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Organizational Liability
Abstract
Companies are acknowledged to be distinct legal persons that bear liability both for organizational failures and misconduct of their agents. Civil liability has long been imposed on companies and organizations. Corporate criminal liability has rapidly been expanded in recent years. Following the common law jurisdictions, in which notions of corporate criminal liability were introduced already in the early twentieth century, many civil law countries also recognize the possibility of holding companies criminally liable. However, distinctions in the use and theoretical underpinning of organizational liability remain across countries.
... Currently, companies trading on the New York Stock Exchange must adopt a code of ethics that regulates specific issues and provides certain control procedures (Benatti 2014). Further, the recognition by more and more countries that companies can be criminally liable for organizational failures and misconduct of their agents (Heine and Grabovets 2016) has caused many small and medium enterprises (SMEs) and multi-national enterprises (MNEs) alike to implement an organizational structure analogous to a formal code of ethics. 26 In this context, it appears that the corporate scandals that plagued the 1960s, '70s '80s, '90s and 2000s have contributed to the development of a global culture-both corporate and societal-that is more aware of (and sensitive to) business practices in conflict with today's socio-economic principles and standards. ...
Sustainability is a central challenge of the fashion industry. In an era where Internet and social networks allow information to spread quickly, more consumers are familiar with the call for “ethical fashion” as disasters such as Rana Plaza resound worldwide. However, consumers interested in buying “ethical” clothing could have a hard time orienting themselves amongst the abundance of brands claiming to be ethical on the market. Consumers might make purchasing decisions based on their knowledge of a brand. In this context, it is imaginable that corporate social responsibility (CSR) communications, including codes of ethics, could constitute one way a consumer can learn more about a company’s values. These codes may serve a variety of purposes—they are undoubtedly one of the ways a brand communicates its commitment to ethical principles. Indeed, by analyzing the codes of ethics of some of the industry’s well-known brands, it is evident that they primarily focus on employment and workers’ rights (including equality and discrimination issues), labor safety standards, bribery and anti-corruption, counterfeiting and unfair business practices, as well as respect for (and sometimes improvement of) the environment. A company’s code of ethics is also a powerful tool for improving brand image by adopting a code that responds to the issues that consumers care about. It is therefore necessary to distinguish between companies that are truly ethical and those that merely appear so. In order to protect consumer confidence in such documents, a fil rouge across legal systems may be found (although the specific characteristics may vary greatly) in the laws that protect consumers from misleading advertising.
This article demonstrates that, at least since the adoption of the Organizational Sentencing Guidelines in 1991, the United States legal regime has been moving away from a system of strict vicarious liability toward a system of duty-based organizational liability. Under this system, organizational liability for agent misconduct is dependant on whether or not the organization has exercised due care to avoid the harm in question, rather than under traditional agency principles of respondeat superior. Courts and agencies typically evaluate the level of care exercised by the organization by inquiring whether the organization had in place internal compliance structures ostensibly designed to detect and discourage such conduct. I argue, however, that any internal compliance-based organizational liability regime is likely to fail because courts and agencies lack sufficient information about the effectiveness of such structures. As a result, an internal compliance-based liability system encourages the implementation of largely cosmetic internal compliance structures that reduce legal liability without reducing the incidence of organizational misconduct. Furthermore, a review of the empirical literature on the effectiveness of internal compliance structures suggests that many organizations have adopted precisely this cosmetic approach to internal compliance. This leads to two potential problems: first, an underdeterrence of organizational misconduct and, second, a proliferation of costly but ineffective internal compliance structures.
How should the law structure the responsibility of corporations for the crimes and intentional torts of their managers and other employees? This question has received too little attention despite its intrinsic importance. Under both criminal and civil law, a firm is directly and vicariously liable for wrongs committed by its agents (managers and other employees) within the scope of their employment. A firm's liability under this principle is very far reaching. For example, it extends to crimes committed by the firm's subordinate agents (including salesmen, clerical workers and truck drivers), even when these agents violate corporate policy or express instructions. Moreover, although culpable agents must generally intend to benefit the firm before it is liable, this requirement is easily met if there is any possibility that wrongdoing might increase corporate profits -- even if its net effect is to injure the firm, once expected corporate sanctions are considered.
