photo: DigitalGlobe-Imagery (flickr)

Corporations are creatures of statute, not, despite the best efforts of the Supreme Court in cases like Citizens United, human beings. Corporations don’t have consciences, or any other human attributes. We hope that the people running corporations have human attributes, like consciences, but it appears that is not always the case. The only goal of a corporation is to make money while limiting liability for the owners. This fixation frequently leads to massive disasters, like the destruction of the Gulf of Mexico.

The economist Richard Thaler, whose ideas the President likes, wrote an article in the New York Times recently in which he admits that no one has figured out a way to force people generally, and corporations specifically, to protect against significant risks. The disaster in the Gulf and the collapse of giant banks in 2008 are salient examples.

Economists believed that if risks were severe enough, someone would police the risk-taker, maybe an insurance company, maybe a creditor. Those of us who still believe in regulation thought that strong regulators would do the job.

Thaler explains that neither will work. Insurance companies and creditors have no way to evaluate the level of risk corporations are taking; they have other concerns about their own profits, or they are behind the learning curve, or they have personal reasons to trust the risk-takers. Regulators are always behind the learning curve of the sectors of the economy they are supposed to control. Corporations always underestimate risks. He could have added a discussion of the principal-agent problem: management’s rewards for taking risk are very high, and their personal risk of loss is very low.

What is a society supposed to do? Thaler hopes something will happen, but he makes no proposals. So, I will. The only thing that deters people from taking risks is the certainty of jail time. It focuses their attention on problems mightily. The big problem is that we have a legal system that rich people can tie up forever. We need something clear and direct, with no room for lawyers to play their games.

The starting place is the responsible corporate officer doctrine. Most statutes defining crimes use words like “it shall be unlawful for any person” to do the prohibited act. The definition of “person” includes corporations and other legal entities, and in some cases it specifically includes a “responsible corporate officer”. I discussed the applicability of this definition in the BP case here.

A recent law journal article shows that courts can construe the word “person” to include a responsible corporate officer, even if it is not expressly included in the definition.

When imposing the RCO doctrine upon a corporate officer in Park, the Supreme Court acknowledged that the imposition may be onerous. Nevertheless, the Court determined the obligation was “no more stringent than the public has a right to expect of those who voluntarily assume positions of authority in business enterprises whose services and products affect the health and well-being of the public that supports them.”

Christina Schuck, Note And Comment: A New Use For The Responsible Corporate Officer Doctrine: Prosecuting Industry Insiders For Mortgage Fraud, 14 Lewis and Clark Law Review 371, 389 (2010); footnotes omitted. This holding does not change the necessity of proving the statutory mens rea, like knowledge or intent to cause harm. Later decisions create a defense of impossibility: defendants can prove that there was nothing they could have done to prevent the disaster.

This is a good starting place. All we have to do is to change the mens rea requirement to negligence or even strict liability. A good way to do this in the case of disasters like the Gulf is to say that there will be strict liability, subject only to the defense of impossibility, for all responsible corporate officers, regardless of their intent, if the total damage exceeds $50 million. The punishment would be a short jail term, and a fine equal to the amount of damage.

The burden of proof on the government is to show a) that the damage exceeded $50 million, and b) the defendant could have affected the decision to proceed with the corporate act. Defendants have the burden of proving that there was nothing they could have done to prevent either the corporate act, or the damage.

Between jail and loss of all one’s assets, I think we would encourage corporate officials to find, if not a conscience, at least its functional equivalent.



I read a lot of books.