The Uneven Consequences Of Corporate Misbehavior

Who, or what, you are, really does seem to matter in America. While corporations may be techno-legally "people," they are seldom treated as harshly as private citizens when it comes to breaking the rules. There are many reasons why you may hate big business. A cynic may say that this is because of the huge contributions they funnel to politicians, while a more charitable argument could be made that the jobs and tax revenue created by corporations create the possibility of substantial collateral damage. Whatever the reason, given the differences in prosecutions and punishments between street crime and corporation crime, it is worth asking if governments really care about the misbehavior of corporations.

Corporate Malfeasance Is Still Commonplace
There's really no independent "Corporate Crime Index," but it's not hard to see that corporate wrongdoing is still very much with us. Even with increasingly stringent regulations on money laundering, bank transparency and upholding sanctions, major banks such as Standard Chartered and Barclays have nevertheless been dinged for these offenses. Bribery allegations (and fines/settlements) have rocked well-known names like Siemens, KBR and Alcatel-Lucent, as well as enough energy and mining companies to fill a separate column.

That's really only the tip of the iceberg. There's a long and unhappy legacy of major pollution/contamination events, with BP offering perhaps the most recent example. Even the healthcare sector has its share: pretty much every Big Pharma company has settled with the government at some point over illegal drug marketing practices and paid hundreds of millions of dollars in settlements and fines.

The Punishments Don't Discourage the Crimes
Perhaps part of the issue with corporate wrongdoing is that there really isn't much incentive to not do it. Business is based upon capital allocation and risk-reward analysis; if the profits to be gained from illegal/immoral activity outweigh the probability-adjusted consequences of being caught and punished, then it makes a certain economic sense to proceed.

Consider those drug company fines. Companies like Pfizer, Lilly and Johnson & Johnson have all paid billions in fines for the improper marketing of certain drugs. The problem is that the drugs in question grossed billions in revenue for multiple years, and paying even 100% of a single year's revenue from a drug is affordable when you're talking about a decade or more of 30%+ operating profits. In other words, a drug company can regard fines for marketing violations as just a cost of doing business.

Along similar lines, the fines/settlements that banks have had to pay for money laundering and/or violating sanctions are very likely only a portion of the money that they made from the actions. Think about that for a moment; the companies are still largely allowed to walk away, showing a net profit for the act. If you could steal a $1,000 diamond and pay a $500 fine (but keep the diamond), it would really be only your morals that would argue against doing so; and while corporations may be legal people, they don't have a living conscience.

There are few examples of imprisonment in corporate cases. There has been no jail time in the BP Deepwater Horizon accident and, likewise, no jail time (that I'm aware of) for those cases of illegal drug marketing (even though the side effects from these drugs could often be serious). Although a few criminal CEOs have been led off to jail (as well as stockbrokers), they don't have a white-collar prison for companies. Companies rarely have to pay the ultimate price, even for a long history of flouting the law or egregious one-time acts. In North America, companies are almost never forcibly wound down. I've heard a joke before that goes, "I'll believe that corporations are people once Texas executes one."

Had an individual saboteur caused the BP or Union Carbide Bhopal disaster, I'm pretty confident that the person would sit in jail for quite some time; but when it's a faceless company, it's just a fine, a consent decree or perhaps a showy appearance before suitably grim-faced Congressmen and then back to business. As a result, there will be always be a next scandal. If it's cheaper to just pay a fine than change a profitable corporate practice, why would a company change, (especially with the peer pressure and collective deniability that goes with a corporate structure)?

The Case for Going Easy
Is there an argument for giving preferential treatment to corporations, as opposed to private citizens, when it concerns violations of law? Perhaps so. Effectively killing a business, a large one at any rate, will harm hundreds or thousands of employees and workers, many of whom likely had no knowledge of, or part in, the wrongdoing. Bringing down a major business reduces the country's potential tax receipts, to say nothing of the potentially far-reaching impact to suppliers, clients and other related parties who also likely had no part in the original illegal act. In the same way that jailing a criminal's family punishes the innocent, severely punishing a drug company or bank would very likely produce a ripple effect that punishes many other innocent companies and people.

All of this said, it doesn't excuse a failure to more aggressively target corporate executives. If FINRA has been given the power to banish stockbrokers and broker/dealer executives from the securities industry, why couldn't the Department of Justice get similar authority to suspend or banish industry executives? Likewise, I suspect that corporate behavior would start to change if a few drug, energy or financial corporation executives ended up sitting in a cell.

The Case for Harsher Punishments
If there's a case to be made for going easier on companies, there's also a case for going even harder on them. It seems fundamentally unfair to strictly enforce individual responsibility, but give a pass to collective or corporate responsibility. Otherwise, you can reach a pretty antisocial conclusion that crime is OK, so long as there are enough criminals acting together. Likewise, I believe separate legal systems and processes for corporations and people can reinforce classism; the bigger, richer and more powerful you are, the more likely you are to receive special treatment. Although this might strike many readers as just the way things have always been, it's still bad as a matter of policy.

It's also well worth noting that corporate wrongdoing can inflict serious harm. BP's Gulf of Mexico accident hurt a lot of people in a variety of industries (including tourism, fishing and energy), improperly-marketed drugs can lead directly to serious side-effects (or at least wasted money), and there's little argument that the shortcuts and greed of commercial and investment banks during the housing boom ultimately hurt hundreds of thousands (if not millions) of Americans.

Clearly, the current philosophy regarding corporate punishments has not been sufficient to discourage wrong actions - bribery, pollution and illegal marketing cases continue to crop up year after year. At a minimum, it seems there's an argument to be made that punishments need to, at least, be increased to a point where there are lasting economic consequences of serious bad behavior.

The Bottom Line
There are some who believe that any restrictions on corporate behavior are tantamount to socialism and antithetical to the free market principle, that is, until some act of corporate wrongdoing affects them personally. I would argue instead that there is an enormous difference between "free market" and "free for all." At a minimum, rule of law is important within any civilization and bad things happen when certain groups in a society get preferential treatment.

By no means should the Department of Justice or federal government look to decimate the Fortune 500. At the same time, the government ought to realize that any organization (corporate or governmental) will get the behavior it incentivizes. If companies can knowingly break laws, get caught and still profit (on balance) from it, they will continue to do so. At a minimum, perhaps it is time for the legal system to hold senior executives and board members to a higher standard of behavior. If they have the right to hire and fire thousands, approve multi-billion dollar mergers and collect multi-million dollar pay packages, it doesn't seem exactly unfair to also make them more accountable for what happens on their watch.

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