Corporate Managers and Crime

Perhaps not since the early 20th century has there been so much outrage about the malfeasance of the large corporation, and particularly the relationship of senior managers to such conduct. The sentiment is understandable. In reckoning with the wrongs of the big business firm in one serious case after another, a responsibility gap has emerged. The financial crisis of 2008 crystallized the problem, which has only repeated across many scandals since.

Consider, for example, the huge banking firm Wells Fargo, which became an emblem of the seeming impossibility of controlling management of big financial services corporations. The bank fired over 5000 employees for a widespread but simple form of fraud designed to boost sales and therefore bonuses: signing up customers for accounts they had not requested. The CEO, John Stumpf, forfeited millions of dollars in compensation and resigned after enduring the usual severe congressional chastisement. But aside from approving the bank’s management structure and compensation systems, he appears, at most, to have been the recipient of a couple of warnings that there might be a problem, perhaps buried in a mountain of information coming through his office. In any event, Stumpf cannot be shown to have directed fraud, just as top managers of mega-banks involved in the mortgage-backed securities fiasco leading up to 2008 appear to have floated above the details of how their derivatives traders executed individual deals that might have crossed the line from ill-advised for the buyers to intentionally deceptive.

There are many such contemporary cases. They are very different from those involving smaller firms with hands-on top managers: Stewart Parnell, the CEO of the peanut company whose products killed people after he directed “ship it” in spite of the lack of required safety testing; or Donald Blankenship, the CEO of the coal company Massey Energy, whose obsessive efforts to limit the costs of the federal government’s mine safety rules led to the explosion of the Upper Big Branch mine in West Virginia, killing nearly 30 workers.

In a new paper, “The Responsibility Gap in Corporate Crime,” I take up the problem of what I call the responsibility gap: the inability of conventional theories of criminal liability to easily, or even under strain, satisfy urges to deter or inflict retribution on corporate managers.

The problem is unique to large corporations and arises from their structure. Finding only “line” level workers criminally liable does not merely let all others who bear responsibility off the hook. There is a sense in corporations that line workers have, to some extent, a moral if not legal excuse when management created a culture and incentives that made the relevant conduct and ensuing harm likely or even inevitable. This is what people, including jurors in several high-profile cases, mean when they say the prosecution treated the low or mid-level worker as a “scapegoat.” It is not just that management is also responsible. It is that management appears to be more responsible.

Of course, the other fact generating the responsibility gap is that management is not prosecuted for good reason: Settled criminal law does not have ways to punish this sort of thing. The principal objective of the paper is to demonstrate—particularly for those who do not specialize in criminal law—how theory and doctrine cannot close the responsibility gap. The problem implicates, among other areas of criminal law, the act requirement, omission liability, mens rea, and risk-taking (recklessness and negligence). As one works analytically through each of these areas, one sees that criminal law—in either its current form or as potentially reformed—can’t punish managers of large corporations who preside, in some sense, over crime but do not commit or participate in it.

The responsibility gap has long put pressure on the criminal law, and though perhaps acute at present, it is not new. A 20th century recognition of harms associated with the corporate production of goods, especially substances that enter people’s bodies, long ago produced the peculiar doctrine of “responsible corporate officer” (RCO) liability. RCO provides that in certain federal regulatory regimes—most prominently, the food and drug laws and the clean air and water laws—a corporate manager can be criminally liable for a misdemeanor if he stood in “responsible relation” to a violation of the law anywhere within the corporation, even if he did not know about the violation.

RCO is not a solution to the responsibility gap. Even in current form it is objectionable, if perhaps bearable. But to make it a real answer, legislators and judges would have to expand the doctrine into other areas of federal regulation and criminal law. As crimes became more serious (felonies) and more intent-based (fraud, for example—the most commonly relevant crime in the financial sector), RCO would become more than a slightly embarrassing but limited and perhaps tolerable exception to principles of individual fault. It would require a sea change in Anglo-American theories of punishment.

Corporate criminal liability is another way that American law attempts to close the responsibility gap. As I have argued before, in partial opposition to the standard law and economics account, the doctrine can perform a useful blaming function. It does not imprison, of course. But it does more than impose monetary sanctions under a criminal label. Holding a corporation criminally liable for a serious offense that is the product of a structure and culture created by management can send a powerful message to those who operate the firm, as well as similarly situated firms, about what behavior is unacceptable. When fault is generalized from the individual to the firm, managers are, at least in part, objects of meaningful blame.

The role of corporate criminal liability in narrowing the responsibility gap is underappreciated. Nonetheless, the doctrine cannot close the gap. Its limitations and flaws have been well documented. Among them is the obvious point that a criminal conviction of a corporation does not authorize or involve individual punishment. Any influence of a corporate conviction on managers is indirect and refracted.

And, in the cases in which the responsibility gap is of greatest public concern, actual imposition of corporate criminal liability may be off the table. Convicting a major firm, especially of a serious felony that can lead to de-licensing and debarment, often puts it out of business. Because the economic and social structure of the United States depends so heavily on the existence and survival of such firms, prosecutors understand that full prosecution is unrealistic. Thus we have the now institutionalized practice of settling corporate criminal cases with deferred and non-prosecution agreements. These deals can impose discomfort on managers, particularly if they require reform of corporate functions. Sometimes such agreements are even accompanied by removal and replacement of managers. But the parade of corporate disasters that continue to unfold in an era dominated by these settlements—and the growing public outrage about such disasters—suggests that Justice Department settlements, however punitive, fall short of closing the responsibility gap.

The responsibility gap is symptomatic of deep unease with the large corporation itself: the too-big-to-manage problem; the mismatch between the scale and power of the institution and human capacity to control it; the American dependence on these economic powerhouses and our resentment of their tendency to do us wrong. Making it easier to use criminal law to punish corporate managers for wrongdoing within corporations might yield some additional deterrence, and perhaps some public satisfaction. But only at the cost of badly compromising principles of punishment, not to mention the potential for costly and excessive deterrence.

More to the point, the impulse to expand criminal liability for managers is not going to get us what we seem so badly to want: a humanizing of the corporation—a compression of this unwieldy legal and economic institution down to a size or into a form that appears amenable to control and punishment. For that, we need to look outside the criminal law and to the law and institutions that created the modern corporation and that bear primary responsibility for its constitution and regulation.

This post comes to us from Samuel W. Buell, the Bernard M. Fishman Professor at Duke University School of Law. It is based on his recent article, “The Responsibility Gap in Corporate Crime,” available here.

 

2 Comments

  1. Joseph A Heyison

    I am amazed that the author did not consider Section 15(a) of the Securities Act of 1933, which expressly closes this gap for registration violations:

    “Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under sections 77k or 77l of this title, shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.”

    • Joseph A Heyison

      Also the lesser provisions of Section 906 and 404 of the Sarbanes-Oxley Act, requiring CEO/CFO certifications of financial reporting in an attempt to impose liability on those officers for underlings’ actions, and requiring the 10-K that they certify to to contain an internal control report.. Financial institutions have even more elaborate certification requirements intended to pin problems on the CEO. For at least 15 years, legislatures and regulators have been stumbling toward solutions to the author’s concerns that are far more relevant than RCO.

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