Corporate criminal liability and optimal firm behavior: internal monitoring versus managerial incentives

Legislation addressing corporate criminal liability has been the subject of worldwide debate ever since the financial scandals of the early 2000s. Under current regimes, firms must observe such compliance requirements as internal monitoring mechanisms, the purpose of which is inducing firms to detect the wrongful conduct of their agents. We develop an analytical framework for identifying when, and to what extent, firms may find it beneficial to adopt these regulatory devices. We conclude that more productive firms, those operating in sectors with more market power, and firms whose managers have more opportunities for criminal activity are more likely to prevent wrongful conduct—either through monitoring or the payment of efficiency wages. When the potential returns to illegal activities are high or the firm is large, internal monitoring is probably the optimal strategy of crime prevention; in contrast, smaller firms typically proceed by paying efficiency wages (or ignoring crime). This paper also analyzes the role of the State’s legal capacity as well as the effects of interactions between the structure of reputational losses and the firm’s market power.     

Fraud by Certified Public Accountants in Japan and the United States

In recent years, Japanese and American societies have been beset by massive corporate scandals involving accounting firms and their certified public accountants (CPAs). These scandals included major accounting frauds by CPAs and have led to deep distrust of corporate accounting in both societies. This paper provides a detailed probe into three major financial scandals in Japan and United States: Enron, Kanebo, and Livedoor. Case histories are used to highlight both the characteristics of frauds perpetrated by CPAs as well as the social reactions to these economic crimes in Japan and the US. Finally, the paper outlines similarities and differences in CPA frauds perpetrated in both countries and considers how cultural variations play a major role in producing these outcomes.     

A difficulty with oaths: On trust, trustworthiness, and signalling

In the wake of the Enron and Worldcom financial scandals that rocked Wall Street in 2002, the US government’s financial regulatory body, the Security and Exchange Commission (SEC) took the unprecedented step in June 2002 of requiring that the chief executives and chief financial officers of America’s 947 biggest companies to swear on oath that their company results and financial reports were to the best of their knowledge accurate. The one-off order was quickly followed by the passing of the Sarbanes-Oxely act, which will require many more CEOs and CFOs to certify their company reports and financial statements at regular intervals. In this paper we apply a simple signalling model to examine whether or not this type of institutional signal of trustworthiness is always efficient. We find that in the presence of signalling costs, the separating equilibrium can be socially inefficient as well as causing a general loss of trust. JEL classificationC72. D81. D82. K22     

(Non‐)Enforcement of Directors’ Duties in Corporate Groups: Goh Chan Peng v Beyonics Technology Ltd

Corporate groups, a ubiquitous feature of modern business, pose formidable challenges for common law courts relying on traditional corporate law doctrine. Arising out of a corporate group's recent bid to recover millions of dollars in lost profits from a former director and CEO who had diverted a core business, Goh Chan Peng v Beyonics Technology Ltd raised thorny issues of separate legal entity doctrine, single economic unit theory, and reflective loss shared by common law legal systems. Despite finding that the defendant had breached his duties to the ultimate holding company, the Singapore Court of Appeal absolved the faithless director from most of his liabilities, relying on limited domestic precedent to the exclusion of a rich body of Commonwealth jurisprudence – including the House of Lords’ landmark Johnson v Gore Wood decision. This note explores the paths not taken by the court, and highlights the pitfalls of a narrow, autochthonous approach to problems of common law doctrine.     

Developing Codes of Conduct: Regulatory Conversations as Means for Detecting Institutional Change

The introduction of a new corporate governance code in Sweden, modeled after prevailing Anglo-Saxon norms of corporate governance, offers the opportunity to investigate global regulatory convergence. Using the metaphor of regulatory space, this article analyzes the positions of the parties who submitted formal responses to the introduction of "The Swedish Code of Corporate Governance—A Proposal from the Code Group." While the globalization of financial markets might forecast unconditional acceptance of the proposed code by business and financial interests, the analysis of who made comments, and what was said, reveals three categorically distinct groups: Swedish business "insiders" connected to the existing institutional framework who opposed changes that would erode traditional division of functions, including collective responsibility for the actions of company boards; "outsiders" (i.e., foreign investors and more marginal Swedish investors) aligned with Anglo-Saxon internationalization of the markets who would change the system of corporate accountability; and the professions (i.e., auditors), who advocated for their professional interests. Of the three groups, Swedish business insiders were most successful in gaining support for their positions. Although international financial and political interests were key to the introduction of the Code in the first place, the article demonstrates how the dynamics of national (local) culture and power structures influence the transfer of regulatory law across jurisdictions.     

