WHITHER THE QUEST OF BUSINESS ETHICISTS?
Criminal law has received much attention; civil law liability should too
By
Robert Shattuck
Synopsis
The quest of business ethicists to promote ethical corporate behavior expands,
seemingly endlessly. Disagreements about what is ethical and about how best to
engender ethical behavior abound. Much attention has been paid to how the
criminal law should be applied to improve corporate behavior. In the 1990’s the
federal government initiated new approaches; business ethicists have done
extensive critical review of these; and important questions are unresolved about
how to apply the criminal law. Civil law liability also affects corporate
behavior and is a potential tool for promoting good behavior, but ethicists have
not devoted much attention to it. Ostensibly the criminal law and civil law
liability raise common questions about how they can be employed most effectively
to improve corporate behavior. There is a significant difference that civil law
liability has a compensatory objective as well as a deterrence objective. Given
the quest of business ethicists, it is submitted that civil law liability is
deserving of much more investigation about how effective it is in improving
corporate behavior, and whether it can or should be changed to be more
effective.
The quest of business ethicists (and of regulators) to engineer ethical corporate behavior expands, seemingly endlessly. This article argues for an additional area for ethicists to investigate, to wit, that of civil law liability.
Background
The federal government initiated noteworthy actions in the 1990’s intended to improve corporate behavior in the form of the Federal Sentencing Guidelines for Organizations and the Justice Department’s Principles of Federal Prosecution of Business Organizations. These provided incentives for corporations to be proactive in preventing criminal behavior and to assist prosecutors in uncovering and prosecuting the commission of crimes. This approach to improving corporate behavior has been referred to as the "cooperative model".
In response to massive accounting frauds that came to light early in the decade, Congress enacted Sarbanes-Oxley, which provided for increased application of the criminal law directly against corporate officers and accountants.
In the past year’s national financial crisis, perverse compensation structures have been blamed for leading management of commercial and investment banks to take improper risks with bank assets and wrongfully inflict significant financial harm on their shareholder owners. The banks packaged and sold mortgage securities to investors who were misled about the risks and who suffered losses as a result. These securities contributed to the mortgage industry making improper inducements to homebuyers to buy houses they could not afford. Other wrongdoers participated in creating the financial crisis, such as unethical mortgage brokers, appraisers, and rating agencies.
The country’s lawmakers and regulators have been at work this past year trying to fashion legal mechanisms to prevent future occurrences and to address related financial abuses.
In the health care domain, drug and medical equipment cases, such as Vioxx, have raised ethical questions about honesty of medical research and adequacy of disclosure of health risks by corporations. Concerns have been raised about researcher and physician conflicts of interest in conducting clinical studies and in promoting drugs and medical equipment. Class action lawsuits have been utilized to remedy ethical lapses in the health care domain and in other commercial areas.
Almost on a daily basis, the media reports stories of unethical activity in the business world, as well as in government and politics, and in educational and charitable organizations.
The current situation for business ethicists
Business ethicists seem to have an endlessly full plate.
It is doubtful there is an ethicist who thinks the profession has sufficiently advanced in researching, theorizing, designing and implementing mechanisms to prevent unethical corporate behavior that ethicists can slacken in their quest. The proliferating literature and the growth in ethics centers attest to expanding and intensifying investigation and theorizing about how society can most effectively promote ethical corporate behavior.
In their quest, business ethicists would seem to have a choice of either leaping over, or alternatively possibly getting mired in, attempting to resolve what is ethical in situations in which it is probably impossible to attain agreement. This is because there are competing considerations, interests and values, as to which ethicists and non-ethicists can have differences of opinion about the priorities to be assigned in determining what the ethical action is that should be taken. At one point, MacIntyre posited basically that only shareholder interest mattered. (1) Subsequently, there has evolved extended debate about a stakeholder interest approach to corporate actions wherein a corporation makes (and justifies as ethical) decisions that mediate among competing interests of shareholders, employees, customers, and even the environment. (2)
Some ethicists entertain theories that competing interests can be channeled in a way that converts zero sum games into win/win outcomes. (3)
If there are situations in which the ethical answer is unclear, there are also many situations in which there would be a consensus about what is ethical or not and what a corporation should or should not do (e.g., a corporation should not commit accounting fraud). Here, the business ethics field nonetheless harbors significant disagreements and differing emphases about how to promote ethical decisions and deter action that is unethical.
