Deferred Prosecutions and Corporate Governance

“Prosecutors in the boardroom” is a slogan reflecting an unintended early 21^st century overlap of corporate governance and corporate criminal liability. Although exaggerated, the phrase reflects how prosecutors increasingly demand corporate governance reforms when settling criminal cases using deferred prosecution agreements (DPAs). While a growing body of scholarship seeks to put governance beyond the purview of prosecutors, ousting prosecutors from the boardroom, I explain why prosecutors should consider governance carefully in determining how to proceed ex ante and state rationales for governance changes in DPAs ex post.

Prosecutorial failure to consider governance ex ante can have adverse consequences, including activating governance mechanisms not designed to the purpose and imposing on corporate actors to hastily adopt changes they would ordinarily evaluate dispassionately. Subsequent prosecutorial prescriptions of governance changes are rarely the product of articulated rationales and can seem like ransoms or trophies created on the fly by prosecutors seeking victory. Irreconcilable criticisms result: some say DPAs are coerced extractions of overzealous prosecutors, others that they are mere whitewash that let corporate crooks off the hook.

Prosecutors should publicly articulate the rationales for the governance changes they propose ex post and that articulation should be based on their assessment of the target’s governance profile ex ante. Creating such an ex ante profile would involve modest incremental costs while improving the quality of prosecutorial decisions on how to proceed with a case. Subsequent articulation of rationales would add systemic benefits by increasing rationality, building credibility, deflecting criticism and creating a catalogue of useful. I thus part with critics of prosecutors in the boardroom by explaining the value of prosecutorial investment in corporate governance.

Part I of my article defines the concept of corporate governance—with notes on the governance of other business forms—and highlights the most important developments of the corporate governance movement of recent generations. While critics allow room for prosecutors to consider compliance in the exercise of their discretion, this discussion stresses the importance of addressing governance, not merely compliance. The well-known story of the prosecution of Arthur Andersen is invoked to illustrate the underappreciated importance of governance. Many take the lesson of Andersen’s destruction by indictment to warn against indicting large business organizations. Part I, in contrast, draws the seminal lesson of Andersen: the prudence of prosecutorial consideration of governance when deciding how to proceed against a business.

Part II presents an original account of a more obscure but richer story: the 2005 prosecutorial probe into AIG. This explains how AIG’s culpability at the center of the financial crisis of late 2008 was propelled by prosecutorial failure to evaluate its corporate governance realities in 2005. Analysis reveals concern that prosecutors fail to appreciate how formal uniformity in corporate governance regulation masks considerable substantive variation and how this failure can be costly.

Part III turns conceptual and analytical to explore the relationship between prosecutors and corporate governance, particularly the scope of DPAs. One approach, implicitly reflected in the status quo, conceives of DPAs as pure contract whose terms are limited only by standard contract doctrine; a mirror-image conception, critical of current practice, conceives of DPAs as pure regulation, which limits the range of proper terms to those targeting compliance, prohibiting broader aspects of corporate governance.

A third conception, the most apt, recognizes DPAs as products of prosecutorial discretion, subject to prosecutorial restraint. In this view, DPAs warrant an integrated approach covering a wide range of terms, including governance terms, subject to prudential restrictions: prosecutors should only proffer such terms when they have assembled a formal governance profile of a target ex ante and publicly explain the rationale for such terms when announcing DPAs ex post.

Part IV returns to concrete ground to offer a series of examples of governance terms found in DPAs and rationales prosecutors might have articulated. Examples include terms from the DPA of Bristol-Myers Squibb, which drew sharp criticism, but prosecutors subsequently published a detailed explanation, illustrating the articulated rationale I prescribe. The DOJ should lead by updating its guidelines for federal prosecutions of corporate targets to reflect the integrated approach.

The DOJ has been reluctant to publish guidance on the subject of corporate governance reforms in DPAs. So I suggest steps that should be more congenial. The first is to add corporate governance as a factor to the existing list of factors prosecutors are told to consider when evaluating how to proceed with a case. The other, only slightly lengthier, would direct prosecutors to relate proffered governance reforms to that consideration in public articulations of their reasoning.

Looking at the same group of about 300 DPAs now in existence, those who seek to oust prosecutors from the boardroom see frequent and extensive incursions into corporate governance that must be repelled while those who perceive excessive leniency are eager for greater prosecutorial inroads into governance. Under the integrated approach, the exact DPA population or density of governance terms becomes less important than whether there is investigation ahead of time and an articulated rationale afterwards.

The full article is available for download here.