1. THE LAWâS PATH TO HAPPINESS
The law can best be described as a servant of society â one amongst many tools directed at helping individual members of the community to satisfy their goals. It is therefore appropriate that the law makes use of the most accurate and groundbreaking knowledge available, with a view to shaping the law to better serve the needs of society.
Given that the law is such a servant, and its ultimate function is to ensure that society functions effectively, during the second half of the 20th century and into the 21st century, legal scholars began to embrace other disciplines in the social sciences to gain a better understanding of the behaviour and needs of human beings, with a view to making the law more effective in serving its masters. Corporate law scholars have turned their attention to other disciplines to formulate a richer understanding of what a corporation actually is, and the expectations that stakeholders have when participating in a corporation.
First came what is known as the âlaw and economicsâ movement, which was particularly prominent in the US. Law and economics scholars embraced a neoclassical economic conception of human behaviour, with humans perceived as rational actors in search of the most efficient outcomes.1 Efficiency was generally equated with wealth maximisation.2 Based on this rational-actor model of human behaviour (also referred to as homo economicus), law and economics scholars believed that legal rules and legal institutions could be understood from an efficiency rationale, that is, a rule or institution can be said to maintain its legitimacy if it enhances efficiency in the way rights and obligations are dealt with.3
While the economic analysis of law dominated legal scholarship in the US from the 1960s until the 1990s, with scholars seeking to understand and analyse almost all areas of the law from an economic perspective, it was obvious that there were some limitations with the rational-actor model of human behaviour that provided the basis for strict law and economics analysis. Even though human beings cannot accurately be described as irrational creatures, nor are we machines, programmed to pursue the most efficient outcome in every possible situation.4
Accordingly, in the second half of the 1990s a trend slowly emerged whereby legal scholars were seeking out research from outside neo-classical economics to better understand how human beings truly behave.5 Given, however, the continuing stranglehold that law and economics had on mainstream legal thinking, scholars did not venture beyond economics in their journey of enlightenment. Behavioural economics, the application of research on human and social cognitive and emotional biases to economic decision-making, was as far as scholars initially proceeded. The journey, albeit short, was however valuable, with behavioural economics presenting empirical findings of cognitive psychologists, behavioural researchers, probability theorists and others from over the previous two decades, which demonstrated that the rational-actor model was seriously wanting. Studies had shown that rather than being rational self-actors at all times, people are frequently unselfish, overly-optimistic and are âboundedlyâ rational (meaning they have limited information-processing powers, and frequently rely on short cuts and rules of thumb).6 So began the âbehavioural law and economics movementâ, or what is often referred as the âsecond synthesisâ of law and economics.7
More recently, behavioural analysis of the law has begun to stand on its own, not having to characterise itself as a component of law and economics in order to be taken seriously. Scholars now feel confident enough to apply findings on human and social cognitive and emotional biases, which are central to behavioural analysis, without framing the analysis in economic terms. Corporate law scholars have applied understandings about real, personal human traits, such as trust and sensitivity, to reconsideration of the nature of the corporation and the regulation of corporations, without feeling the need to also justify their contention from an economic perspective. As two leading corporate law academics in the US have written, âmushinessâ, rather than cold hard economic analysis, is fast becoming the flavour of the month.8
Given the recent release of behavioural analysis from the clutches of law and economics, commentators are also beginning to appreciate the fact that if economics can be used in the law to better understand human behaviour, there is no reason why a marriage between the law and other areas of social science, such as psychology, anthropology and sociology, is not possible. Indeed, Richard A Posner, considered the leader of the law and economics movement in the US, in a recently published Harvard University Press monograph, Frontiers of Legal Theory, envisages the future of the law as being an integrated field of social science, combining the force of law and legal institutions with the most ground-breaking knowledge of human behaviour, to produce a powerful tool performing the dual functions of regulating the activities of members of the community, and facilitating the achievement of personal objectives for individuals so that they can flourish.
The legal academy is increasingly prepared to accept that, even at this elementary stage of the law and behavioural movement, as human beings we cry, love, socialise and act unpredictably, rather than simply pursue financial wealth. Indeed, in a major new work on executive remuneration, Pay without Performance: The Unfulfilled Promise of Executive Compensation, published in November 2004 by Harvard University Press, Harvard Law Professor Lucian Bebchuk and Berkeley Law Professor Jesse Fried rely upon empirical and theoretical studies highlighting real human motivation to present a powerful alternative view on why executive pay practices in American corporations have increasingly decoupled pay from performance.