One very significant difference concerns that of an internally oriented approach versus an externally imposed sanctions approach. An internally oriented approach seeks the inculcation of an ethical sense or ethos in individual employees or in an organization that will engender ethical behavior independently of the application of externally imposed punitive sanctions. At the level of the individual employee, this can take the form of straightforward teaching through books, business school courses and corporate ethics programs about how to make ethical decisions.(4) At the organizational level, there is much theorizing about how to construct an organizational ethos to promote ethical behavior, and some of this theorizing has undergone a progression of highly attenuated refinement.(5)
Ethicists who focus on internally oriented approaches can do so without addressing whether or how they should be combined with a system of externally imposed sanctions, such as the criminal law. Most ethicists who focus on internalized approaches probably believe there is a need for externally imposed sanctions, even if they say little about that in their writings.
Other ethicists focus more on the use of externally imposed sanctions. The criminal law in particular is discussed below, and, as will be seen, there are disparate views about how best to use externally imposed punitive sanctions, particularly the criminal law.
One important area of inquiry relevant to this article that hovers over the various approaches to improving corporate behavior is a debate about whether specific detailed rules are better or whether a less specific "principles" approach to regulating corporate behavior is better.(6)
Enormous amount of attention focused on criminal law
An enormous amount of attention has been given to the application of the criminal law to corporations to promote ethical behavior.
A main source of this attention was Congress and the Justice Department instigating the criminal law "cooperative model" referred to above by means of the Federal Sentencing Guidelines for Organizations and the Principles of Federal Prosecution of Business Organizations. Also the enactment of Sarbanes-Oxley providing for increased application of the criminal law directly against corporate officers and accountants heightened the attention paid by ethicists.
The "cooperative model" has been characterized as a "sea change in the legal approach to corporate crime"(7) and naturally has received a great deal of attention, including two books that in differing ways raise significant questions about the efficacy and appropriateness of the "cooperative model."(8)
Currently it is fair to say that the question of how to most efficaciously apply the criminal law to engender ethical corporate behavior has not been finally resolved.
In trying to determine what is most effective, ethicists have had to wrestle with a number of important questions.
First, there is the proposition that a corporation acts only through its employees, and to prevent a corporation from committing a crime, it is necessary to prevent the employees from committing the crime.(9) While this proposition may manifest some obviousness, it is probably not greatly simplifying of the ethicist’s task.
Second, there is a critically important question of the extent to which it is necessary to hold wrongdoing employees personally accountable in corporate crimes in order to have a deterrent effect. In other words, is the deterrent of the criminal law materially undermined to the extent only the corporation is criminally prosecuted, and employees have the belief they will not be held personally accountable if they participate in a corporate crime?
On this question, our lawmakers, in enacting Sarbanes-Oxley, weighed in on the side of a need for personal accountability of employees under the criminal law in order to increase the efficacy of the criminal law.
Ethicists have had more disparate views about the question. Ethicists who focus on internally oriented approaches intended to foster ethical conduct independently of externally imposed sanctions might logically downplay a need of holding employees individually accountable under the criminal law.
Ethicists who believe strongly in the importance of externally imposed punitive sanctions may have differing views on holding employees personally accountable.
