Politics and Corporate Crime Legislation: If Politically Powerful Corporations Feared Corporate Crime Laws, Then Why Are So Many Statutes on the Books?

By Khanna, Vikramaditya S. | Regulation, Spring 2004 | Go to article overview

Politics and Corporate Crime Legislation: If Politically Powerful Corporations Feared Corporate Crime Laws, Then Why Are So Many Statutes on the Books?


Khanna, Vikramaditya S., Regulation


CORPORATE CRIME IS BACK IN THE NEWS. The last few years saw some of the most spectacular revelations of corporate wrongdoing in U.S. history and led to the passage of the Sarbanes-Oxley Act of 2002. This legislation added to the already sprawling realm of corporate criminal liability. Indeed, even before Sarbanes-Oxley, the estimated number of federal criminal offenses for which a corporation could be convicted was well over 300,000. The laws cover a wide range of areas such as environmental, securities, banking, and antitrust violations. With such tremendous breadth and so many new measures being debated and enacted, now seems an appropriate time to think more broadly about how we might better regulate behavior in the corporate sphere.

Legal scholarship has examined many aspects of the imposition of criminal liability on corporate entities, but some fundamental questions remain largely unanswered. In particular, how did so much corporate crime legislation get enacted, given the lobbying strength of corporate interests? We would expect that wealthy, organized corporations would largely be able to get their way in the legislative process, yet they appear to be losing the battle over corporate crime legislation. How can we explain that outcome?

TRADITIONAL ACCOUNTS

Let us begin with a potential public choice explanation. Corporate crime legislation may benefit some incumbent firms by raising competitors' costs for entering or remaining in business. Entrenched incumbents would thus benefit from reduced competition, and would be inclined to lobby for such legislation.

This explanation is not particularly convincing. First, corporate crime enforcement is infrequent and generally not a large cost to business. This suggests that corporate crime legislation would not provide much of an entry barrier to new firms. Second, there are many instances where small firms (which newer firms tend to be) are treated better under the laws than larger firms. For example, under the organizational sentencing guidelines, smaller corporations are likely to receive smaller fines compared with similarly situated larger firms. This suggests that an entry barrier account is not entirely consistent with the facts.

Moreover, if incumbents wanted to discourage new firms from entering the market, they would not need to use criminal liability. Civil liability would be sufficient, as both criminal and civil liability offer only monetary penalties against corporations and civil liability is both more frequent and often larger. The relatively low cost of corporate criminal liability makes other public choice explanations less plausible as well.

Another possible explanation would be that corporate crime legislation arises because politicians are using the threat of more severe legislation to extract (or extort) rents from corporations. This too seems implausible. The infrequency of enforcement and the small size of the penalties make one doubt the rent extraction potential. Moreover, rent extraction is more likely under corporate civil liability because of its more frequent enforcement and larger penalties. Further, if rent extraction were a large concern, we might expect corporate lobbying against such legislation, but we rarely see such corporate opposition.

Finally, one might posit that corporate crime legislation could be in the public interest and that may give it some political strength. To the extent that this claim relies on the notion that such legislation deters corporate wrongdoing, it rests on shaky footing. Earlier studies of the deterrent effect of corporate criminal liability, including my own, find little reason to think that it has much deterrent effect above that associated with corporate civil liability. Indeed, some of my other papers suggest that certain critical aspects of corporate criminal liability are difficult to justify under a deterrence framework (e.g., the requirement of corporate mens rea, the increasing of corporate penalties because of top management involvement in wrongdoing).

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