The New Hall Monitors

The front page of today’s Washington Post reports on a recent explosion in the number of corporate “monitorships,” noting a sevenfold increase since 2001. In these cases, the article reports, federal prosecutors direct contracts to private parties, who are given responsibility to oversee sometimes radical reconstructions of companies charged with fraud or other wrongdoing. The often hefty bill, of course, goes to the relevant company.

Much of the analysis in the article speaks to potential corruption/favoritism in the appointment of individuals to fill these lucrative positions. The article notes the appointment of “various former prosecutors and SEC officials with ties to President Bush, his father and other Republican luminaries,” before focusing on a particular case out of New Jersey. (Which choice I saw, as a perhaps overly defensive temporary resident, to play on pernicious stereotypes of this fair state…)

I was more interested, however, to think about the nature of the institution of “monitors” more generally. What, I wondered, were potential analogies in our schemes of law and governance? Court-appointed special masters immediately came to mind. Naturally, there’s some whiff of our sorely missed independent counsels. Perhaps given my international interests, I somehow thought of the U.N. trusteeship system as well, which in turn brought to mind the various uses of private trustees in the U.S. bankruptcy system.

Wtih full appreciation of the significant variation captured by this litany, what might we say generally about the use of monitorships and similar institutions as mechanisms of regulation? All, of course, involve a certain delegation of monitoring, counseling, and even disciplining functions. But what motivates that delegation? What institutional gains do we understand to follow from such delegation? I assume it’s not simply a matter of cost-savings or some general notion of relatively greater efficiency of the private sector. The latter isn’t out of the question, of course: Taking the case of monitors by way of example, it’s clear, at a minimum, that corporate payments for the privilege of being monitored are more easily made to private monitors than they would be to a public servant or even the agency for whom she acts. And perhaps private monitors are somewhat more likely to be fastidious in their monitoring, given their profit motive (though it’s not entirely clear how that motive would play itself out in the particular institutional context of corporate monitorships).

But I wonder whether the operative notions of regulatory “efficacy” behind the use of monitors (and analogous institutions) don’t also involve some substantive evaluation of the comparative advantages of public versus private institutions, in varied regulatory settings. The Post thus cites “a shift from lodging criminal indictments against businesses for fear they will collapse and cost employees their jobs. Instead, the government has taken a different path: forcing companies to submit to outside oversight at their own expense as a condition of settling fraud and corruption cases.”

Perhaps, this might be understood to suggest, there’s some notion of comparative institutional efficacy at work. While public regulators may be quite effective at penalizing behavior, perhaps they are less effective at changing it? To similar effect, perhaps public institutions are good at defining relevant boundaries, but less effective at more nuanced, day-to-day classifications of relevant behavior? Assuming public institutions enjoy a comparative advantage at least at some things, though, greater attention to questions of relative regulatory efficacy would seem to be in order.

Beyond the fascinating question of what institutions such as monitors imply for our understandings of regulatory design, a distinct (and no less fascinating) issue concerns the contracts by which the relevant relationships are established. Assuming a single contract, who are the parties in privity and who is the third-party beneficiary of the contract? At what level of detail are the contracts drafted? And what, perhaps more oddly, what might be the remedies for breach?

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