For over two decades, the federal government has employed roughly the same approach to corporate crime. Prosecutors promise leniency in exchange for corporations’ commitment to improve the internal structures and systems that ensure their employees’ compliance with law. Over the years, this leniency-for-compliance framework has generated not only a sophisticated and robust compliance industry, but also a proliferation of enforcement policies designed to improve corporate policing and disclosure.
The framework has also generated two sub-fields of scholarship. One examines the dynamics of corporate enforcement, whereas the other studies the corporation’s compliance function. Two recent papers of mine seek to further conversation in both of these areas.
Improving Leniency Programs by Examining Their Design Elements
The first paper, a book chapter written for the Cambridge Handbook of Compliance, interrogates two Department of Justice policies promulgated in late 2015 and early 2016, respectively, to extrapolate lessons in policy design. The first of these two policies, the now infamous Yates Memo, was styled as an incredibly tough stick: To obtain “any” credit for cooperating with the government, corporations would be expected to hand over all information in their possession relating to any employee’s crimes. Anything short of that would result in a determination that the corporation had failed to cooperate in the government’s investigation. This factor, in turn, would play a role in how and whether the government decided to charge the corporation criminally for its employees’ crimes.
The overriding purpose of the Yates Memo was fairly simple: to prevent corporations from shielding high and mid-level employees from criminal accountability. If the corporations did their part, the government reasoned, prosecutors would be better positioned to secure convictions of executives who flouted the law.
The second of the DOJ’s two enforcement policies was a pilot program that focused on corporate violations of the Foreign Corrupt Practices Act. Portrayed as a carrot, the program emphasized the benefits of cooperation: The corporation that voluntarily disclosed its own FCPA violations and met other requirements could expect a full declination of charges and steep reduction in fines. More importantly, the program outlined how self-disclosing corporations would fare better than those who either allowed or waited for someone else to discover their wrongdoing.
Several years later, the Yates Memo has all but disappeared; its predicted wave of executive prosecutions never occurred. Meanwhile, the pilot program has thrived and become a permanent enforcement policy. Compliance professionals and corporate defense attorneys reference the DOJ’s FCPA policy frequently in their materials. “Declinations with disgorgement” have become a permanent feature of the corporate enforcement landscape.
Both policies arose during the waning days of the Obama administration. Both were implemented by roughly the same DOJ enforcement personnel and during roughly the same time period, although the pilot program was devised and administered by the department’s Fraud Section and therefore bound a narrower subset of prosecutors. One policy clearly succeeded (at least on its own terms) whereas the other one neither achieved its goals nor attracted the support of the wider community. What is to account for this contrast?
To answer this question, the first paper examines several contrasts in the structural designs of the two programs. Several aspects of the pilot program quickly secured an enthusiastic response from the corporate compliance community and white-collar defense bar. Because it was styled as a carrot, it enabled corporate officers to view self-policing and self-disclosure in more positive terms. Corporate counsel could assure recalcitrant boards that the company’s compliance expenditures represented an investment in good governance and that the company could count on less severe punishment in the event the corporation identified and disclosed a serious instance of wrongdoing. The paper also hypothesizes that the pilot program was helped by its relatively narrow jurisdiction: it applied to just one category of crime (FPCA violations) and was centralized within a relatively small group of prosecutors (the Fraud Section of the Department of Justice’s Criminal Division). As a result, corporate attorneys could more easily forge a relationship of trust with relevant prosecutors, easing the way for self-reporting by corporations and the government’s well-publicized declinations of prosecution.
Thus, the lesson a policymaker might draw from this episode is that credible carrots make for better enforcement tools than blustery sticks, insofar as the pilot program easily outlasted the Yates Memo. There are, of course, a number of objections one might make to this narrative. First, a leniency program that generates support among its “insiders” may induce more reporting, but it is not necessarily guaranteed to induce better compliance with law. Moreover, a program that emphasizes its rewards over its punishments runs the risk of authenticating the concern, raised often by progressive reformers, that government prosecutors and corporate defense attorneys already enjoy too close a relationship to reduce the incidence of crime. The policymaker who examines these contrasting policies would do well to keep these lessons in the back of his or her mind. Leniency policies need insider support to succeed, but the messages they convey to the general public are equally important.
