The Challenge of Holding Big Business Accountable

Is big business ungovernable? Some of today’s calls to break up and intensely regulate big business do not hinge on harms to consumers as consumers, but rather on the claim that giant corporations with market power treat legal requirements as mere recommendations, and routinely engage in behavior that harms others as long as it maximizes their own bottom line. Importantly, the big-is-ungovernable claim has by now firmly entered policy circles. To illustrate, in 2020, a congressional subcommittee investigating the conduct of big tech platforms maintained that Google, Amazon, Facebook, and Apple leverage their power to shape the regulatory framework that governs them and repeatedly violate existing laws and court orders. This pattern of behavior, concluded the subcommittee, “raises questions about whether these firms view themselves as above the law, or whether they simply treat lawbreaking as a cost of business.”

Though the stakes could not be higher, the big-is-ungovernable claim as currently construed is underdeveloped. In fact, existing law-and-economics analyses suggest that big is more governable. Larger corporations are more publicly visible, increasing the probability that any misconduct would be detected. And they have more to lose from being caught misbehaving: from higher punitive damages in court to greater reputational fallout in the marketplace. If “big is ungovernable” is based on little more than anecdotes and riding a strong anti-bigness sentiment, we could end up with bad policies negating economies of scale.

My new article examines the extent to which super-large firms with market power are less governable. The article spotlights several unique institutional features of big business that dilute the effectiveness of deterrence across all systems of control – not just legal, but also non-legal controls such as reputation concerns or moral constraints.

Consider first the prospect of legal deterrence. Super-large corporations enjoy greater ability to influence the regulatory agenda not just via lobbying or campaign contributions but also via “soft” channels, such as “epistemic capture,” stemming from their ability to fund research that cloaks their self-interest in a noble, public-interest explanation. They can thus ensure that their behavior falls within regulatory requirements. When their behavior nevertheless transgresses the law, the unique institutional features of bigness hinder public enforcers’ ability to investigate, prosecute, and properly calibrate the sanction for misbehavior. As a result, enforcers often avoid taking big business to court, opting instead to settle early for what big defendants write off as the small costs of doing business. Further, super-large corporations can leverage their market power to force counterparties to sign class action waivers or gag clauses, thereby diluting the prospect of private enforcement as well.

What about reputational deterrence (market discipline)? Classic reputation models suggest that the effectiveness of reputational deterrence increases with firm size, as bigger companies have bigger reputational caches to protect. I find this conventional wisdom wanting, for various reasons. Market power makes it harder for consumers to switch to competitors, harder for workers to blow the whistle, and harder for information intermediaries to certify allegations. And while the conventional wisdom is right to point out that big corporations have strong incentives to protect their reputation, it underplays how they can protect their reputation not necessarily by behaving honestly but rather by managing appearances.

Finally, bigness also dilutes the moral constraints operating on individuals within super-large corporations. The fragmentation of knowledge inside super-large corporations and their hierarchical nature creates moral blind spots. Looking from the outside in retrospect, we view behaviors such as emitting toxic chemicals as abhorrent. But inside mammoth-sized corporations in real time, no single individual realizes the moral consequences of her behavior. Size eases our natural tendencies toward selective perception, plausible deniability, and leaving ourselves “moral wiggle room.” It creates an environment where even good people are more likely to behave badly.

Recognizing the gaps in the ability of laws, markets, and morals to govern big business opens up space for rethinking oft-made policy proposals. For example, proposals to increase the sanctions and regulatory enforcement budgets may work against normal-sized corporations but are less likely to ameliorate bigness-control problems. The threat of a bigger penalty down the line does not make it easier to prove culpability inside big corporations to begin with. It does not dispel enforcers’ fear of collateral consequences but only aggravates it. Nor does it alleviate the disengagement and information-silos dynamics, whereby super-large corporations do not comply with the law even when a rational calculation would suggest that they should. In fact, raising the sanction may backfire, as it heightens big corporations’ incentives to leverage their power to avoid detection and fight with all their might against enforcement.

Solutions have to directly address the two institutional features that render deterrence ineffective, namely, information and power asymmetries. To tackle information problems, we could promote whistleblowing by lower-level employees, and emphasize the oversight duties of higher-level decision-makers, in order to reverse their incentives to remain ignorant. To address problems stemming from power we could make mandatory arbitration provisions unenforceable and recalibrate enforcers’ priorities. Enforcers should dedicate more of their scarce resources to vigorously pursuing meritorious cases against big business and monitoring post-settlement behavior, even if this means opening fewer enforcement actions and collecting less money annually.

This post comes to us from Roy Shapira, professor of law at Reichman University. It is based on his article, “The Challenge of Holding Big Business Accountable,” which is forthcoming in the Cardozo Law Review and available here.