Punishing Corrupt Companies Without Punishing the People Who Make Them Corrupt

By all means, fine corrupt companies, but we need a new dress code for their management.

From The National Law Journal, December 8:

“The Justice Department has announced that Wachovia Bank N.A., now known as Wells Fargo Bank N.A., will pay $148 million to federal and state agencies after admitting to anti-competitive activity in the municipal bond investments market.”

I understand why the Justice Department, the SEC and other federal agencies fine companies huge amounts for what is essentially criminal conduct, choosing negotiated settlements rather than engaging in time-consuming trials that would cost taxpayers money and risk failing for reasons ranging from investigator error to skillful defense strategy. Nevertheless, the policy encourages rather than discourages unethical conduct by corporate decision-makers. It  does nothing to improve a culture that tends to define a bad business practice as a gamble that doesn’t work, or a scheme that gets discovered.

Think about it: company executives violate regulations and laws in pursuit of unfair and prohibited profits for stockholders while simultaneously enriching themselves. If a plan works, they get rich. If it is foiled by authorities, a timely settlement will ensure that the legal entity pays a penalty, but the individuals behind the scheme usually suffer no legal consequences at all. This makes corruption a calculated risk for the company, and a relatively minor risk for the executives. For all we know, Wells Fargo executives have engineered multiple schemes, and only this one was discovered. If their successful crimes netted more than the $149 million, then they qualify as business whizzes in the eyes of their investors. If not? Well, they may lose their jobs, but with lucrative golden parachutes, their pain will be endurable. The point is, they won’t go to jail. The legal fiction is that Wells Fargo is the criminal, not the people who run it, and you can’t lock up companies.

I could have begun this post with any one of dozens of similar stories of multi-million dollar settlements between federal authorities and corrupt corporations. Lots of money changes hands from corporate scofflaws to the U.S. Treasury in these arrangements, but the key ethical feature of accountability is left out of the equation, making the settlements efficient, lucrative, and ineffective as behavior modification. When the unethical executives and boards of corrupt companies start being sent to prison like the criminals they are for the harm the inhuman legal entities they control do to trusting citizens, dishonest business practices won’t be such a good gamble any more. “I made a mistake” is so much easier to explain away at the Harvard Business School reunion than “I was sent to the Big House.”

The government needs to punish corrupt companies, but without punishing the human beings who make them corrupt, nothing will change.

4 thoughts on “Punishing Corrupt Companies Without Punishing the People Who Make Them Corrupt

    • If they would articulate it like that, it might do some good. I’m talking about jailing execs who break laws. OWS talks about jailing execs whether they broke actual laws or not. One is the rule of law, the other is mob rule and vigilante justice.

  1. I think you hit the nail on the head. My bet would be that they made more than $148 million, probably a lot more. Illegal activities have just become another acceptable business practice. The executives in question get $148 million good bonus money, not a crippling fine for their company. Barring unbelievable incompetence, the only way such a ridiculous situation exist is with the complicity of the regulators and the judges. If you fined them $50 billion for an incident like this, or fined them $100x the money they COULD have made off of the scheme (like the RIAA fines consumers for infringement), the current situation would not exist.

  2. There are few better ways to spot heinous criminality on someone’s part (particularly if he’s a celebrity of some sort) than when he says in public, “I made a mistake”. It’s practically a code word for an admission of guilt… with the hint that he;s too big and/or famous to prosecute anyway, so you might as well forget it so (another code phrase) “I can move on”.

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