In their work, Bebchuk and Fried discuss the shortcomings of what they describe as the âofficialâ view of executive remuneration â that corporate boards operate at âarmâs lengthâ from the executives whose pay arrangements they determine, instead being totally focused on serving the interests of shareholders by structuring remuneration arrangements that are directed at increasing shareholder value. It is suggested that financial economists and corporate lawyers have largely worked within this armâs length model to explain both remuneration arrangements that try to connect pay with performance, as well as arrangements that are inconsistent with the cost-effective provision of incentives, which add to shareholder value. These latter arrangements have traditionally been explained as being either âanomaliesâ or âpuzzlesâ that can be explained within the armâs length paradigm. According to Bebchuk and Fried, however, the armâs length paradigm â[fails] to account for the realities of executive compensationâ.9 Bebchuk and Fried go on to explain that:
Directors have had various economic incentives to support, or at least go along with, arrangements favourable to the companyâs top executives. Various social and psychological factors â collegiality, team spirit, a natural desire to avoid conflict within the board team, and sometimes friendship and loyalty â have also pulled board members in that direction.10
Bebchuk and Fried, in their book, propose a series of measures to reform the corporate governance arrangements of corporations, the reforms being based on this very humanistic understanding of what motivates directors to set in place executive remuneration arrangements decoupled from company performance. The reforms are intended to make directors more dependent on shareholders (by, for example, giving shareholders greater access to the corporate ballot in nominating directors), in the hope that directors will become more motivated by shareholder interests than by the interests of executives.11 In response to this new perspective on the problem of executive remuneration in modern companies, and the recommendations contained in Bebchuk and Friedâs book, John C Coffee Jr, Professor of Law at Columbia University has expressed the view that:
Their evidence, their conclusions and their recommendations cannot be ignored: they should be studied by boards, courts, the SEC â and anyone who wants contemporary corporate governance to work.12
Joesph Stiglitz, Nobel Laureate in Economics, has said of the findings in Bebchuk and Friedâs book, that:
This work will shape debates on executive compensation and corporate governance for years to come.13
Thus, the future of corporate governance as a discipline of study, and an area of legal regulation, could very much be guided by inquiries as to what really does make corporate participants (directors, managers, shareholders, employees) think and behave in that way that they do.
During the same period in which the legal academy began to explore outside the narrow field of classical economics to gain a better understanding of human behaviour, psychologists were devoting an increasing amount of time and energy to studying the most basic, yet also the most elusive, aspect of human behaviour, the pursuit of happiness. For centuries, it has been postulated that happiness is the ultimate objective of all human beings and forms the basis for everything we choose to pursue or not to pursue. Notwithstanding the importance of happiness, however, it has been considered too vague and indeterminate to be capable of being precisely defined. Hence, as a concept, happiness has not been taken seriously in mainstream academic thinking and amongst policy makers.
2. HAPPINESS AT THE FOREFRONT
Recent empirical research carried out since the early 1990s, however, demonstrates that there are certain key factors, common to us all as human beings, that contribute to personal happiness. Prominent psychologists, such as Ed Diener, David Myers, Tim Kasser and Martin Seligman, have shown, as a result of comprehensive empirical studies carried out across the globe, that there is a strong positive correlation between experiences such as participating in activities, companionship, and enjoying autonomy and authenticity, and levels of personal happiness. Tim Kasser has referred to these positive happiness contributors as âpsychological needsâ.14 Importantly, what more recent empirical research has shown is that beyond the satisfaction of basic needs, in general terms money and the generation of wealth does not contribute to oneâs level of happiness.15 Indeed, some studies show that there is even a negative correlation between the pursuit of wealth and oneâs level of happiness.16
The happiness movement is arguably the most significant development in the study and practice of psychology over the past two decades. Best-selling books by the worldâs leading psychologists have outlined the findings of empirical studies on happiness,17 and the implications of these findings. Martin Seligman, a former president of the American Psychological Association, has established a new field of âpositive psychologyâ, devoted to exploring (relying on recent happiness findings) how psychologists can help make people happier, rather than just relieve suffering; and over the last couple of years psychologists have begun to open practices specialising in positive psychology.
To date, while economic researchers have caught on to the significance of understanding the empirical determinants of happiness (with a new field of âhappiness and economicsâ starting to take shape),18 recognising that economics has much to do with human well-being, legal scholars have failed to embrace this new research (although the Deakin Law Review in Australia recently published a special feature, in Vol 10 No 1 (2005), on the implications of empirical happiness studies for the law, with articles by prominent happiness psychologists, such as Tim Kasser, David Myers and Martin Seligman). This is perhaps understandable given that it took legal scholars at least two decades to come to terms with actual, as opposed to purely rational, human behaviour, due to the dominance of the law and economics movement at the time. Legal scholars are only just now prepared to transcend a strict economic analysis of law. In my view, however, it will not be too long before legal scholars, accepting that legal analysis has a licence to explore outside terrains, such as psychology and sociology, awaken to the happiness movement that has been spreading like wildfire throughout psychology departments across the US and other countries over the past decade. Empirical happiness studies are, at present, at the forefront of discourse amongst researchers in psychology, and legal scholars entering the domain of psychology in search of greater meaning will inevitably have to confront such studies during their journey.
Indeed, positive psychology researchers are already beginning to write on the potential for happiness indicators â with happiness now being just as capable of precise definition as any other concept â to replace economic indicators as the primary measure of the well-being of a nation, and to provide an ultimate source for developing effective policies. Professors Diener and Seligman, in applying recent empirical...