Laufer espouses the crafting of a new concept and foundation for holding a corporation criminally liable and, in his book(10), has little discussion of the role or relevance of holding employees individually accountable. Hasnas has articulated a conundrum (that is described below) connected to the use of direct punitive sanctions against employees.(11) Boatright appears to think that sanctions must be brought to bear on employees. (12)In Di Lorenzo’s article cited above, one could wish Di Lorenzo said more about the subject of holding employees individually accountable or not.(13)
Third, if it is believed critical to deterrence by the criminal law that employees be held personally accountable, this presents significant practical difficulties in pinpointing the culpability of individual employees. In the words of Boatright, "In practice, the complexity of organizational behavior and the secrecy around it make it very difficult for prosecutors to obtain evidence of wrongdoing and to identify the individuals responsible." (14)
Another significant issue ethicists have investigated relative to the application of the criminal law is the previously mentioned matter of whether a specific rules based approach is better or whether a more general "principles" based approach is more effective.(15) Internal to the corporation, this translates into a parallel investigation of whether a "command and control" approach is more effective or whether "self-regulatory" is better.(16)
One can almost despair about whether it is possible to "get it right" in the application of the criminal law to obtain desired corporate behavior. Hasnas, in his article "Up from Flatland: Business Ethics in the Age of Divergence"(17), articulates a conundrum as follows: First, Hasnas posits, for various reasons, an extreme difficulty in enforcing an "expanded" federal code within the confines of American criminal law.(18) This difficulty, continues Hasnas, has resulted in a practical necessity of getting the cooperation of the corporation itself, i.e. the cooperative model. Then Hasnas, in his article, proceeds to explain that the cooperative model is counterproductive to the desired end, including that it is based on seeking to apply direct sanctions against employees, but the use and application of such direct sanctions is counterproductive because employees respond better to "organizational justice" and direct punitive sanctions cannot be mixed in.(19)
In their quest, it is appropriate that ethicists wrestle with all the questions that are presented concerning how the criminal law should be applied in order best to engender ethical corporate behavior. As suggested by the above discussion, this has opened up expansive areas of investigation, and much remains to be resolved in more definitive ways about the criminal law.
Business ethicists should expand their attention to the civil law
The purpose of this article is to suggest that, besides investigating and considering how best to apply the criminal law in order to regulate corporate behavior, business ethicists ought also to consider the civil law liability system.
In the raising of this suggestion, it needs to be acknowledged at the outset that civil law liability serves a compensatory purpose, as well as a deterrent purpose. This is unquestionably a complicating factor that cannot at any point be lost sight of if business ethicists are going to consider how civil law liability affects corporate behavior and how civil law liability can be best utilized to engender ethical conduct.
For some business ethicists, it may be a matter of first impression to consider how the civil law does or does not affect corporate behavior and does or does not deter corporate wrongdoing and does or does not foster more ethical corporate behavior. Except for this author’s self-published online article(20), it seems that thus far business ethicists have left the civil law liability system largely unexamined.(21) Hopefully this article and the aforesaid online article will persuade ethicists that they ought to explore civil law liability more than they have thus far.
To introduce the subject, the force of the civil law in affecting corporate behavior derives from large monetary liabilities, or the threat of large monetary liabilities. How efficacious are they in engendering ethical corporate behavior?
To begin to answer that question, it seems manifest that there is significant commonality of relevance to both the criminal law and civil law liability of the above mentioned issues that have been considered on the criminal law front
To repeat those issues here: First, there is significant validity to the proposition that a corporation acts only through its employees, and to deter a corporation from engaging in wrongdoing that will give rise to a civil liability, it is necessary to deter the employees from engaging in that wrongdoing.
The second common question is the extent to which it is necessary to hold employees personally accountable for corporate wrongdoing that gives rise to civil liability in order for the civil liability to have a deterrent effect.
Third, if it is believed critical to deterrence by the civil law that employees be held personally accountable, it needs to be recognized that there can be very significant difficulties in identifying and holding accountable culpable employees, as Professor Boatright points out concerning the criminal law.
Fourth, the debate over a specific rules based approach under the criminal law versus a more general "principles" based approach would seem potentially to have relevance to the civil law liability domain.
Possibly the conundrum that Hasnas has articulated related to the criminal law has relevance on the civil liability law front as well.
