Situationist contributor Sung Hui Kim’s article, “Gatekeepers Inside Out,” was published in the latest issue of Georgetown Journal of Legal Ethics, Vol. 21, p. 411, 2008. The article is available to download for free on SSRN. Here is the abstract.
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Gatekeepers Inside Out challenges the conventional wisdom that in-house counsel are simply “too captured” by their senior managers in their corporations to serve as effective gatekeepers of our securities markets. The author revises classical gatekeeping theory introduced by Prof. Reinier Kraakman in his seminal article (Gatekeepers: Anatomy of a Third Party Enforcement Strategy, 2 J.L. Econ. & Org. 53 (1986)). In that article, Kraakman clarified that a gatekeeping strategy requires gatekeepers “who can and will prevent misconduct reliably, regardless of the preferences and market alternatives of wrongdoers.” Although Kraakman did not make much of the distinction, he recognized that successful gatekeepers must not only be “willing” but also “able” to prevent misconduct. Now, consider also that gatekeepers must not only be prepared to “interdict” misconduct but also to “monitor” to detect such happenings in the first place. By combining these two simple observations, we see that potential gatekeepers can be evaluated by their: (1) willingness to interdict, (2) willingness to monitor, (3) capacity to monitor, and (4) capacity to interdict. Using this new framework of analysis, the author compares inside and outside counsel for the gatekeeping role. Along the way, the author departs from traditional gatekeeping theory’s exclusive reliance on rational choice theory and imports empirical findings from social psychology and sociology that illuminate the four conditions of effective gatekeeping. By running inside and outside counsel through this rigorous mill of analysis, the author comes to unexpected conclusions. The analytical framework set forth by the author can also be used to evaluate the effectiveness of other traditional gatekeepers, including investment bankers, securities analysts, accountants, and, yes, even credit agencies.
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Here is a quotation from the article:
[T]o understand the willingness of gatekeepers to interdict misbehavior, it may not be most illuminating to consider costs and benefits consciously calculated based on the model of the rational actor. Indeed, the efficacy of sanctions in constraining behavior may be seriously eroded by various psychological factors. Instead, as social psychology teaches us, we may be inclined toward certain behaviors through cognitive processes guided by the the situation and the roles we inhabit in those situations.
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To link to the entire article, click here. To access a related article by Professor Kim, see “The Banality of Fraud: Re-Situating the Inside Counsel as Gatekeeper.” For related Situationist posts by Professor Kim, see “Why Do Lawyers Acquiesce In Their Clients’ Misconduct?” — Part I, Part II, and Part III.