Managerial influence and CEO performance incentives

We study whether CEO influence is evident in CEO incentive arrangements by examining how the imposition of state anti-takeover laws (ATLs) in the 1980s affected CEO compensation and retention. On balance, we find that CEOs have higher compensation and more job security, and their compensation and retention are less sensitive to stock-based performance after the enactment of ATLs. We also find that CEO compensation and retention are more sensitive to accounting-based performance after ATLs, but the increased sensitivity is attributable to the accruals component of accounting-based performance. Based on prior evidence that CEOs often exercise discretion in measuring accounting-based performance, we interpret our results as evidence that CEOs have strong negotiation power vis-à-vis their corporate boards.     

论中国公司法的供给侧结构性改革——兼论中国公司法的“服务型”转向

无论是从公司合同主义的理论解说路径出发,还是从优化营商环境改革的实践背景切入,甚或是从商主体治理的制度诉求出发,公司法的基本定位都应当是"服务型"的。以"服务品质"为标准重新检视中国公司法,我们会发现其至少存在"知识源"供给不均衡、公司合同范本"老化"以及过于依赖后置型公司合同"漏洞"填补机制三个层面的问题。这意味着中国公司法需要进行一场深入的供给侧结构性改革。通过引入与更新立法"知识源"、缺省性规范增量扩容、公司法规范的清单式指引设计、程序性规则体系化完善,以及构建创新导向型公司法基础规则、以信息信用为核心统筹公司信用监管体系、打造有助于投资而非投机的公司金融规则等举措,提升中国公司法在私人治理和国家战略两个维度上的服务品质。     

Issues in Anti‐Corruption Law: How Can Code of Conduct Laws Be Drafted in Order to Reduce Corruption in a Public Sector like Romania's

International organisations, like the UN and EU, have encouraged their Member States for years to increase civil servants' compliance with particular codes of conduct. Romania represents probably one of the most advanced countries in attempting to legislate on civil servant ethics through its Code of Conduct Law. Yet, the Romanian Code of Conduct Law possesses significant weaknesses, emanating both from the inherent difficulties of using hard law in a soft law area (like civil servants' ethics) and the Law's silence as to specific procedures, which government agencies should use in implementing the Law. Given these weaknesses, Romanian government agencies should adopt regulatory instruments that compensate for these weaknesses at the legislative level. In this paper, we present the provisions—particularly related to the establishment of agency‐level ethical doctrines—which regulatory drafters can use to implement these codes of conduct in a civil law system without running afoul of the basic requirements of civil law jurisprudence for clarity and predictability. We discuss the legal basis in Romanian administrative law for the elaboration of specific ethics‐related doctrines and the ways in which such a ‘doctrinal approach’ to administrative ethics can help achieve the objectives of the flawed Code of Conduct Law. We specifically discuss the ways in which Romanian governments can adopt such regulatory instruments and the types of provisions that should be included in order to help overcome the flaws of the Code of Conduct Law.     

Public perceptions of white-collar crime and punishment

Although financial losses from white-collar crime continue to exceed those of street crime, the criminal justice system has traditionally focused on the latter. Past research suggested that citizens are more likely to support punitive sanctions for street offenders than white-collar offenders. Recent corporate scandals have increased public awareness of white-collar crime, but whether public attitudes have been altered remains to be determined. Using a 2005 national sample of 402 telephone survey participants, the current study examined citizen perceptions of white-collar and street crime, as well as attitudes regarding apprehension and punishment. This research extended prior studies by also considering the influence of sociodemographic characteristics as well as perceptions of white-collar crime and punishment on the public's support for increasing resource allocation. Implications for future research and development of more effective white-collar crime control policy are discussed.     

Are codes of professional ethics ethical?

This essay reviews and situates codes of professional ethics within the general field of ethics and considers the specific characteristics of such codes. In the process, the author argues against the view that one's professional role and code take precedence over other roles or codes. One's personal value system, once clarified and criticized, provides the appropriate basis from which to continuously assess our codes of professional ethics.     

