Corporate Culpability and the Limits of Law

8/18/2019 Corporate Culpability and the Limits of Law

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CORPORATE CULPABILITY AND THE LIMITS OF LAW

William S. Laufer

bstract

Ethicists and legal theorists have proposed models of corporate

culpability that shift the standard of guilt determination from vicarious

attribution of individual action and intention to an assessment of

culture, policies, as well as organizational action and inaction. This

paper briefly reviews four prominent models of corporate culpability,

arguing that each m akes claims that ex tend well beyond the limits of

existing law. s an alternative to these models, a constructive corpo-

rate fault is described that relies on both objective and subjective

reasonableness judgments. The paper concludes with a consideration of

constructive corporate fault in relation to an Accountability model of

corporate liability.

F

or nearly a century, the criminal law has imputed individual action to

corporate entities. Corporations under both state and federal law have

been vicariously liable for the criminal acts of agents and employees (Brickey,

1984).

The law 's strong allegiance to vicarious liability has thwarted any

serious consideration of a genuine corporate liability, or culpable policies and

attributes of organizations. The distinction between vicarious and genuine

corporate liability was highlighted w ith the passage of the federal sentencing

guid elines for organ izations in 1991 (Nagel Sw enson , 1993;

Rakoff

Blum kin, Sauber, 1993). The guidelines are the first codified references to

corporate actions and inactions in federal and state criminal law. Corporate

action before and after the commission of the offense is critical in determining

an entity's culpability score (a proxy for an entity's blameworthiness) at sen-

tencing. Aggravating factors, such as evidence that the organization ob-

structed or impeded justice during the investigation or prosecution of the

offense or failed to report the commission of the offense, reveal an unprece-

dented consideration of corporate action and corporate fault. This considera-

tion of corporate action and fault, however, is strictly limited to the

determination of proportional sentences after conviction. Substantive criminal

law, responsible for the adjudication of culpability in relation to liability,

considers the acts and intentions of corporate agents, not corporate entities

(Laufer, 1992).

Even with the law's strong individualistic bias, a number of business ethicists

and legal commentators have proposed models of corporate culpability that shift

the inquiry of guilt determination from vicarious liability to genuine corporate

liability. Models of genuine corporate liability consider the proactive efforts of


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312 BUSINESS ETHICS QUA RTERLY

organizations to prevent the commission of crime, the reactions of organizations

to the discovery of illegalities, the organizational ethos or personality that toler-

ates illegalities, and policies that may have contributed to the commission of an

offense. This pape r briefly reviews four prom inent m odels of corp orate culpa-

bility, arguing that each makes assumptions or relies on constructs that extend

well beyon d the limits of existing federal and state law. A second and third pa rt

of this paper discu ss the prosp ects of a m odel of corporate liability that co nside rs

both objective and subjective judgments of fault (Laufer, 1994).

Vicarious Liability and Corporate Fault

Courts find corporations criminally liable for the conduct of employees acting

within the scope of employment and with an intent to benefit the corporation.

The doctrine of respondeat superior derived from tort law, views corporations

as princ ipals, and officers, direc tors, and em ploy ees as age nts. U nder federal

law, the intentions of agents are simply imputed or attributed to the principal.

State laws vary, but most require acts authorized, requested, performed, or

tolerated by the board of directors or by high managerial agents (See, Model

Penal Code, 1962; Brickey, 1984, 1993). Both federal and state law hold stead-

fast to the princip le that: A corporation can only act through its em ploy ees and ,

consequently, the acts of its employees, within the scope of their employment,

constitute the acts of the corpo ration (United States v. T.I.M .E.-D .C, 1974).

The only notable exception to vicarious liability was proposed in United States

Bank of New England (1987) where the First Circuit Court of Appeals ruled

that a bank m ay be presumed to have that knowledge representing the collective

know ledge of all em ployee s. Ag gregate emp loyee know ledge constitutes cor-

porate know ledge. No other court has ventured so far from a com m itment to

respondeat superior.

There are at least two sources of the law's allegiance to vicarious liability.