There are also at least two important differences. One is the previously mentioned matter that civil law liability has a compensation objective that the criminal law does not have, and this will likely inject a substantial problem for ethicists if they begin exploring civil law liability. An additional matter that will weigh heavily is a suggestion this author has made to the effect that leading actors on the civil law liability front have little or no interest in civil law liability being efficacious in engendering ethical behavior, and those actors have achieved some success in creating a civil law liability system that undermines business ethics. See the author’s self-published online article.(22)
Going from the criminal law to the civil law, and back
A good starting point for a foray into the civil law liability system would be the foregoing matters that have been raised in the context of the application of the criminal law that would seem to be applicable on the civil law liability front. This starting point includes considering the modes of investigation and research in the criminal law context, a review of what the thinking and learning are about those matters on the criminal law front, and evaluating how all of the same are or may be applicable on the civil law liability front.
First, what are those modes of research and investigation in the criminal law context?
The business ethics literature regarding the application of the criminal law to foster ethical business conduct has found useful and has cited scientific studies of human psychology and behavior. For example, in arguing that a more general "principles" based approach is better than a rules based approach, Michael cites scientific experiments that used magnetic resonance imaging (MRI) to monitor brain activity as subjects considered a series of personal and impersonal moral dilemmas.(23) Those experiments and other scientific studies could also be relevant on the civil law liability front.
The literature also draws a lot on much less scientific and more anecdotal, observational, and common human experienced based data and understanding as a basis for theorizing. Again to cite Michael, one of his arguments against rules is how they can be used to deflect criticism and shield against regulatory sanctions. Michael does not cite any scientific investigation about this and seems to be mainly relying on common human knowledge about human nature and psychology.(24)
Another instance previously referred to of an ethicist positing something that seems not based on scientific research and that is derived from less rigorous observational methods is Boatright’s observation quoted above to the effect that there can be very significant difficulties in identifying and holding accountable culpable employees due to "the complexity of organizational behavior and the secrecy around it . . .."(25)
Regardless of where a line is drawn between scientific research and "unscientific"observational evidence, the questions of human psychology, and motivation that affect and possibly determine employee decisions and actions manifestly have some commonality whether the criminal law or civil law liability is under consideration. Di Lorenzo, in his discussion of "decision making heuristics" in his article, relates it to civil penalties and private lawsuits (26) and that makes a start for the investigation this article argues for.
To focus the above discussion in a concrete manner, consider the Vioxx case.
A recent general interest book about Vioxx entitled Poison Pills: The Untold Story of the Vioxx Scandal (27) depicts many different actors who contributed to whatever wrongdoing Merck perpetrated. These included top level corporate management who have a job to produce profits for shareholders, the Merck product development department and its employees who had the job of conceiving and carrying out product development including Vioxx, Merck’s marketing department that designed and implemented the marketing plan for Vioxx, the Merck sales force whose job was to be an enthusiastic "boots on the ground" component of the marketing effort, physicians who were recruited to promote Vioxx in medical association meetings and seminars, Merck researchers who had an economic bias in favor of Vioxx, and outside researchers who questioned Vioxx.
If business ethicists try to address how best to try to deter a Vioxx from happening again, it would seem that scientific experiments at this point cannot provide much substitute for knowledge and understanding that business ethicists employ in their work that is gained from an extensive fact based depiction of actual events and activities, such as transpired in the Vioxx story and is revealed, for example, by means of a book.
That being the case, the quest could be very daunting for business ethicists. They obtain information such as by reading a book depicting a significant corporate story, such as Vioxx. After reading the book, business ethicists who take their work seriously by trying to respond to "real" world situations, could well scratch their heads and say, "How in the world are we going to corral all these disparate actors with all their disparate roles and motivations in order to prevent the occurrence of another Vioxx case?"
That is highly daunting for coming up with a "real" world answer. It could be that there simply is not one at the moment.
Alternatively, it might not be unreasonable for an ethicist to say, just sock Merck with a ten, twenty or thirty billion dollar civil law liability, and that will send a message to business corporations generally and cause them to get their act together.
