Companies on trial: are they ‘too big to jail’?
Brandon Garrett asks whether America’s legal system has swung too far towards rehabilitation at the expense of deterrence and punishment
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Boxes of documents are rolled into court in Houston, Texas, during the trial of former Enron executives Ken Lay and Jeff Skilling, May 2006
Disillusionment with government and large institutions is a salient feature of contemporary American life. An important cause is the widespread sense that big companies and those who run them are not held accountable for their crimes – that they are regarded, in the phrase that provides the title for Virginia law professor Brandon Garrett’s important book, as Too Big To Jail. The fact that no one has been imprisoned for the misdeeds that led to the financial crisis is seen as outrageous by many on Main Street. At the same time, the multibillion-dollar fines and enforcement actions against financial institutions that now seem to be a monthly event are a new phenomenon, and one that is highly troubling to those at risk of paying them.
Garrett’s title and his subject of course bring to mind the financial crisis and the related concern about “too big to fail” banks. But it is a first virtue of Garrett’s book that he places issues around crime in financial institutions in the broader context of corporate crime. He considers examples of corporate criminal enforcement ranging from bribery at Siemens to Arthur Andersen’s destruction of Enron-related documents, KPMG’s marketing of dubious tax shelters, and BP’s problems with worker safety and deep-sea drilling. A far from trivial fraction of the major companies in the US has faced at least the prospect of criminal prosecution in recent years.
Much of what law professors write is prescriptive but without a strong empirical foundation.
This has started to change in recent years and Garrett’s work represents a further advance. He is to be hugely commended for the laborious task of compiling a database on every significant corporate prosecution in the 21st century that resulted either in a conviction or some kind of agreement between prosecutors and the corporation in question. Better yet, he makes this data available for other scholars on his university website. In addition to drawing on this database, Garrett provides narratives of some of the major cases that keep the reader at the edge of his seat.
The reader emerges with a much greater sense of the complexities involved in responding to corporate crime. Early on, Garrett quotes the 18th-century British Lord Chancellor Edward Thurlow as remarking that corporations have “no soul to be damned, no body to kick”. While they can, like an individual, be sued to enforce a contract, and the Supreme Court has recently in Citizens United invoked First Amendment free speech rights to strike down restrictions on their ability to fund political campaigns, corporations cannot be jailed, nor can they (as distinct from those who lead them) be said to have the intent that is the essence of crimes such as murder.
Prosecution of and punishment for crime is usually thought to be motivated by some combination of society’s desire for retribution, its desire to deter criminal acts by the prospect of punishment and its goal of rehabilitating the criminal. These operate somewhat differently in the case of corporations to the case of individuals and there is an additional important consideration – the potential costs of punishment to those other than the perpetrators.
Take the example of the accounting firm Arthur Andersen, vividly described by Garrett. The evidence is compelling that Andersen partners and those they employed failed to blow the whistle on Enron when legally obliged to do so out of a desire to keep collecting high fees.
Further, when controversy arose there was an effort to prevent evidence from coming to light by shredding damaging documents. Andersen was convicted of obstruction of justice, which led to its demise as a company given that it lost the ability to audit public corporations – its primary business activity.
Certainly, it can be fairly argued that this was retribution for Andersen’s misdeeds, and that its destruction would deter other companies from similar transgressions. And any sympathy for Andersen should be tempered by the awareness that it could have settled the case in a way that would have been highly embarrassing and costly but not existentially threatening. On the other hand, less than 1 per cent of Anderson’s 30,000 employees were directly involved in the calumny, so a conviction that represented a kind of corporate capital punishment was a very blunt instrument of retribution, and not one well targeted at deterrence. The jailing of the ringleaders, surely, would have had a much greater impact on the behaviour of accountants in the future. Beyond the costs to Anderson employees, there is the value to the broader society of having more rather than less competition in accounting.
Similar difficulties arise with large financial penalties for corporate wrongdoing. Shareholders who have no direct role in corporate decision-making, and who often were not even holding shares at the time of the crime, are an odd target for retribution. Nor is punishing them likely to be a great deterrent to managements facing competitive pressures and high-powered incentives to raise their compensation.
Garrett shows how considerations along these lines have led to the rise of policies based on non-prosecution or deferred prosecution agreements. In these agreements, the emphasis is on what would in traditional criminal law be labelled rehabilitation. In return for enforcement authorities staying their hand, companies agree to new management practices, close monitoring and programmes to transform their cultures. The authorities retain the option of prosecution to assure compliance.
There is considerable logic in this approach, especially when the conviction of the corporation would have substantial adverse consequences borne by those other than the guilty parties. But it is of course awfully close to a “too important to jail” policy. And the capacity of enforcement authorities to bring about corporate cultural change has yet to be convincingly demonstrated. What are the authorities to do with recidivists?
Garrett’s data and his narrative provide a textured understanding of these trade-offs and many others in dealing with corporate crime. And he provides a thoughtful and balanced set of recommendations for improving the process through, for example, more judicial involvement in enforcing deferred prosecution arrangements, better efforts to detect corporate crime and more efforts to hold individuals accountable. All of his advice seems reasonable, as does his conclusion that corporate prosecutions themselves are too important to fail.
My bet would be that deeper understanding and perhaps improved policy approaches will come out of thinking of corporations as a nexus of contracts explicit and implicit between their various stakeholders, and considering the incentives of each of the actors.
The current trend towards large fines as the response to corporate wrongdoing seems to promote a somewhat unattractive combination of individual incentives. Managers do not find it personally costly to part with even billions of dollars of their shareholders’ money, especially when fines represent only a small fraction of total market value. Paying with shareholders’ money as the price of protecting themselves is a very attractive trade-off. Enforcement authorities like to either collect large fines or be seen as delivering compensation for those who have been victimised by corporate wrongdoing. So they are all too happy to go along.
In the process, punishment of individuals who do wrong or who fail in their managerial duty to monitor the behaviour of their subordinates is short-changed. And deterrence is undermined. There is a broader cultural phenomenon here as well. Relative to other countries such as the UK or Japan, the principle that leaders should resign to take responsibility for failure on their watch even when they did not directly do wrong is less established in the US. This is probably an area where we have something to learn.
Like the poor, corporate criminals will always be with us. All future considerations of what to do about them should draw on Brandon Garrett’s important work.
Lawrence Summers is Charles W Eliot University Professor at Harvard and a former US Treasury secretary
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