First, there is evidence that vicarious liability rules were adopted as a matter of

judicial conve nience and expediency (Mueller, 1957). According to one English

court, vicariou s liability is a neces sary doctrine for the proper enforcem ent of

much modern legislation {Coleman

v

Mills 1897). At the turn ofthe century,

when the substantive criminal law was first applied to corporations in the United

States, it appeared to courts as if employees were the only source of criminal

action and intention. [T]he re are som e servants or agents of a corp oratio n, one

jud ge wr ote, w ho can be treated as 'the directing mind and will of the corpora-

tion, the very ego and centre of personality of the corporation'.... (Len/iarrf's

Carrying Co. v. Asiatic Petroleum Co. 1915). Typically, senior managem ent

were considered the mens ofth e corporation. Judges had not considered the role

that the collective or group plays in shaping employee behavior (May, 1989).

Further, corporations were not yet considered capable of possessing an organ-


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CORPORA TE CULPABILITY 313

Second, courts and legislative bodies have made two critical assumptions

about the application of vicario us liability to illegal corpo rate action . First,

courts use the doc trine of responde t superior in the corp orate crim inal law with

the assum ption tha t it achiev es fairness in risk and loss allocation . Th is is not

surprising given that the tort law doctrine of

responde t superior

allocates risks

and economic losses based on the abilities of the parties to compensate for

realized losses (Prosser, 1971). It seem s obvious that entities are in a better

position to assum e responsibility for losses due to the acts of ag en ts. An d

second, courts assume that in practice responde t superior induces organiza-

tions to enforce individual accountability (Braithwaite & Fisse, 1985). Th ere is

an intuitive appeal to the notion that upper level management will exercise

greater care in supervising subordinate em ployees w ho may bind the entity w ith

any acts, committed in the scope of their authority, that may be said to benefit

the corporation.

Notwithstanding this allegiance, commentators have been critical of the fic-

tional imputation of action and intention that is the hallmark of vicarious liabil-

ity. A corp orate fault m akes little sense when it is based on the actions of a

rogue em ployee w ho, under the scope of her authority, acts to benefit the co rpo-

ration by violating express corporate policy, administrative regulations, or the

criminal law. The sam e criticism ap plies when co urts attribute culpability to a

parent corporation for the actions of several departments in a remote subsidiary.

In large part, it is the tenuous connection between entity and agent that has

resulted in the emergence over the last decade of four models of corporate

culpability that attemp t to capture a genuine corporate intention. Credit also

must be given to an increasing prominence of research on organizational deci^

sion mak ing and culture (Sims, 1994;; Trevino, 1990; M arch, 1 989). There is

considerable support for the notion that corporate entities share characteristics

or attributes that are distinct from the sum of their mem bers . Finally, it appears

as if the often lively deba te over the place of criminal law in relation to co rporate

personhood has reached an impasse. Many philosop hers, ethicists, and crim i-

nologists question w hether corporate entities should be criminally, no less m or-

ally, resp on sible for the action s of em ploy ees (Keeley, 19 81 ; Velasqu ez, 198 3;

M anning , 1984; Cressey, 1988; Wolgast, 1992; Ge is, 1995). They argue pe rsua-

sively that corporate acts are found strictly in the actions of corporate agents;

that the corporation is a convenient fiction through w hich autonom ous individu-

als act; and that corp orate inten tions are insufficient for the purp ose of a scribing

moral responsibility. This debate, however, has only theoretical impo rtance

(Walt & Laufer, 1 99 1, 1992). As a practical matter, the law has granted the

fiction of corporate action and intention for nearly a century through the sor-

tilege of vicariou s liability. Th ere is no mean ingful legal distinction m ade

betwe en, for exam ple, corporate action and individual em ployee action, or indi-


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314 BUSINESS ETHICS QUAR TERLY

reasons of public policy, commentators have turned their attention to how this

may be best accomp lished. Each model of genu ine corporate liability d escribed

below is notable for its departure from or rejection of vicarious liability, and

exploration of culpability in relation to features of the corporate form.

