The Effect of Deferred and Non-Prosecution Agreements on Corporate Governance

The following post comes to us from Wulf A. Kaal and Timothy Lacine of University of St. Thomas School of Law.

The increasing use of Non- and Deferred Prosecution Agreements (N/DPAs) has enabled federal prosecutors to incrementally expand their traditional role, exemplifying a shift in prosecutorial culture from an ex-post focus on punishment to an ex-ante emphasis on compliance. N/DPAs are contractual arrangements between the government and corporate entities that allow the government to impose sanctions against the respective entity and set up institutional changes in exchange for the government’s agreement to forego further investigation and corporate criminal indictment. N/DPAs enable corporations to resolve allegations of corporate criminal conduct, strengthen corporate compliance mechanisms to prevent corporate wrongdoing in the future, and mitigate the risks that collateral consequences of a conviction can bring for companies, their shareholders, employees, and the economy.

Through the increasing use of N/DPAs, prosecutors are in effect reforming Corporate America by changing the governance of leading public corporations and entire industries. Investigating corporate criminal conduct and negotiating N/DPAs with corporate criminal wrongdoers enables prosecutors to implement business changes and attain significant corporate governance changes including replacing the board and management, improved internal controls, updated compliance programs, enhanced self-reporting obligations, etc. We show that 97.41% of the 271 publicly available N/DPAs in the time period from 1993-2013 contained relevant corporate governance changes. Our findings suggest that N/DPAs play a significant and increasing role in improving corporate governance in the United States. Corporate governance provisions in N/DPAs have increased substantially since 2002.

The most significant corporate governance changes identified in our study pertain to business changes, board changes, and changes to oversight obligations for senior management. We show that 29.5% of the N/DPAs in the sample contained provisions mandating business changes that substantively changed the way in which the respective entities could conduct their businesses. N/DPA mandated business changes can include fundamental changes in the business model or a requirement to shut down entire business units, among other possible business changes. 38% of the N/DPAs in our sample contained provisions that required board changes. Over 30% of those N/DPAs that included provisions mandating board changes required additional reporting obligations for the board. 8% of N/DPAs in this category required changes to existing board committee structure of the entity, often creating new board committees. Other mandatory changes to the board included increased monitoring obligations (5% of the sample), the addition of independent director(s) (3% of the sample), and changes pertaining to management (4% of the sample). The number of N/DPA provisions that required additional oversight by senior management has generally increased since 2001 and peaked in 2010. Overall, 29.9% of the N/DPAs in the sample contained provisions related to additional oversight responsibilities for senior management. Similarly, N/DPA-related monitoring obligations have generally increased since the year 2002. 45.76% of the N/DPAs in the sample contained provisions that related to monitoring requirements.

The evidence provided in this article suggests that the corporate governance changes instituted through the increasing use of N/DPAs could over time require a reexamination of corporate practices. The trends identified in our data suggest that directors, officers, and their legal counsel will increasingly have to address N/DPA-related governance requirements in addition to other regulatory demands. N/DPA-related business changes, board changes, and cooperation requirements could over time have a substantive impact on corporate governance, especially if the DOJ targets a particular industry.

Preemptive remedial measures instituted by the respective corporate wrongdoer to avoid the execution of N/DPAs (63.47% of the N/DPAs in the sample) and the associated governance changes may play an increasing role for boards, management, and their legal advisers. Given the high number of executions of N/DPAs after the institution of preemptive remedial measures (63.47% of the N/DPAs in the sample), the current quantity, quality, comprehensiveness, and effectiveness of preemptive remedial measures may be insufficient. High quality and effective preemptive remedial measures can help avoid the execution of N/DPAs. Boards, management, and corporate counsel could benefit from increasing the effectiveness of preemptive remedial measures. This seems especially true should future N/DPAs increasingly mandate the replacement of senior management and members of the board (currently only at 38% in our sample).

Finally, N/DPA governance reform may be preferable to changes to federal law. Compared with more meaningful congressional governance reform, N/DPA-related governance reform is relatively “cheap” for corporations because comparatively few board and management positions are adversely affected. Furthermore, N/DPA-related governance reform is a measure supported by most corporate insiders as it is seen as beneficial for investors. Until regulators belatedly realize the threat posed by particular industry practices, as identified in N/DPAs, and consider acting upon it, N/DPA-related governance reform takes the role of a regulatory supplement that is entity specific and increases the availability of relevant, decentralized, and institution specific information for regulatory action. It is unclear if N/DPAs can result in lasting and meaningful corporate governance reform.

The full study is available for download here.

Both comments and trackbacks are currently closed.
  • Subscribe or Follow

  • Cosponsored By:

  • Supported By:

  • Programs Faculty & Senior Fellows

    Lucian Bebchuk
    Alon Brav
    Robert Charles Clark
    John Coates
    Alma Cohen
    Stephen M. Davis
    Allen Ferrell
    Jesse Fried
    Oliver Hart
    Ben W. Heineman, Jr.
    Scott Hirst
    Howell Jackson
    Wei Jiang
    Reinier Kraakman
    Robert Pozen
    Mark Ramseyer
    Mark Roe
    Robert Sitkoff
    Holger Spamann
    Guhan Subramanian

  • Program on Corporate Governance Advisory Board

    William Ackman
    Peter Atkins
    Allison Bennington
    Richard Brand
    Daniel Burch
    Jesse Cohn
    Joan Conley
    Isaac Corré
    Arthur Crozier
    Ariel Deckelbaum
    Deb DeHaas
    John Finley
    Stephen Fraidin
    Byron Georgiou
    Joseph Hall
    Jason M. Halper
    Paul Hilal
    Carl Icahn
    Jack B. Jacobs
    Paula Loop
    David Millstone
    Theodore Mirvis
    Toby Myerson
    Morton Pierce
    Barry Rosenstein
    Paul Rowe
    Marc Trevino
    Adam Weinstein
    Daniel Wolf