In a USA Today op-ed, my pal Josh King, general counsel of Avvo, argues against the zeal to hold individual corporate executives culpable for wrongs committed at corporations under their watch.
More prosecutions of corporate executives! It’s a reflexive call to make in the wake of the deepest economic slowdown since the 1930s, and a string of scandals in both the financial sector and industries beyond Wall Street. But while perp-walking executives offers an undeniable appeal to the retributive side of our nature, is it sound policy? Does it deliver the goods in making our marketplace sounder, safer and less corrupt?
The answer has to be almost certainly “no.” What lesson did law enforcement learn from the string of prosecutions after the financial sector meltdowns of a decade ago — WorldCom, Tyco, Enron, etc.? That aggressive pursuit of individual convictions comes at great cost.
While there’s no doubt that convictions come at great cost, it’s not entirely clear that the examples offered back up the assertion. There were identifiable individuals in those cases who made an active choice to engage in conduct that caused enormous economic harm to a great many unsuspecting victims. Being a corporate executive doesn’t absolve one from facing the consequences of the decision to engage in fraud.
But then, the outgrowth of the string of high profile debacles a decade ago changed our national perception of both corporate crime (I hate the phrase white collar, for reasons previously explained) both by causing Congress to press for enormously stiff penalties rivaling murder and by inserting young government lawyers with no business acumen into corporate decision making to the point of deciding how many pens to order and from whom.
Josh goes on to suggest that the public psyche as relaxed a bit since the Enron days, no longer demanding death to the executives.
The Justice Department has in recent years adopted a more nuanced approach to corporate wrongdoing. Through the use of deferred prosecution agreements and similar arrangement, Justice has been able to accelerate investigations and focus more on ameliorating problems at the root.
Corporate executives, no longer faced with a Hobson’s choice between a plea bargain and a bet-it-all criminal trial, are free to reach arrangements with the government that help ensure the enterprise is run more soundly — often accompanied by a hefty settlement payment.
This may be the way it looks from a distance, but tell it to the former CEOs and CFOs and SVPs enjoying a lengthy vacation in Club Fed. While the big news is the billion dollar penalties levied on the miscreant corporations who told us their laundry detergent is new and improved, there is often a human being or two named in the last paragraph who will be the face of corporate malfeasance when sentencing time rolls around.
While the Board of Directors makes the decision to agree to buy the corporation’s way out of the accusations, the warm bodies who were once their most beloved business stars are thrown under the bus in the process. Anything to keep the corporation viable. You can always find a new CEO. The problem, apparently, is that the corporation is the star of the investigation, so few know or care about the lives sacrificed so the corporation can live.
This is not to say that prosecution of corporate executives is never a good idea. But it is a tool of limited applicability. The threat of prosecution isn’t what makes the vast majority of executives want to do the right thing. It’s their integrity, their drive to succeed — and their fear that a misstep will cause the business they’ve worked so hard to build to be undone. Law enforcement should leverage this attitude and focus on those outcomes that result in better-run businesses — not more corporate executives behind bars.
Here’s where the lines gets drawn. There are cases where individual corporate executives make discrete decisions to engage in crime, usually a deliberate fraud or bribery. But these cases are exceedingly rare. The reason the threat of prosecution doesn’t work is because the executives aren’t committing crimes at all, and certainly not in their own minds. They are making business decisions which, when held under a microscope and viewed by a kid from Justice who can only see black and white, has no clue how businesses function and no history in an industry, scrutinizes their decisions as to whether they’re the decisions she would make. If not, then it’s a Crime!
The problem can stem from industry practices, developed decades ago of necessity to accommodate laws at the time together with other real world influences, like union contracts (a huge influence) and the public’s demand for the availability of the products they demand at a price they can afford. Everyone in the industry knows about the practices, and they were firmly in place long before corporate executives were given their corner offices.
Everyone knew about it. Everyone except the kid at DOJ, who was shocked to learn such horrible things were happening. By his account, the industry practice was fraudulent and evil, and the executives should have seen it his way and stopped it immediately. Their failure to do so made them criminals. Remember, this is the same government whose rules demanded they buy $640 toilet seats (actually, it was a toilet seat shroud, and it was later corrected to $100 after public outrage, but the Navy originally approved it at $640) .
The CEO is expected to know everything, every decision, every choice, every function performed by thousands of people under him. Trust your people to do right, to follow policy, to weave their way through a hundred obstacles and demands, and come out the other side with a product that works, is affordable and makes the corporation a profit, and suffer the consequences if any of them screw up. At least in the eyes of a Justice Department lawyer.
Of course, not everybody appreciates what corporations do. Max Kennerly offers the alternative view:
Let’s call GlaxoSmithKline what it is: a criminal enterprise. GSK didn’t miss the finer points of a couple red-tape regulations: the DOJ alleged they tampered with scientific studies, concealed safety data, then lied to doctors and patients and, if that didn’t work, outright bribed the doctors.
Evil corporate greed. A criminal enterprise (in ominous boldface). They must pay for their crimes, and he’s pissed that no one is going to prison…
Unless, of course, the defendant did the deed in service of a big corporation. No one at GlaxoSmithKline is under any threat of prosecution.
So actual prison time, even just the threat of prosecution, for selling people deadly snake oil is out the window. Even the $3 billion is less than it seems, too; calling it a “slap on the wrist” isn’t quite right, but it is by no means real punishment, perhaps more a whisternefet. The money is all being paid by GlaxoSmithKline, not by the employers, officers or directors involved, so it does nothing to deter future drug company employees from doing exactly the same thing — which we know they will…
Max points to no individual who committed a crime, but certainly someone, someone, in the generic evil corporation must be guilty of something, and so the absence of a warm body sent off for a decade at Club Fed proves that the fix is in.
He’s hardly alone it taking such a retributivist view, that someone must be punished even though they have no clue who or why. No consideration is given to the life-saving drugs the evil Big Pharma invented that wouldn’t exist but for their willingness to invest in research. Or that Big Pharma has drastically cut back research following the imposition of these massive fines.
Tell someone who would have lived because a cure was discovered by evil Big Pharma (and we’re not talking about restless legs syndrome) that his death was unavoidable because someone had to go to prison for overselling Paxil, and it turned out to be the guy who would have invented his drug.
The point isn’t that corporate executives should never be prosecuted, or convicted, or imprisoned (though not to the extent of an ax murderer). The point is that our national outrage toward corporate crime has gone overboard, and the aggressiveness of government investigations and prosecutions of conduct that hadn’t been considered criminal for decades can now put a corporate executive who did nothing more than effectively perform his job in a federal prison for a very long time.
And if you’re wondering where American jobs went, or why prices are out of control, or why products no longer work, or why there is no cure for your child’s disease, consider the implications of people screaming criminal enterprise at corporations that may be far from perfect, but also far from criminal.