Models of Corpo rate Culpab ility

It took some time for common law courts to demonstrate confidence with rules

that held corp oration s liable for crim es. At the turn of the century, many courts

and legal com me ntators app eared to have difficulty justifying a crim inal indict-

ment again st an entity, rather than its em ploy ees. Even so , the law becam e clear

after the landmark case

of New York Central Hudson River Railroad

v

United

States

(19 09). Th e Suprem e Cou rt, in quoting from Bish op's treatise

New

Criminal Law,

acknowledged an equivalence between the actions and intentions

of corpo rate agents and the corporate entity. According to Bishop (1901),

[s]ince a corporation acts by its officers and agents, their purposes, motives,

and intent are ju st as much those of the corpo ration as are the things d one . If,

for example, the invisible, intangible essence of air, which we term a corpora-

tion, can level mountains, fill up valleys, lay down iron tracks, and run railroad

cars on them it can intend to do it, and can act therein as well viciously as

virtuously.

With this reference to Bishop, the Supreme Court signaled an appreciation of

the distinct capacity of the corpo rate entity to act and intend. The doctrine of

respondeat superior

allowed the court to find equivalence between agents and

principals. Over the last decade, comm entators have revisited this equivalence

and the prev ailing allegian ce to vicarious liability. Shou ld cou rts con sider the

efforts of corp oration s to preve nt crimes? Shou ld the inquiry regarding entity

liability and culpability turn on the reactions of the entity to the discovery of

illegal beha vior? Should courts focus on corporate cultures that encourage

crime com mission or corporate policies that tolerate, if not promo te, law viola-

tion? Nea rly a century after the crimina l law was first applied to the corpo rate

entity, com men tators are considering pro active, reactive, culture-based, and cor-

porate policy models of culpability.

Proactive Corporate fault (PCF) assumes culpability where a corporation's

practices and procedures are inadequate to prevent the commission of a crime

(Fisse, 1983 ). Corpo rations are culpable when they fail to take reasona ble steps

to imp lement policies and practices that reduce the likelihood of crime com mis-

sion. Eviden ce of reasonable efforts to prevent crime comm ission w ould com e

from: (1) the development and implementation of certain proactive safeguards,

and (2) the effective delivery to employees of ethical and legal prohibitions.

Pro active efforts in clude the ordering of internal aud its, external audits, and

com pliance review s. Th e proactive exercise of due diligence (i.e., that amo unt


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CORPORA TE CULPA BILITY 315

measures serve as a proxy for the reasonableness of corporate practices and

procedures.

Reactive corporate fault (RCF) considers the corporate reaction to the crimi-

nal act or inquiry from fault prior to the time of the criminal act (or actus reus ,

to fault in reaction to the actus reus (Fisse, 1983; Fisse and French, 1985).

Evidence of a reactive due diligen ce or responsiv e adjustment following the

discovery of an offense becomes the basis of finding both liability and culpabil-

ity. Failure to undertake reasonable co rrective or remedial measu res in reaction

to the disco very of an offense is eviden ce of fault (No te, 19 79). Both PC F and

RCF abandon the legal convention that fault must be time-bound or contempo-

raneous w ith the comm ission of an offense. This departure s justified given the

dynamic nature of corporate action (Fisse and Braithwaite, 1993).

Where an organization's ethos or personality encourages agents to commit

crim inal acts there is liability unde r a theory of corporate etho s (CE) (F oersch ler,

1990; Bucy, 19 91, 1993; M oore, 1992). A corporate ethos or personality may

be deciphered from the corporate hierarchy, corporate goals and policies, efforts

to ensure compliance with ethics codes and legal regulations, and the indemni-

fication of em ploy ees. Q uestions relating to the role of the board of direc tors,

and how the corporation has reacted to past violations, if any, will be asked as

w ell. CE falls under the broad rubric of Co rporate Ch aracter Theory (see

M oore , 1992 ). Corpo rate Character Theory con siders those features of a corpo-

ration—its policies, structures, and procedures—that cause employees to com-

mit crime in the nam e of the company. Three circumstances a re required: (1)

the presence of an illegal policy and an agent responsible to act on the policy,

(2) an illegal act committed, authorized, ordered, or endorsed by a high mana-

gerial agent, and (3) an implicit ratification of the violation by the organization.

Finally, commentators have argued that corporate action and intention may be

found in decisions and choices that are com mu nicated through corp orate policy

(CP) (French, 1984). It has been argued, for exam ple, that the comp onen ts of

the corporation's internal decision structure, consisting of the corporation's

flowchart and procedural and recognition rules, define corporate intentionality.

The corporation establishes certain goals and objectives that reflect prosocial as

w ell as crim inal action or intention. A summ ary of the pos tulate s, cons tructs and

hypotheses of all four models appears below in Table One.


