Compliance, Compensation and Corporate Wrongdoing

Reinier Kraakman is the Ezra Ripley Thayer Professor of Law at Harvard Law School; Karl Hofstetter is Professor of Business & Private Law at the University of Zurich; and Eugene F. Soltes is Jakurski Family Associate Professor of Business Administration at Harvard Business School. This post is based on their conclusions from a roundtable at Harvard Law School.

It can hardly be disputed that society has a basic interest in companies’ maximum compliance with the law. Numerous cases in the financial industry, particularly in the aftermath of the Financial Crisis 2008, have indicated that this remains a significant challenge. Bank of America alone paid $56B in fines to the US government in connection with the subprime practices of its group. JP Morgan Chase, Citigroup, Royal Bank of Scotland, Credit Suisse, BNP Paribas, Deutsche Bank and others also paid fines in the billions. According to the Boston Consulting Group, the settlement payments of US and European banks after the Financial Crisis totaled $321B overall.

The recent sales practice scandal at Wells Fargo, leading to the dismissal of more than 5300 employees, shows that the compliance challenge is an ongoing and permanent one—and it is not limited to the financial industry at all. High profile cases involving industrial companies like Siemens (Foreign corruption), Volkswagen (Diesel-test fraud), BP (Deepwater Horizon disaster) or GM (Safety failure of ignition switch) show the many fronts on which companies may fail in respecting applicable legal rules. In July of this year, the EU dumped a landmark fine of Euro 4.38 B ($ 5 B) on Google for the alleged abuse of market power involving its Android technology. This record antitrust fine – with no precedent in Europe or the US – indicates that the trend of ever increasing corporate fines is ongoing and that it is by no means limited to the US.

The big and still unresolved question, however, remains: Are the hugely increased fines, including those paid in settlements with prosecutors and regulators, the appropriate answer to the compliance challenge? Or are there superior ways to rein in corporate conduct? Are corporate monitors and individual sanctions better tools than corporate fines? Or should prosecutors and regulators more effectively harness the toolkits of corporations themselves, i. e. their compliance organisations or compensation policies? And what can academic research contribute to this debate?

The HLS roundtable discussed these and other questions among participants from the private sector, government and academia. There are perhaps two very general conclusions that can be drawn from the day long debate, before turning to more specific issues:

  1. The importance, magnitude and sophistication of corporate legal compliance efforts have been growing significantly over the last two decades. Nonetheless, corporations are still in a learning process. This applies to compliance in general and to the use of compensation policies as a compliance tool in particular. Given this and the limited availability of public information about compliance in action, the different branches of government, i.e. regulators, prosecutors and legislators, but also academics, may not yet have fully grasped nor harnessed the potential of corporate compliance efforts. It is therefore no surprise that crude sanctioning measures, like corporate mega-fines that are irrespective of the specific compliance efforts undertaken by companies, still dominate the landscape.
  2. The search for more sophisticated sanctions in response to corporate breaches of the law is therefore still on. The same applies to the search for better and more effective compliance toolkits. Compensation policies, in particular, do not seem to have been widely finetuned to legal compliance goals yet. In addition, systematic measurements of the effectiveness of compliance measures appear to be lacking everywhere. This is in line with a dearth of quantitative, and perhaps also conceptual, academic research about corporate compliance in general, and its interactions with the legal system in particular.

The complete paper is available for download here.

Trackbacks are closed, but you can post a comment.

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

  • Subscribe or Follow

  • Supported By:

  • Program on Corporate Governance Advisory Board

  • Programs Faculty & Senior Fellows