Will that have any efficacy? It certainly employs the bludgeoning force that is the theoretical basis for the civil law liability affecting corporate behavior.
After reading Poison Pills, this author wrote to the book’s author and other persons mentioned in the book inquiring about the efficacy of corporate civil law liability alone without personal accountability of the employees and others who have a role in corporate wrongdoing. Professor Marcia Angell, an expert in ethics in the health care arena, replied and said:
I agree with you that the treatment of corporations as individuals undermines
business ethics. Most of the big drug companies have agreed to pay hundreds of
millions of dollars to settle criminal and civil charges of fraud, and it is
just a cost of doing business. Even the $1.4 billion Eli Lilly will pay for
marketing Zyprexa for off-label uses is small compared with the sales income
from Zyprexa. Like you, I believe the individuals within the drug companies who
were responsible for unethical or illegal decisions should be held accountable,
and until that happens, nothing much will change.
Note that, while this author inquired only about civil law liability, Professor Angell, in responding expressly referred to both criminal and civil charges of fraud. In other words, Professor Angell seems to view both criminal and civil law liabilities as of a piece, and, if individuals are not held personally accountable, corporations will not be deterred from their unethical behavior regardless of civil or criminal liability. This response of Professor Angell is very supportive of the argumentation contained in this article to the effect that business ethicists, having given great attention to the criminal law, should expand their attention to the civil law as well.
Conclusion
To repeat and conclude: for many business ethicists, it may be a matter of first impression to consider how the civil law does or does not affect corporate behavior and does or does not foster more ethical corporate behavior. Except for this author’s self-published online article previously referred to, it seems that ethicists have left the subject of civil law liability largely untouched, arguably woefully so when compared to the way they have delved into the criminal law. The purpose of this article is to broach this as a new area of exploration for ethicists. Hopefully this article and this author’s online article will trigger an interest in further consideration, investigation and evaluation of what effect the civil law liability system has on influencing corporate behavior, how well it contributes to making corporate behavior more ethical, and whether there are defects and deficiencies in the system that could or should be changed to better foster ethical corporate behavior.
As mentioned, civil law liability serves a compensatory objective as well as a deterrence objective, and that additional objective may dissuade some ethicists from delving into the subject. At a minimum, sufficient investigation needs to be made to evaluate the extent to which the compensatory objective is a bar or limitation on utilizing the deterrence objective to help ethicists in their quest. Further, insofar as judges and lawmakers are in fact attempting to accomplish both objectives, they are deserving of guidance and input from ethicists about how effectively the deterrence objective is being achieved under the circumstances, whether the two objectives conflict with each other, and whether there are ways to augment the effectiveness of the deterrence objective and at the same time accomplish the compensatory objective adequately.
Civil law liability and the threat of liability forces corporations to expend enormous amounts of resources, and ethicists should want those resources, if possible, to have a resultant improvement in corporate behavior, and not be wasted. Ethicists should be especially concerned if, as this author has suggested, the civil liability system undermines business ethics. Investigation and consideration of civil law liability by ethicists would almost seem to rise to the level of a moral imperative for them.
ENDNOTES
(1) Alasdair MacIntyre, After Virtue, 2nd ed. (London: Duckworth, 1985).
(2) See, e.g., Joseph R. DesJardins and John J. McCall, Contemporary Issues in
Business Ethics, 5th ed. (Belmont, Calif.: Wadsworth, 2005).
(3) See, e.g., Ingo Pies, "Moral Commitments and the Societal Role of Business:
An Ordonomic Approach to Corporate Citizenship", 19 Business Ethics Quarterly ____ (2009).
(4) See, e.g., Laura Nash, Good Intentions Aside: A Manager's Guide to Resolving Ethical Problems (Harvard Business School Press 1990); Gary R. Weaver and Linda Klebe Treviño, "Compliance and Values Oriented Ethics Programs: Influences on Employees’ Attitudes and Behavior", 9 Business Ethics Quarterly 315 (1999).