The Trial of Joseph Dotterweich: The Origins of the “Responsible Corporate Officer” Doctrine

This article analyzes the origins of the “responsible corporate officer” doctrine: the trial of Joseph Dotterweich. That doctrine holds that an officer may be personally liable for the criminal act of a subordinate if the officer was, in some indefinite way, able to prevent the violation. Applying this doctrine, the prosecution of Dotterweich entailed strict liability for a strict liability offense. The underlying offenses—the interstate sale of one misbranded and adulterated drug and one misbranded drug—were said to be strict liability offenses. And then, with respect to Dotterweich as the corporation’s general manager, the government argued that he was strictly liable because he stood in “responsible relation” to the company’s acts. The government never tried to prove that the company, Buffalo Pharmacal, was negligent, nor did it try to prove that Dotterweich was negligent in his supervision of the employees of Buffalo Pharmacal. The prosecutor and judge were candid about this theory throughout the trial, although the judge conceded that it seemed bizarre and unfair. The defense lawyer repeatedly sought to inject what became known throughout the trial as the “question of good faith,” but was circumvented at almost every turn. What would thus seem to be the crux of any criminal trial—the personal fault of the defendant—was carefully shorn from the jury’s consideration. The government’s theory was so at odds with intuitive notions of liability and blame that, as one probes into the case, and looks at the language used in the government’s appellate briefs, imputations of moral fault inevitably crept in. Yet the government was not entitled to make such accusations, as it had pruned moral considerations from the trial. The article argues that the responsible corporate officer doctrine can never enjoy a secure place in our legal system. First, the doctrine is at a minimum in tension with, and often in direct opposition to, basic principles of the criminal law; and second, the doctrine fails, when followed to its logical conclusions, to accord with basic notions of fair play. The article concludes that the responsible corporate officer doctrine is either unnecessary, in cases in which the evidence establishes personal fault, or unjust, in cases in which it creates liability in the absence of personal fault through the unspecified notion of “responsibility.” The Dotterweich case illustrates what is contemplated by the latter possibility, and why it is problematic in any judicial system that purports, in the words of the Model Penal Code, “to safeguard conduct that is without fault from condemnation as criminal.”     

Should we trust the gatekeepers?: Auditors’ and lawyers’ liability for clients’ misconduct

Many corporate scandals of the past years (Enron, Worldcom) have made apparent the essential role of professional service providers, such as auditors, corporate lawyers, and securities analysts, in detecting and revealing corporate misconduct on the part of their clients [Coffee, J., Jr. (2006). Gatekeepers. The role of the professions in corporate governance. Oxford University Press]. Political and legal responses in the aftermath of those scandals have increased the level of regulatory intervention upon auditors and lawyers. For instance, several measures were introduced in the Sarbanes–Oxley Act of 2002, and were recommended by the European Commission.The imposition of duties of care and reporting on gatekeepers, conditional on their having observed an underlying wrongdoing or misconduct of their clients, is, however, more complicated at a theoretical level than believed by policymakers and commentators. Using framework similar to the one we have recently employed to analyze heterogeneous victims in terms of their costs of care [Ganuza, J., & Gomez, F. (2005). Caution, children crossing! Heterogeneity of victim's cost of care and the negligence rule [article 3], Review of Law and Economics, 1], we model the interaction as one in which the gatekeeper observes the state of the world affecting misconduct with a given probability, and Courts or regulators imposing duties or liabilities are unable to verify whether, in fact, misconduct had or not been observed by the lawyer or auditor. The wrongdoing by the client, however, is ex post costlessly verifiable by the Courts or regulators. Information on wrongdoing is thus verifiable but hideable. In this setting, we show that general (albeit maybe increased) standards of professional behavior by auditors or lawyers may well be sufficient as incentives. If those standards can be adequately set by Courts or regulators, in anticipation of the opportunities for strategic behavior derived from the imperfect observation and the unverifiability of actual observation, legal rules do not need to rely on more complex policies of trust or distrust towards the statements, or on the proofs, provided by the gatekeepers, concerning the actual observation of clients’ misbehavior. The implications of the model tend to imply that the distinction between voluntary violation (scienter) of duties, and mere negligence, contrary to existing Law, is not very useful in this context.     

Identifying Successor Corporations Liable under CERCLA and Pursuing Insurance Coverage for That Liability

The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) imposes liability well beyond general corporate successor rules. A company can allocate liability to other Potentially Responsible Parties as more culpable, taking advantage of CERCLA's joint and several liability. Often a source of recovery must be teased from a complex corporate history somehow connected to the site. This article examines the basis for attributing environmental liability to entities within a corporate history, before addressing how even a bankrupt or dissolved target may still have insurance that can be tapped. Similarly, CERCLA's strict liability enables recovery from insurance with some connection to either the target's or the company's corporate history, notwithstanding insurers' non-assignment arguments.     

Professionalism as Bar Politics: The Making of the Model Rules of Professional Conduct

Based on extensive archival research, this article offers a political account of the six-year process in which the ABA developed its latest ethics code for lawyers, the Model Rules of Professional Conduct. The article casts doubt on the validity of several functionalist and critical theories about the provenance and significance of professional ethics codes generally and the ABA's codes in particular. It evaluates the Model Rules process as an instance of de facto law making by a private group. And it identifies a lawyer's "professionalism-in-fact"–a set of common themes in the way lawyers currently think about the field of legal ethics. At the same time, however, the article stresses the ethical pluralism and structural differentiation of today's legal profession and roots the ethical preoccupations of various types of lawyers in the circumstances of their particular practices.     

