differences, and running a factory to make cars or carpets. People have high expectations for the state, the agents of their liberation. But the state rarely delivers on the prosperity that people expect, for the simple reason that states are not very good at running businesses.

Note that business folk do not appear in the narrative of liberation. Since society takes the state (and not business) seriously, a disproportionate number of talented people make their careers in politics, making economic development that much more unlikely. The economy becomes about extraction, either or both of natural resources or taxes, in either case controlled by the state. Corruption becomes a problem. And so forth. What's missing here, in short, is a developed imagination of a modern civil society, of the institutions between the citizen and the state.

In addition, people in a lot of places -- including some very developed places, like France -- are grappling with the consequences of the idea that the historic processes we refer to generally as "globalization" will mean, in part, that the state plays a somewhat smaller role in social life. Too many institutions that are not states, ranging from international institutions to foreign press agencies to guest workers, are too important. This retreat of the state is accompanied by anxiety. What will it mean if a large number of social decisions, what we usually think of as "politics" in the sense of the outcome of state processes, are done by other institutions? If the state is understood to be responsible for social welfare, as it is in many countries, then doesn't the retreat of the state strongly imply that society will be worse off? And so forth.

Interestingly, the retreat of the state is fundamentally less of a concern in the United States, and not only because the U.S. has less of a social welfare tradition. We also have lots of states, and a great deal of internal migration. If you do not like New York, move to North Carolina. Perhaps even more importantly, matters that are handled by the state in many countries -- education, health care and religion -- are largely or entirely handled by non-state institutions in the United States. Nobody thinks that Georgetown, for example, is the state. But Georgetown clearly thinks it is operating for the public good. In fact, we even think that businesses, so long as run legally and in a competitive market, operate in the public interest -- Adam Smith got that part right.

I think that the U.S. experience with civil society, and with corporations in particular, offers two very general, and basically encouraging, messages for countries confronting globalization, and for developing countries in particular.

First, we can and should think about the politics of civil institutions of various sizes, without simply understanding all politics as expressions of the state. Transparency is part of this. So, for obvious example, we care that publicly traded companies are transparent because, both in their operations and as investments, such companies play critical roles in our society.

Second, the public interest is not the exclusive property of the state; the public interest may be achieved by other institutions, too. So we need not regard the retreat of the state as requiring the worsening of society. More generally, we need not automatically regard corporations and other non-state institutions with suspicion.

Taken together, I think these two messages can encourage development. States are rarely very good at running businesses; the public interest in economic development is going to require establishing solid companies. But I think that has been hampered by what amounts to a lack of business imagination, and less than helpful attitudes towards business.

So what I'm hoping is that a richer imagination of business institutions -- and a richer ecology of civil society, as it were -- will encourage people in developing countries to found and establish their own businesses. Practically, what I hope to do is to revise and rewrite "Between Citizen and State" to address directly these concerns of audiences outside the United States. I'm thinking this new book will be called "Working Together."

Q: As has been widely reported, the present credit crisis began with securities backed by home mortgages. In light of this crisis, what are the practical and concrete benefits for the housing market for securitizing mortgages? What does the idea of transparency add to this?

Westbrook: It is worth remembering that securitizing loans means that banks can make more loans. The United States has made not only home ownership, but education, and a great many other good things, available to Americans through the extension of credit. A huge percentage of Americans own their own homes and, on balance, I think that is a good thing. At any rate, it has been public policy in this country for a long time.

The availability of that credit largely depends on the ability of lenders to sell their loans to investors, which is what securitization at bottom is. For investors, and to turn the matter around, securities based on mortgages and other debt have provided a useful class of assets -- useful for university endowments, retirement funds and so forth.

So, in general, securitization has been very beneficial, and very useful, to a lot of people. Which means -- and here matters get difficult -- the practice has been very widely adopted. Securitization has transformed entire industries, for example, banking and commercial real estate and a fair share of portfolio investment. Thus, when something goes wrong in these markets, as it has, we have a huge problem on our hands, which we are now, as a sophisticated capitalist society, trying to think through.

Can the idea of transparency help? Yes, but perhaps not as much as we might hope. Securitization, by its nature, takes rather particular, specific relations -- my ability to pay my home loan, for example -- and converts them into sophisticated and abstract (often very sophisticated and highly abstract) financial products that can be traded at a distance and en masse, that is, that look sort of like stock in a company. The people trading such instruments do not, and really cannot, know too much about my ability to make my mortgage payments. So, in general, such instruments are not very transparent. We can regulate to make them relatively more transparent, or we can think about other ways of regulating financial markets in which such securities play big roles.

Q: What policies are needed in order to encourage transparency throughout the Western Hemisphere? Is one or the other presidential candidate more likely to encourage such policies?

Westbrook: Transparency is fundamentally an issue for citizens of Brazil and other countries. They need to ask themselves whether public actors are going to be accountable, and how -- as a legal and institutional matter -- such accountability is going to be achieved. In the United States, we have to ask ourselves the same thing -- that's the lesson from Enron. These problems are not "solved," they are managed more or less successfully. And that task does not go away.

Those things said, as a matter of public diplomacy and in its negotiations, the United States has done quite a lot to encourage transparency and to encourage what we see as a favorable business climate, in a range of countries. Of course the U.S. government wants the business climate to be favorable for U.S. investors. But we also believe that a healthy business culture is in everybody's interest -- surely beats numerous familiar alternatives.

As in many places, our presidential election is a matter of widespread interest in Brazil. Cab drivers knowledgeably quizzed me, not only about what I thought, but also about what I thought the different candidates might mean for Brazil. With regard to the fundamentals of business culture, however, I do not think there is much difference between the candidates. Both Obama and McCain have promised -- as they should -- substantial reform of capital market regulation in the United States. Any such reform is going to be in large part about disclosure and so transparency. In a similar vein, I think that, if elected, either candidate is likely to put more stress on public diplomacy and "soft power" generally. So we are likely to see more efforts to discuss what transparency might mean, and more generally, how to construct a healthy business culture. I think that such developments would be good.

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