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CORPOR ATE CULPAB ILITY 317

culpability and liability generally ignore the requirem ents of substantive crim i-

nal law. PC F, R CF and CE mo dels do not require a finding of crim inal intention

mens rea)

in relation to the illegal corporate act. In particular, all three models

neglect the fact that the criminal law requires proof of a culpable mental state,

i.e., purp ose, know ledge, recklessness, or negligence (Robinson & Grail, 1983).

This requirement, true for individuals and organizations alike, reflects a strong

commitment to restrict the reach of the criminal law to those who have acted

intentionally. Models of corporate culpability that fail to consider

mens rea

can

not be incorporated into existing statutory provisions without significant revi-

sion to the Federal Criminal Code and state criminal codes, which at present

seems quite unlikely.

Models of corporate culpability also obscure the difference between the as-

sessment of pre- and post-conviction culpability. Prior to a conviction, culpabil-

ity is raised in relation to an en tity's liability. The prosecu tion m ust establish

that the organization is sufficiently culpable so as to render it criminally liable.

The task is a narrow one, limited to establishing proof of culpable mental states

in relation to the elemen ts of the offense. A second exa mina tion of cu lpability,

which is considerably m ore broad, occurs after conviction. Here courts consider

culpability in relation to sentence severity. The effort is to fashion a sentence

that is proportional to the crime committed, and the culpability of the corporate

offender. U nder the federal senten cing gu ideline s, federal courts conside r a w ide

range of evidence including PCF, RCF, and the existence of an effective ethics

code Rakoff, Blumkin, & Sauber, 1993).

In many cases, the assessment of culpability before trial informs the post-con-

viction assessm ent of blam e. An entity's reckless disregard of an illegality, for

exa m ple, m ay satisfy a standard of culpa bility in relation to liability and provide

useful evidence to a sentencing judge regarding the extent to which that entity

was to blam e for the com m ission of the offense. Th e inverse, how ever, is not

true.

Inquiry reg arding the proactive or reactiv e culpab ility of an entity does not

provide evidence of culpability in relation to liability (cf. Fisse and Braithwaite,

1988,

1993). Un less existing standard s of liability are all but aban don ed PCF ,

RCF, and CE should be considered as models of post-trial culpability. Th e

narrow inquiry required by pre-conviction culpability is simply not satisfied.

This is implied or acknowledged by architects of ethos and culture-based mod-

els. M oo re (19 92 ), for exa m ple, goes so far as to say that, the corpora te

character theory is

more

suitable for use at senten cing than at trial (p. 768 ).

A number of models of corporate culpability fail because the criminal law

requires a contem poraneity or concurrence betw een the

mens rea

and

actus reus

of an offense (A shw orth, 1991 ). In short, a m ental state must actuate a related

or concurrent act (W hite, 1985). As Ashw orth (199 1) has noted, this requirement

forms part of the ideology that the function of the criminal law is not to judge

a person's general character or behaviour over a period of time; its concern is

only with the distinct criminal conduct charged (p. 133). This requiremen t


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BUSINESS ETHICS QUARTERLY

The inquiry must center on culpable mental states in concurrent relation to the

prohibited act, not its antecedents or its sequ els (Ashwo rth, 199 1, p. 134),

Reactive fault, in particular, fails to the extent that a reactive program of a

corporation reflects an entity's response to the discovery of an illegal act, rather

than the commission itself A corpo ration's failure to respond reasonab ly may

reveal blam e— but it is blam e in relation to its failure to act. It is not n ecessarily

evidence of a distinct intention in relation to acts that gave rise to the omission.

Thus, even though blameworthiness in general may not be limited to an absolute

temporal standard, culpability in relation to ctus reus must be . An entity's

disregard of an agen t's act creating an un reason able risk of injury is not the same

as an intention to com m it the act. This is ma de clear in con sidering M ay 's

(1983) notion of vicarious neg ligence. Vicarious negligence is determined by

evidence of a failure on the part of a person with authority to assume preventive

measures w hen a harm or offense could have heen predicted. Standing alone,

vicariou s negligenc e is an inade quate liability rule for corporate illegality. At

present, there is no distinct criminal offense associated with failing to assume

prev entive m easu res. Vicarious neg ligence is also too narrow to capture the

culpability associated with many corporate offenses.

