Corporate law gives corporations the ability to own assets, enter contracts, raise funding, and operate at scale. The central commitment corporations make in return is to act lawfully. Yet when violations of the law are hard to detect and penalties are limited, illegal conduct can be profitable.

In a new paper, we analyze how corporate governance practices can undermine weak law enforcement policies. A good example is policies that provide leniency to corporations in exchange for cooperation and implementing compliance programs or commitments to report misconduct.

Standard approaches to corporate governance focus on ensuring that managers act in the interests of shareholders. In the ideal world, law enforcement would prevent the pursuit of profit from harming customers, employees, taxpayers, or the public. However, when laws are inadequate or enforcement is weak, internal governance mechanisms may push managers to engage in profitable misconduct.

Policies that determine how external rules are interpreted and enforced may reduce deterrence.  These policies can, perversely, create incentives for managers to engage in the higher levels of misconduct that maximize profits while taking into account the expected penalties. In our paper, we show that adjustments in managerial compensation often weaken and may entirely undo the potential deterrence of penalties. Insurance and indemnification can also undo the impact of enforcement actions against corporate leaders by shielding them from consequences.

Because detecting and investigating corporate misconduct is difficult and costly, enforcers often rely on corporations to establish compliance programs, conduct internal investigations, report misconduct, and provide information. The rewards for cooperation can include lower fines, reductions in other penalties, and decisions not to prosecute. In May 2025, for example, the U.S. Department of Justice revised its corporate enforcement policy so that corporations that voluntarily disclose, cooperate, remediate, and satisfy other criteria can receive a declination of prosecution. Speaking about the changes, the head of DOJ’s Criminal Division said that “never before have the benefits of self-reporting and cooperating been so clear.” More recently, the U.S. Attorney’s Office for the Southern District of New York announced a new Corporate Enforcement and Voluntary Self-Disclosure Program for Financial Crimes. The program applies even where misconduct has already been detected and reported in the media. In exchange for self-reporting and cooperation, there will be no financial penalties, no corporate monitor, and no prosecution of the corporation.

Prosecutors like leniency policies because they encourage corporations to reveal misconduct that may have gone undetected for many years. A well-functioning compliance program can increase the probability that misconduct will be detected earlier and shorten its duration. Self-reporting can reveal misconduct that may have otherwise remained hidden. If cooperation reduces enforcement costs and helps detection of misconduct, it can be beneficial.

However, corporations governed in the interest of shareholders will adopt a compliance program, self-report, or otherwise cooperate with authorities only if doing so benefits shareholders. Authorities must therefore offer benefits that make cooperation more profitable than non-cooperation. The prospect of lower penalties that makes cooperation attractive in those cases can also make the underlying misconduct more profitable and thus more attractive to corporations and their shareholders to pursue before it is revealed. We show that, even if cooperation may reduce the likely duration of misconduct, it can be profitable for corporations to engage in higher levels of misconduct before it is detected. The result may be more harm to society from misconduct.

By giving significant or even complete discounts on fines and other penalties for voluntary compliance or self-reporting, authorities give corporations the choice of how to respond (e.g., when to self-report). The corporation will choose the most profitable approach and may do more harm even as they seem to be complying. Mandatory monitoring, whistleblower programs, and properly audited reporting obligations, by contrast, can increase detection without making misconduct more attractive. Leniency will not be needed and will thus not make fines simply a cost of doing business.

The case for offering leniency in exchange for compliance programs is even weaker when such programs are ineffective or largely cosmetic, which is more likely when the misconduct is profitable. In our analysis, we assume that compliance programs genuinely increase the probability of detection. If corporations receive credit and leniency for programs that just create the appearance of compliance, then the leniency will not improve detection but instead make the misconduct more profitable and frequent.

Our analysis suggests that cooperation may not be the best approach to enforcement in the corporate context. Cooperation policies should be evaluated by asking whether they increase detection and reduce the underlying harm, not merely whether they reduce enforcement costs or induce corporations to help authorities.

Overall, if misconduct and law breaking is profitable, internal governance mechanisms that align managers with shareholders, which may be valuable when laws are well designed and effectively enforced, can exacerbate the conflict between corporations and society and the potential harm corporations may cause when enforcement is weak. Our analysis underscores the importance of a broader perspective that might be called societal corporate governance, one that ensures that the interactions between external and internal governance are constructive and lead corporations and the individuals acting on their behalf to produce genuine benefits without causing undue harm.

Anat R. Admati is the Joseph McDonald Professor of Finance and Economics at Stanford Graduate School of Business, Nathan Atkinson is an assistant professor at the University of Wisconsin Law School, and Paul Pfleiderer is the C.O.G. Miller Distinguished Professor of Finance, Emeritus at Stanford Graduate School of Business. This post is based on their recent paper, “Profitable Misconduct, Corporate Governance, and Law Enforcement,” available here.