(5)See, e.g., Geoff Moore, "Re-Imagining the Morality of Management: A Modern Virtue Ethics Approach", 18 Business Ethics Quarterly 483 (2008).
(6) Compare Vincent Di Lorenzo, "Does the Law Encourage Unethical Conduct in the Securities Industry", 11 Fordham Journal of Corporate & Financial Law 765 (2006), which makes an argument against vague standards, with Michael Michael "Business Ethics: The Law Of Rules", 16 Business Ethics Quarterly 475 (2006), which makes an argument in favor of general principles over specific rules.
(7) .John Boatright, Book Review, 18 Business Ethics Quarterly 417, 422 (2008) (reviewing. William Laufer, Corporate Bodies and Guilty Minds: The Failure of Corporate Criminal Liability).
(8) John Hasnas, Trapped: When Acting Ethically Is Against the Law
(Washington, D.C: Cato Institute, 2006); William S. Laufer, Corporate Bodies and Guilty Minds: The Failure of Corporate Criminal Liability, University of Chicago Press, 2006.
(9) ". . . ultimately the only actors that can be deterred are individuals;
organizations can be deterred only by influencing the behavior of their agents." Boatright, supra note 7, at 422. See also John Hasnas, "Up from Flatland: Business Ethics in the Age of Divergence"; 17 Business Ethics Quarterly 399, 404 (2007).
(10) Laufer, supra note 8.
(11) Hasnas, supra note 8.
(12) Boatright is open to a choice between applying the criminal law directly against employees and creating incentives for shareholders to monitor employees. The relevant difference between sanctioning organizations and individuals is whether individuals will be deterred directly by the application of the criminal law or indirectly by creating incentives for shareholders to monitor employees. . Boatright, supra note 7, at 422.
(13) Di Lorenzo supra note 6 at 788-791.
(14) Boatright, supra note 7, at 417.
(15) Michael, supra note 6.
(16) Hasnas, supra note 8, at 413-4.
(17) Hasnas, supra note 8.
(18) "The federal fraud offenses are directed against the type of deceptive behavior that is intentionally designed to be indistinguishable from non-criminal activity. As a result, considerable investigation may be required merely to establish that a crime has been committed, and even then, a great deal of legal and accounting sophistication may be required to unravel the deception. Proving such an offense beyond reasonable doubt can therefore be an arduous and expensive task. Furthermore, because such behavior often occurs within corporations in which decision-making responsibility is diffused among many parties, it can be exceedingly difficult to prove that any individual acted with the level of intentionality required by the fraud statutes. In addition, the evidence necessary for a conviction, which will predominately consist in the business records of the individual or firm under suspicion, will frequently be protected by the individual’s Fifth Amendment right against self-incrimination or the firm’s attorney-client privilege, and hence be unavailable to the government.30 And although there is no need to prove that a defendant acted intentionally to obtain a conviction for a public welfare offense, such offenses are so numerous, and frequently so technical and arcane, that no police agency could have a budget large enough to enforce them in a country as populous as the United States. Hasnas, supra note 8 at 404.
(19) Hasnas, supra note 8 at 412-3.
(20) Author, 2007.
(21) Di Lorenzo supra note 6 at 788-791 addresses civil penalties and private lawsuits and is an opening to the subject of this article, and perhaps he would be in agreement with this article to the effect that civil law liability is deserving of much more attention by ethicists.
(22) Author, 2007.
(23) Michael, supra note 6 at 482.
(24) Michael, supra note 6 at 492.
(25) This sort of observation not based on scientific research would seem to play a very substantial and useful role in the theorizing work of business ethicists. At this time, it seems indispensable as to some relevant matters in the work of ethicists, and scientific experimentation is not capable of providing a substitute.
(26) Di Lorenzo supra note 6 at 788-791.
Tom Nesi, Poison Pills: The Untold Story of the Vioxx Scandal (New York : Thomas Dunne Books, 2008).
(27) Di Lorenzo, also possibly views the criminal law and civil law liability as of one piece. See Di Lorenzo supra note 6 at 788-791.