Imagining the Drawbacks in an Emergence of a Compliance Elite
It is no secret that corporate compliance has become, in the wake of the government’s efforts to enforce corporate crime, a billion-dollar industry. Corporations annually invest large sums of money in products and personnel to help them identify, address, and deter wrongdoing. As the compliance function has changed over time, so too has the position of the person tasked with managing that function, the chief compliance officer.
With greater responsibility comes greater power, as well as prestige and salary. Particularly among corporations that have suffered embarrassing bouts of compliance failure, there is an increasing preference for hiring into the CCO position highly credentialed attorneys who boast stints in top law firms and federal enforcement agencies. In other words, a small but noticeable cadre of compliance elites have joined the modern corporation and their elite status carries important implications for the compliance function’s ultimate success. The aim of my paper, Compliance Elites, is to document this phenomenon, synthesize its benefits, and warn of several of its dangers.
On the one hand, the emergence of a compliance elite is good news. When a corporation’s board hires an elite attorney to fill the chief compliance function, it signals how seriously it takes the company’s compliance obligation. As in any workplace situation, credentials can serve as proxies for skills, intellect, or expertise. An elite CCO may also attract a cadre of talented attorneys and professionals to fill the ranks below her position. Finally, if corporate management or the board attempts to starve the compliance program of its necessary tools, an elite compliance chief can more credibly threaten exit. In all these ways, elitism inures to the compliance function’s benefit.
At the same time, elitism carries a number of drawbacks, which become uniquely problematic when one considers the situational factors that trigger deceptive crimes such as fraud and bribery. As I argue in the paper, “measuring and compensating performance has long been understood to play a foundational role in fueling corporate misconduct; employees violate laws in order to preserve their jobs or get ahead.” Some employees would commit crimes under any circumstance; others, however, commit or enable crimes, not because that is their first choice, but instead they feel pressured to do so because of the company’s culture and the goals it has set for its employees.
Compliance programs, to be effective, must identify and neutralize corporate performance regimes that make unrealistic demands on employees, set arbitrary goals, and punish employees disproportionately for just missing those goals. Regimes like these fuel antisocial behaviors such as fraud and corruption because of the immense pressures they place on mid- and lower-level employees. When employees fall short of the company’s pre-defined goals, they respond by cutting corners and, eventually, violating the law.
Why might elite compliance officers be less able to recognize the preconditions that drive violations of law? Drawing on the behavioral ethics literature and Bazerman and Tenbrunsel’s theory of “ethical blind spots,” I hypothesize that an elite compliance officer is less able to identify a dangerously harsh performance regime because the officer, having performed so well and at the top of her game for so long, suffers a kind of performance blind spot. Because elite lawyers have, as I argue in the paper, performed extremely well for most of their adult lives, they lack the ability to recognize the risks inherent in severe performance regimes. After all, they have been subject to harsh performance regimes for much of their career and, again and again, they have authentically bested those regimes. Accordingly, they are more likely to discount the misconduct risk inherent in goal-setting exercises that are unforgiving and harsh.
The theory of performance blind spots advances the compliance literature on several levels. First, it explains how talented individuals may fail in their otherwise sincere efforts to shore up a company’s compliance program. Second, it emphasizes the need for corporate boards to consider factors other than credentials and prestige when hiring for the company’s top compliance positions. To be sure, no one is suggesting boards should exclude attorneys with elite credentials, but they ought not assume that the hiring of an elite will solve the company’s problems. Finally, this article’s account may be most important to those elites who already direct their respective companies’ compliance functions. Like other biases, blind spots can be mediated, presumably with training, debiasing techniques, and the use of artificial intelligence. But to address a blind spot, one has to know it exists. The aim of Compliance Elites is to urge those in the compliance profession to begin the hard work of identifying and exploring this potential weakness so that they can more effectively counteract it.
This post comes to us from Professor Miriam H. Baer at Brooklyn Law School. It is based on her recent book chapter, “Designing Corporate Leniency Programs,” available here, and her recent article, “Compliance Elites,” available here.