Deterring Corporate Crime - Book Report/Review Example

CORPORATE CRIME The professional journal I chose is “Deterring Corporate Crime” by Sally Simpson and Christopher Koper, August 1992, Criminology 30 (3) , 347–376. This is in line with his course in Business Administration. Using event history analysis, the authors examine the recidivism patterns of a sample of 38 corporations charged with one or more serious antitrust violations between 1928 and 1981 to see whether sanction experience decreases the likelihood of a firms reoffending. In essence, they found that the sanctions had worked to curtail recidivism but that “industry characteristics are stronger by far in their effects on future illegality than formal sanction risk or consequence.” It is my opinion that the state should regulate corporate crime instead of leaving it to the industry to work out the details. The problem of corporate crime has often been seen as a concrete manifestation of a capitalist society that both implicitly and explicitly validates the survival-of-the-fittest theme. In the context of companies striving to keep ahead of the pack, so to speak, this would normally mean resort to any and all means to slaughter the competition and enjoy unbridled profits. Many scholars believe that regulatory mechanisms have, to a large extent, been inadequate in controlling corporate crime. There are, of course, many different types of corporate crime. There is what is known as “corporate manslaughter”, as when it involves a corporation causing a fatal disaster resulting in massive loss of lives. A good example of this would be the Union Carbide case of 1984. A more common type of corporate crime is one involving embezzlement by the directors of the corporation, resulting in prejudice to the minority shareholders and the public at large. In cases involving tax evasion, there is prejudice to the government as well. There is no dearth of examples of abuse of fiduciary duty by company directors. The idea of corporate governance is rooted in the idea of agency. Those who infuse capital into a business enterprise hire managers to run the business for them and see to its day to day affairs. The board of directors and the institutional investors also play a role in the monitoring and control of firms. However, the relationships of these players – to each other and to the general public -- must not be left alone and unregulated. It is imperative that there be well-established rules for companies to follow as they navigate the course of the growth. In theory, a director, holding as he does a position of trust, is a fiduciary of the corporation. As such, in cases of conflict of his interest with those of the corporation, he cannot sacrifice the latter without incurring liability for his disloyal act. The fiduciary duty has many ramifications, and the possible conflict of interest situations are almost limitless, each possibility posing different problems. There will be cases where a breach of trust is clear, as where a director converts for his own use funds or property belonging to the corporation, or accepts material benefits for exercising his powers in favor of someone seeking to do business with the corporation. In many other cases, however, the line of demarcation between the fiduciary relationship and a director’s personal right is not easy to define. The law has attempted at least to lay down general rules of conduct and although these serve as guidelines for directors to follow, the determination as to whether in a given case the duty of loyalty has been violated has ultimately to be decided by the court on the case’s own merits. What is clear, however, is that shareholder conflicts are prevalent in virtually all jurisdictions and the law has to formulate appropriate channels of redress in order to resolve these conflicts. Yes, I believe that it more ethically sound to have the law or the legal system play a prominent role in curbing corporate crime. The fact that there are many ways of committing corporate crime, and it impacts the most heavily on the minority shareholders, these shareholders must have a concrete form of redress instead of waiting for the industry to do its job. There is no surfeit of examples to demonstrate how minority shareholders and their interests can be prejudiced by the director or those with controlling interests in the corporation. One of the most typical situations of self-dealing is the fixing of directors’ and officers’ compensation. As insiders, directors and officers have access to confidential information relating to the business of the corporation. Their fiduciary position prohibits them from using any such information to benefit themselves or any competitor corporation in which they may have a more substantial interest. Though there are benefits, one being that information is more quickly disseminated in the markets, improving the choices of decision makers, there are obvious marked costs, particularly to minority shareholders. Another situation which may involve the duty of loyalty of a director is when he occupies such a position in two corporations dealing with each other. It is not unusual to find the name of one person in the directorate of different corporations not necessarily because he has big investments therein, but because his services may have proven to be valuable and efficient. Many times, these corporations of which he is concurrently director, may have some business ties, such as that of supplier and customer, or manufacturer and distributor. Or the corporations may be competitors. The original attitude in many jurisdictions was to prohibit dealings between corporations with interlocking directors. They were concerned mainly with protecting shareholders from overreaching directors. With the tremendous growth of the corporate enterprise and the greater familiarity of the courts with the corporation, came an increasing realization that interlocking relationships often presented very definite advantages to the corporation. This realization produced a gradual change in judicial attitude which today is no longer one of prohibition but one at least of tolerance. I think we should have a law that Act essentially expands the existing derivative action, and allows shareholders to sue the directors for a wider range of breaches, namely in respect of an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust. Another significant change is that a shareholder who has brought proceedings must apply to court for permission to continue the claim. In the United Kingdom, for instance, they have the Companies Act. The major purposes underlying the UK’s Review of Company Law is to protect shareholder rights, to ensure directors’ responsibility, to promote corporate governance – all of which will, in the end, facilitate a better policy environment for commerce and trade. The Act essentially expands the existing derivative action, and allows shareholders to sue the directors for a wider range of breaches, namely in respect of an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust. Another significant change is that a shareholder who has brought proceedings must apply to court for permission to continue the claim. The Act also contains restrictive provisions on the issue of ratification by the majority. Members who are personally interested in the ratification or who stand to gain from it will not be allowed to vote, when such ratification involves a director’s negligence, default, breach of duty or breach of trust. The consequence of this is that it will now become easier for shareholders to obtain permission to continue a derivative action. If leave of court is granted, the company must reimburse the shareholder for the costs of litigation. Simpson and Koper would have us to believe that it is the respective industries that should tighten the noose on the erring companies and that this would be the best way to stop recidivism. I say that this leaves a lot of holes unplugged. Where should disadvantaged stockholders go to seek redress? Or to as for an order for prohibition? It is the legal infrastructure that can best assure us that corporate crime will not go unpunished. Of course, it is best when combined with the synergetic efforts of the other stakeholders like private industries. For indeed, if what is sought in the long-term is a robust commercial system supported by a legal regime that protects rights, accommodates as many players as possible, then it must be a system that will not countenance fraud or breach of duty or corporate crime of those wielding power. In sum, the developments have been promising and are certainly an improvement over the previous legal environment where corporations conduct business with impunity and unbridled by any restrictions. However, the jury is still out as to whether these laws can be meaningfully implemented. Read More