New Accountability for Corporations: Jail Time for Executives

The OccupyWallStreet (OWS) movement has gathered momentum rapidly, from a mere mention in a July 2011 e-mail newsletter from Adbusters, a Canadian activist organization, to hundreds of locations and thousands of supporters across the US and beyond (see Wikipedia history on OWS). The We are 99 Percent movement, as some are calling themselves, have many grievances, most of which are directed at corporations and a lack of accountability of the executives running these corporations.

"We are 99 Percent"

Companies are a relatively recent invention. The modern company is viewed as emerging in the UK, with the Joint Stock Companies Act of 1844 and the Limited Liabilities Act of 1855. Key to this was the creation of a company as a separate legal person, a vehicle which housed the rights and duties of investors and managers.

As companies have grown in economic importance, we have seen a growing disconnect between the activities of the corporation, and the human needs that these entities are supposed to represent and serve. A company commits gross acts of negligence, such as the recent BP oil spill in the Gulf, and its punishment is a fine. A fine which is ultimately paid by the shareholders of the company, not the managers or executives in the company, the people who actually had the responsibility for the crime in the first place.

This lack of accountability is most stark in the financial industry. Lehman Brothers went bankrupt and caused a collapse of practically the entire financial system. And yet the executives and board directors who ran the corporation ended up keeping their past bonuses, gained from running the company as a pyramid scheme that finally crashed. The worst that happened to them was that they lost their jobs. Big deal.

Richard Fuld netted $500 million in compensation between 1993 and 2007. He sold his $13M house to his wife in Nov 2008 for $100 to protect his assets from law suits

In 2009, in the midst of the financial crisis, I started working on some ideas on how to prevent this type of meltdown in the financial system. I considered it to be a complex system, replete with many types of entities and interactions, vastly complex… and yet at the same time, fortunately not very complicated. A complicated problem is hard to fix. A complex problem is simple, providing that one understands the simple rules that guide the actors in a complex system.

What became apparent is that the financial system – and that of the corporate system – was run by entities called companies (and governments, but that is a side issue). These entities were owned by shareholders, an amorphous mass with basically no power or say in how their investments were actually run. The entities were controlled by boards of directors, a group of individuals with distinct legal obligations on behalf of the investors and the companies. And the entities were managed by executives, sometimes the same people who sat on the board.

These structures created an appearance of accountability. In reality there is no accountability whatsoever. No one asks directors to pay back their wages for three years of running a pyramid scheme (like the Lehman situation). No one seeks jail time for executives who make stupid decisions (like Northern Rock, RBS, Citigroup, Dexia, and, and, and).

Dexia Bank - consumed €6 Billion in EU taxpayers cash in 2008... all gone now

Now this would not be a problem as, in some people’s minds, these corporate disasters have been victimless crimes. Unfortunately they are not victimless. The people who have to pay for these mistakes, these crass errors of judgment, are the taxpayers, today’s and tomorrow’s. And the people who benefit from these mistakes? The very same people, often, who caused the mistakes in the first place.

So, my suggestion is to introduce the concept of personal accountability into business. This would mean creating a new type of criminal offence, a Corporate Responsibility crime, and that people who are judged in court to have broken the law will go to jail.

In the 1800s many countries had Debtors’ Prisons that incarcerated people if they had not paid their debts (See Wikipedia history). These offences were eliminated, and in 1976 the International Covenant on Civil and Political Rights came into effect stating, “No one shall be imprisoned merely on the ground of inability to fulfill a contractual obligation.”

Today, of course, there is a 1-800 number to hire a service to manage your debts for you...

Today, I believe that the absence of meaningful personal repercussions for bad or poorly thought-through behavior has directly resulted in billions of dollars of wasted taxpayer money, many deaths in corporate accidents, and has perversely put billions of dollars back into the pockets of those who cause the problems in the first place.

Until there is a downside to the upside equation, this perverse set of behaviors will continue. Indeed, within just two years of the last financial meltdown and multi-billion dollar payout to banks and bankers around the world, we find our governments about to make the same deal with the same bankers. Taxpayers are paying twice to the same people for basically the same mistakes.

So, I believe a fairer deal is a new form of corporate social responsibility (CSR). Not the type where a company claims to support the environment, provides support to local arts companies, and takes blood from its staff (aka blood drives on site). A new type of CSR where the Directors and Senior Executive positions are eligible for this new type of Corporate Responsibility crime if their business fails in a material way while they were in a position of responsibility.

In this way the individuals who run a company have to think about the impact on themselves:

  • Is an extra $1 million in bonuses worth the risk of going to jail for six months as you agreed to cut back on maintenance in a refinery?
  • Is a 5% increase in the share price, triggering a fat options contract, worth two years of prison if it means leveraging the company to the hilt on debt?

Now of course there will be lots of issues in working out how such a crime can be crafted into law, and then put into action. It is hard to imagine such a law being introduced retrospectively, for instance. And the devil will certainly be hiding in the details, ably supported, as always, by the devil’s advocate. And yet it is not impossible to craft such a law. Laws have been created many times to handle new crimes that come into being, or new societal perspectives on things that used to be considered normal (husbands raping wives, adults having sex with minors, etc).

The current system of justice is totally unfair. Crimes that cost no real damage to property or to others can end up with jail sentences for months and years. After the UK riots a 23-year old college student with no criminal record was jailed for 6 months for stealing a £3.50 case of bottled water (see Telegraph story). Meanwhile the bankers responsible for the huge new borrowing of UK government to protect the banking system got off totally scott free. A spot of garden leave at home. And usually a nice fat pension for the rest of their lives.

So we need to inject personal accountability into corporations to balance out the corporate system. Corporations are a vehicle of human invention, the invention of governments and the law. They have not existed for ever, just 150 years of our existence. And even during this time they have morphed and responded to changes in the economic and social context.

I believe it is time to add accountability back in to the contract a company has with society, and that entails developing and enacting a new law, a criminal law. That should scare executives and directors enough to stop their excesses. Nothing else seems to.

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