Before I get to the heart of the matter, let me briefly respond to John’s latest claim that corporations, as mere legal fictions, cannot be agents (I assume he means “actors”) because they are not “real entities.” He’s right, of course, in the sense that the corporate “being” exists on a piece of paper filed with the state. But he’s being far too formalistic in his legal thinking. In reality, a “corporation” is a group of people who are organized in a certain way: there are shareholders, who are the owners; officers, who run the show; mid-level managers, who make decisions within their realm of authority; and employees, who carry out day-to-day tasks. If we decide to punish the corporation for wrongdoing, we’re not punishing some ethereal being; rather, we’re punishing in a collective fashion the people associated with the corporation. Viewed this way, the philosophical issue is really a red herring. (So, from this point forward, the reader should assume that I am using the term “corporation” as a shorthand reference for the human constituencies that comprise the overall entity.) The real question is whether punishment administered by the state against this collective is justified in deontological and utilitarian terms.
This question restates the one I posed earlier: does corporate criminal liability serve the fundamental purposes of punishment? The answer is yes.
One of the main purposes of punishment is deterrence – the prevention of future crime by the wrongdoer (specific deterrence) and others (general deterrence). One would not need corporate criminal liability if administrative fines and penalties were sufficient to keep corporations in line, but they are not. Corporations tend to treat fines as a cost of doing business; if the benefits of socially irresponsible behavior outweigh the potential costs (times the likelihood of getting caught), they will undertake it. The prospect of a criminal conviction, however, is different in kind. A corporation’s reputation is one of its biggest assets, and a criminal conviction tarnishes that reputation in a serious and often unpredictable way. The corporation (really, its officers and managers) has an immense incentive to avoid this outcome. Stated differently, the prospect of criminal liability has a considerable additional deterrent effect over administrative remedies. Don’t believe this? Look up the statistics on the number of corporations under investigation in recent years that decided to cooperate with law enforcement in exchange for a “deferred prosecution agreement” – that is, the promise that criminal charges would not be filed.
Let me be even more specific. In the absence of entity liability, corporate officers have every incentive to encourage criminal conduct by mid-managers and lower-level employees as long as the officers themselves are shielded from personal liability. They can accomplish this by, for example, setting productivity targets so high that they cannot be met through legal means, and then firing or demoting employees who fail to meet them. Employees quickly understand what they need to do to keep their jobs and get promoted, while high level management hides behind a veil of plausible deniability. Later, if criminal proceedings are initiated and lower-level employees get caught, management can (correctly) point to the fact that it never sanctioned criminal activity and was not “aware” of its existence. It can go even further and throw a couple of minor employees to the prosecution wolves, claiming that they were rogues and that their termination (and prosecution) has cured the problem. Meanwhile, the managers – the true rogues – will continue their way up the sleazy corporate ladder.
Entity prosecution significantly reverses this equation. If managers obliquely encourage widespread criminality and the entity gets caught, prosecution of the corporation means that the entity will pay a price. It will suffer a loss of reputation and likely lost revenues and market valuation. Harm to the corporation means harm to the officers. They may lose their jobs, or at least suffer monetary losses such as a reduction in the value of their stock options and portfolios, and perhaps the loss of future salary increases or bonuses. Certainly their professional reputations will be forever tainted. Given these prospects, preventing – as opposed to encouraging – criminality within the corporation now looks like the better path to choose.
Corporate liability also serves the second purpose of punishment: rehabilitation. This is far from a nonsensical notion. The people making up a corporate body create an “atmosphere” with many different characteristics, including whether criminality is encouraged, tolerated, or deplored. This atmosphere is self-perpetuating: agents of the corporation are likely to hire new agents with the same or similar proclivities, and these will be reinforced in an infinite number of ways within the organization over time. Punishing a few wrongdoers is not likely to change the atmosphere of a big organization, but collective entity liability will. By holding the corporation liable, prosecutors (and judges) can ensure that the corporation puts in place compliance programs with real teeth in them. In recent times, corporations have even agreed to place outside “watchdog” directors on their board to help with the oversight process. Over time, compliance programs and careful oversight can reform the organization.
One part of rehabilitation is the paying of restitution to the victims of one’s crime. Often, white collar prosecutions involve millions – even hundreds of millions or billions – of dollars of fraud. Convicted individuals do not have at their disposal anything near the amount of money necessary to pay restitution to the victims. The corporate entity, however, does.
Corporate criminal liability can also serve the purpose of incapacitation, which is the disabling of the wrongdoer’s ability to commit crime. For individuals, incapacitation is traditionally achieved by incarceration, obviously impossible in the case of a collective entity. However, one of the potential penalties for corporate criminal behavior involving government programs – which constitutes a huge percentage of health care fraud and all of defense procurement fraud – is debarment from that program, a form of incapacitation. Although this corporate form of “death penalty” should be used sparingly, it is undoubtedly warranted in cases in which the harm to taxpayers was extreme.
Finally, there is the question of retribution – punishment for punishment’s sake. John’s position is that imposing criminal liability on corporations is immoral because the “corporation” is nothing more than a group of wholly innocent shareholders. This position is overly simplistic: as noted at the beginning of this post, the “corporation” is made up of all of its human constituencies. When crime is committed by a set of individuals within the corporate structure, some members of each constituency are deserving of the “hurt” that corporate criminal liability imposes on them – and, admittedly, some are not.
Take the shareholders, for example. Some of them may not be so innocent: often, the major shareholders in a corporation are also its officers, who may very well have participated in the crime. Moreover, even some shareholders who are not direct participants should, indeed, help pay for it. And let’s be clear: all they will do is pay monetarily through the reduction in the value of their shares. Their personal reputations will not be impugned; they will not serve any time in prison. Depending upon the timing of their purchases and sales, they may very well have benefitted monetarily from the criminality; if so, paying for it is not unfair. Even if a shareholder is truly innocent, one would expect that an efficient market would price in the risk that a company will get caught committing a crime, making the shareholder’s loss in a particular case simply one of many perils associated with investing (and offset through diversification).
I’m not suggesting that in holding corporations criminally liable, some innocent people are not harmed. I concede that shareholders simply caught holding the bag are impacted solely as a result of bad timing, which is not particularly fair. In addition, to the extent that the corporation suffers monetarily because of the punishment and reduces in size (or in the rare instance, goes bankrupt) as a result, innocent employees will be hurt financially. Finally, if the corporation raises its prices to offset the costs of a criminal conviction, innocent consumers will literally pay the price, although market forces should act to keep this harm to a minimum.
Corporate criminal liability thus has some very significant benefits in deterring corporate crime and forcing corporations that commit crime to clean up their act. It punishes high- and mid-level managers who might otherwise mastermind immense frauds and get away scot-free. These benefits should not be underestimated – given the extent to which our economy is dominated by corporations, without such liability, white collar crime could very well run rampant throughout our business sector (even more so than it does today). On the other hand, corporate criminal liability does negatively impact some innocent people. Unlike John, I think these people are analogous to the innocent family members who are harmed by a loved one’s incarceration. To me, the critical question is how to ensure that corporate criminal liability is imposed only when its benefits outweigh its costs. I will take up that question in a later post.