Options backdating, tax shelters, and corporate culture.

(100) See Akerlof & Kranton, supra note 48; Donald C. Langevoort, Resetting the Corporate Thermostat: Lessons from the Recent Financial Scandals About Self-Deception, Deceiving Others and the Design of Internal Controls, 93 GEO. L.J. 285, 288 (2004) ("[T]raits such as over-optimism, an inflated sense of self-efficacy and a deep capacity for ethical self-deception are favored in corporate promotion tournaments, so that people who possess them are disproportionately represented in executive suites.") (emphasis omitted); Claire A. Hill, The Law and Economics of Identity 30-32 (Minnesota Legal Stud. Research Paper No. 46, 2005), available at http://ssrn.com/abstract=844345.

(101) In Richard Russo's delightful Straight Man, English professor Hank Devereaux struggles to teach creative writing to a group of mostly disinterested undergraduates. RICHARD RUSSO, STRAIGHT MAN (1997). He uses an exercise called: "I know you, Al. You're (not) the kind of man who--" Id. at 101. The exercise measures character development by challenging the writer to complete the sentence in an interesting and revealing way. Id.

Hank, of course, is suffering an identity crisis of his own. As dean of the English department, he is conflicted between the administration's demands that he fire some of his colleagues and the moral obligation he feels to the principles of academic freedom, not to mention the loyalty to his friends. Hank comes to realize that we cannot know what we will do in such a situation until it happens. We need our friends and colleagues because they know us better than we know ourselves. I know you, Hank, and you're not the kind of man who rolls over for the administration.

We know from the psychology literature that people seek to act in such ways that are consistent with their own personal narratives. And we know that, like Hank, they rely on their friends and colleagues to check the calibration of their moral compass. To reduce the demand for tax shelters, we need companies to cultivate a culture of compliance that can make a tax director pause and seek guidance from the tax bar (not the tax shelter bar) about how to proceed. We need to encourage systems where it's someone's job to say, "I know you, Al, and you're not the kind of guy who enters into tax shelters."

(102) See Lauren B. Edelman, Christopher Uggen & Howard S. Erlanger, The Endogeneity of Legal Regulation: Grievance Procedures as Rational Myth, 105 AM. J. Soc. 406 (1999); Lauren B. Edelman & Mark C. Suchman, The Legal Environments of Organizations, 23 ANN. REV. SOC. 479 (1997).

(103) See Donald C. Langevoort, Internal Controls After Sarbanes-Oxley: Revisiting Corporate Law's "Duty of Care as Responsibility for Systems", 31 J. CORP. L. 949, 968 (2006).

(104) See id. at 970.

(105) See Akerlof & Kranton, supra note 48, at 11.

(106) See id. at 27.

(107) This is more than just a long-winded way of acknowledging the point, sometimes missed by the media, that the optimal amount of fraud is greater than zero. Recognizing the role of culture in determining the demand for tax shelters may guide our design of regulatory controls, for example, by mandating the use of outside counsel on large transactions (and reducing the audit resources devoted to smaller transactions). Skilling's "loose-tight" vision isn't necessarily a bad idea; it just requires more careful implementation with a closer balance of power between the departments charged with being "loose" and those who must be "tight." At the moment, SOX may have tipped the balance of power a bit too far in the tight direction, or it may be tightening up on the benign transactions rather than the malignant ones.