Moore, Bucy, and Foerschler also do little to distinguish culpability from

liability in their treatmen t of corporate personality, ethos and character. Dis -

cussion of the foreseeability that a corpo rate policy or practice w ould lead to the

crim e; the authorization or approval of high manag erial officials; and the rati-

fication of employee violations are couched in terms of culpability when each

app ears , in their respec tive mod els, to reflect a set of liability rules (M oore ,

1992, pp . 769 -77 0). Th ere is only passing reference to a neg ligence standard

for corpo rate fault (M oore , 1992, p. 769 ), Lim itations of this sort suggest the

need for a model of corporate intention that remains w ithin the limits of existing

law (see Table Tw o). It is of utmo st imp ortance that this model co nsider attrib-

utes and processes of the organization. This conceptualization, however, must

mak e use of existing stand ards of culpability and be capab le of imp lemen tation

withou t significant c hang es to existing law. A construc tive corpora te liability

and culpability, proposed in some detail in an earlier article (Laufer, 1994), is

outlined below.

Table Two

imit tions

PC F

RCF

CE

Proof of

Culpable

Mental State

No

No

No

Most

ppropriate as

Post Conviction

Culpability

Yes

No

Yes

Temporal

Fallacy

Yes

Yes

No

Reveals

Evidence of

LiablUty and

^ not Culpability

No

Yes

Yes


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CORPORATE CULPABILITY 319

Constructive Liability and Culpability

In law, the word

constructive

stands for that which has not the cha racter

assigned to it in its own essential nature, but acquires such character in conse-

que nce of the way in wh ich it is regarded by a rule or policy of law (Black ,

1968).

Constructive corporate liability and culpability are implied or inferred

where there is proof of: (1) an illegal corporate act, and (2) a concurrent corpo-

rate crim inal state of mind. Th e former is satisfied by evidence of a prim ary act,

defined as an act own ed or authored by the entity. Primary a ction is identified

through an objective test where it is determined that given the size, complexity,

formality, functionality, decision making process and structure of the corporate

organization, it is reasonable to conclude that the agents' acts are the actions of

the corp oration . This reasonablene ss test is a thresho ld assessm ent that sepa-

rates cases in wh ich primary corporate acts have occurred, from secondary acts,

defined as acts attributab le to agen ts rather than to the corpora te entity. It is

argued that this constructive test of primary corporate action should replace

vicario us liability. In those cases where the acts are con structively tho se of the

entity, cou rts would a lso require proof of a culpab le state of min d. To avoid the

vagaries of obscure mental states, the Model Penal Code's four part conceptu-

alization of culpable mental states is adopted, requiring proof of purposeful,

knowing, reckless, or negligent corporate acts.

Constructive Corpo rate ctioti

In determining whether or not there is a corporate criminal act, courts and

juries would consider evidence relating to delegation, authorization, reckless

toleration, as well as the status of the agent who has acted and the scope of her

authority. The stronger the agent-entity relationship, the more reasonable it is to

consider an agent's action to be a construction of the corp oration 's. Agents

given the authority, through delegation, to carry out their duties, with a certain

power and responsibility, act for the organization, on behalf of the organization,

and with a consideration of organizational goals and objectives. Th e reason-

ableness test looks to the relationship of the agent to the entity and determines

who, constructively, is the author.

Corporate Mental States

Proof of a constructive corporate act must be accompanied by proof of a

corresponding and concurrent corporate mental state. With the assistance of

reasonableness judgments, constructive corporate culpability considers pur-

pose,

know ledge, recklessness, or negligenc e. Evide nce of actual kno wledg e by

the entity also may be considered . Th us, cons tructive culpab ility is not strictly

objective (i.e., derived from evidence of what a reasonable corporation would

have done in like circumstances.) Unlike a model of culpability that makes

reference to the behavior of an average or reasonable co rporation, constructive


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CORPORATE CULPABILITY 321

awareness or knowledge, indifference or recklessness? Would the average cor-

poration of like size, structure, and complexity have known of the risks of

injury? Th ese questio ns are addressed in relation to the four part hierarch y of

culpability found in the M odel Penal Co de: purpo se, know ledge, recklessne ss,

and negligence.