THE OBJECTIVE OF THE COMPANY

The important role that corporate governance has played in a wide range of public companies is self-evident. Recent major corporate failures are more or less related to bad corporate governance and the increasing corporate scandals call for good corporate governance not only in China but all around the world. Corporate governance is principally about how companies are structured and directed, which is indeed a quite broad field. It is a good direction to discuss how to improve the overall corporate governance level in China through the perspective of perfecting shareholder protection. However, while running companies for shareholder interests is getting increasingly more criticisms, the so-called stakeholder model and entity model are raised as alternative approaches. Accordingly, it is the purpose of this paper to find the most appropriate corporate objective which could be applied as the starting point for future corporate governance discussion by providing a right direction for assessing and evaluating corporate performance and accountability of management. Through the comparative studies of the three models, this paper concludes that shareholder primacy is a more effective and efficient approach with regard to advancing social welfare and controlling director’s accountability among others; the other two models cannot justify substituting the shareholder model as the corporate objective.     

A New Ethical World of British MPs?

Following a series of financial scandals in the early 1990s, the House of Commons implemented new ethics rules and regulatory procedures, including a Code of Conduct, a ban on paid advocacy, a Parliamentary Commissioner for Standards and a Select Committee on Standards and Privileges. In the absence of hard data about parliamentary integrity and the prevalence or otherwise of unethical parliamentary conduct, this paper explores the possible effects of the new rules and procedures on MPs' attitudes by comparing data from the 2005 British Representation Study with research conducted in the late 1980s. The evidence suggests that there has been some attitudinal change at the aggregate level, although it remains unclear how much of this change can be attributed directly to the Nolan reforms.     

Institutional change in the European Parliament: balancing legislative ethics and parliamentary independence

Research on legislative ethics has shown how scandals often trigger ethics reform; yet, the content of the reform often differs from that of the scandal. Why is this the case? And if scandals don't explain legislative ethics reform outcomes, then what does? If not this kind of external shock, then what factor(s) shape legislative reform outcomes? These questions provide the point of departure for a case study of the European Parliament's 2011 ethics reform. Drawing from the legislative ethics literature and from recent theories of institutional change, the article examines the impact of the scandal that initiated the reform, the interests and strategies of reform agents who wanted a quick reform process that would not undermine the EP's independence; and the institutional order in which those actors were embedded. It argues that an institutional logics perspective offers a convincing and comprehensive account of EP ethics reform, and suggests a new analytical framework that might be used by researchers in future research on legislative ethics.     

A Radical Economic Model of Crime with an Empirical Test in Non-city Zip Codes

This article addresses three main issues. First, the structural explanation of crime rates across zip codes within a US county outside of that county’s major city’s limits. Second, this article addresses whether the traditional social disorganization argument which links measures of disorganized neighborhoods and in particularly deficiencies in informal social control to race, income inequality and poverty provides an adequate explanation of variations in non-city zip code crime rates. Third, this article also examines a radical critique of the kind of structural model posed by social disorganization, and tests an alternative radical economic model of crime at the zip code level. The empirical evidence illustrates the weakness of social disorganization explanations of crime at the zip code level. In contrast to those results, the empirical results for the proposed radical economic model of crime support its use for explaining crime across county zip codes. This type of empirical evidence demonstrates that radical models of crime have utility in explaining how economic structures influence the distribution of crime independently of variable identified in orthodox criminology.     

Technology transfer to developing nations

What’s a developing nation? For that matter, what’s technology transfer? When put in the context of exporting and importing technology, the answers are moot. Transfer still turns on how much someone — developed, developing or undeveloped — is willing to pay for the technology, and whether there is an identifiable need that it can satisfy with a minimum of sophistication. The simpler — and cheaper — the better. That may very well become the theme of a new worldwide movement called “appropriate technology”, which, among several other matters, is also discussed in this paper.     

The Ethics of Corporate Legal Strategy: A Response to Professor Mayer

In this issue of the American Business Law Journal, Professor Don Mayer continues an important conversation regarding the ethics of corporate legal strategy. 1 Addressing several of my published works, Mayer offers two primary criticisms: (1) the works are too sanguine with regard to the appropriate scope of the strategic decision to “breach‐and‐pay,” and (2) the works offer too little guidance for the well‐intentioned corporate executive. In this response, I briefly restate my views, address Mayer's two criticisms, and offer concluding remarks.