Constructive Corporate Culpab ility and the Limits of Law

No court or commentator has maintained that the corporate criminal law

requires v icarious liability. On the other hand , for a model of corpo rate liability

to find acceptance in legislatures and courts, it is not too much to ask that it is

set within the requirem ents of the substan tive law. To da te, attem pts to define

corporate liability have required evidence that defies extant law. Theorists have

disrega rded the fact that evid enc e of a certain culture or etho s, for exam ple, m ust

accom mo date the substantive law. Notw ithstanding problems with accom mo-

dation, this inattention to legal requirements has limited the application of cul-

pability provision s, as well as obscured the boundary between torts and crime s.

Th is is illustrated in the recen t prop osal of an Acco untability M odel of co rporate

liability and culpability, proposed by professors Fisse and Braithwaite (1993).

A corporation is liable, Fisse and Brathwaite argue, when and where it fails to

eng age in reactive due diligence for actions that violate the crim inal law. Ac -

cording to these theorists: Und er the Accou ntability Mo del, the corporation

may be held responsible for the

actus reus

of the offence and then required to

conduct a rigorous self-investigation which may lead to individual discipline,

remediation of defective SOPs, compensation to victims, or other relevant re-

spo nse s. If the reme dial and disciplinary me asures docum ented in the self-in-

vestigation are insufficient and inexcusable, then the court can proceed to

criminal conviction and sentencing of the corpo ration (Fisse and Braithwaite,

1993,

p. 163). The elaborate set of liability rules and related sanctions found in

the Accountability M odel are quite impressive. They are , however, limited by a

disregard of certain legal requirements. Fisse and Braithwaite do not require

concurrence between actus reus and mens rea arguing that restricting the notion

of culpability to a strict temporal standard disregards the dynamic nature and

character of corporate offending.

At least two con ceptual pro blem s arise with a system of corporate liability that

dismisses the need for contemporaneity and yet requires a criminal act, as well

as a failure of the entity to respo nd. First, the Acc ountab ility M odel un nec es-

sarily limits the crimina l law to corporate ne gligence or reckless nes s. A failure

to reasonably respond or engage in reactive due diligence is negligence or, at

most, recklessness. The corporation should have known of the risk of harm

associated with the

actus reus

(similar to a corpo rate me ntal state of neglig enc e).

The organization was aware of the potential for harm and, with the awareness,

disregarded a substantial and unjustifiable risk of injury (similar to a reckless-

ness mental state).


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322 BUSINESS ETHICS QUARTERLY

place at all. W ithout concurrence betw een the corporate act and an associated

mens rea, courts risk the imposition of strict liability for omissions. Corporate

action in response to the perception of an illegality resembles due diligence and

the duty to exercise reasonable care which already exists in statutory and com-

mon law (Kn epp er and Bailey, 199 3). The duty of directors to m onitor and

supervise the activities of the corporation, for example, raises questions in tort

law of neglig en ce. Of course , failing to act in such a way as to prev ent harm , or

failing to act reasonably after the discovery of an illegality reveals culpability.

Unless or until there is a meaningful connection between the actus reus of a

corporate offense and departures from reasonable action, however, any resulting

blame should derive from tort law. To be fair, Fisse and Braithwaite acknow-

ledge and acce pt the notion of corp orate blame w orthin ess. They write freely

about corporate negligence and recklessness. The Acco untability Mo del, how -

ever, like PCF, RCF, CE, and CP models, does little to unite culpability provi-

sions and liability rules.

The challenge for ethicists and legal theorists alike is to address critical fea-

tures of the corporate form in the context of culpability provisions and liability

rules.

Proposing a conceptualization of genuine corporate fault without attend-

ing to existing law, as has been demonstrated, severely limits the usefulness of

any resulting m ode l. D evelop ing mode ls of corporate fault that are incom pat-

ible with law is nothin g short of a m issed opportunity. As corporation s in creas-

ingly implem ent ethics codes, com pliance program s, and procedures to insulate

the entity from criminal liability, ethicists and legal theorists should collaborate

in reconceptualizing corporate fault (Pitt & Groskaufmanis, 1990; Laufer

Ro bertso n, in pre ss). This collaboration m ust, how ever, allow for the idiosyn-

crasies and limits of law.

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Corporate Culpability and the Limits of Law