The recognition of legal entities has been an important step in the development of many countries and has often gone hand in hand with their industrialization. Necessary investments for projects such as railways required states to allow private entities to act legally on their own and restrict liability to the money invested, in order to attract investors. Since the middle of the nineteenth century, when economic markets and the emergence of companies had gained momentum as a result of the industrial revolution, legal systems have dealt with the problem of how these entities, with companies being the most important ones, should be treated when its members infringe legal regulations. This question becomes particularly significant for society when members commit crimes.
The effect of such “corporate wrongdoing” can be tremendous. An early example is the collapse of the South Sea Company from 1719 to 1721 and the financial ruin left in its wake due to widespread insider trading and corruption. The accounting scandals within Enron and Worldcom in the US, the case of financial fraud within Parmalat in Italy, or the corruption cases within Siemens in Germany are vivid examples during the last decade of the scope and severe consequences corporate wrongdoing can have on direct stakeholders and the overall market. In a liberal society, and especially in a free market economy, the freedom of conducting business without state interference is a critical element of the system. Yet the mere scope of the aforementioned cases calls for an adequate response by society and its legal systems. This chapter takes a comparative view of existing national and international solutions to corporate criminal liability (1) from prevailing models (2) over new approaches (3) to new perspectives in regulation (4).
The evolution of corporate criminal law is explained by the shifting risks of liability and loss between corporations and their agents in accommodating the illogic of vicarious liability. A vivid example of the effects of this risk shifting is seen with the recent emergence of the good citizen corporation movement. This movement encourages prosecutors with vast discretion to leverage indictments and convictions of subordinate agents, resort to civil and administrative actions against large and medium-sized corporations in place of criminal indictments, compromise agent indemnification, and enforce corporate self-regulation through elaborate plea agreements. Not surprisingly, organizations tend to conceive of corporate compliance, no less corporate ethics, as matters of risk management that serve an impor-tant insurance function. Corporations that purchase only the amount of compliance nec-essary to effectively shift liability away from the firm encourage moral hazards. After risks are transferred, the firm's incentive to maintain high levels of care decreases. Crimes once imputed to the firm remain with "wayward" agents. Given equivocal evidence of compliance effectiveness, the rise of the good corporate citizenship movement risks undermining the objectives and spirit of the corporate criminal law.
This chapter describes the present situation concerning corporate criminal liability for acts of corruption in France, and especially the role of corporate anti-bribery rules within the French criminal system. It shows that although France does not now present a very welcoming prospect for the acknowledgment of the “doctrine” and correlative techniques of compliance within its criminal justice system, this does not entirely rule out the existence of possible relationships in the future. Although still rather limited and uncertain, it is possible to observe a tendency in France towards addressing corporate organizational failure more closely, and designing a more direct or autonomous system for corporate criminal liability. These could turn out to be first steps towards the positive acknowledgment of compliance programs. Parallel to this, another path could be taken, which consists of taking the avatars of corporate social responsibility (CSR) seriously, and using CSR as a tool against corporate practices that are inconsistent with it. Combined with the multiplication of incentives favoring compliance, these developments could also hasten their acknowledgment within the French criminal justice system.
Although considerable debate surrounds society's increasing reliance on criminal liability to regulate corporate conduct, few have questioned in depth the fundamental basis for imposing criminal liability on corporations. In this Article, Mr. Khanna explores the underlying rationale for corporate criminal liability and finds it problematic. After summarizing the historical development of corporate criminal liability and surveying the current legal landscape, the Article explores the justifications for such liability. Mr. Khanna argues that corporate civil liability can capture the desirable features of corporate criminal liability, especially criminal liability's powerful enforcement and information-gathering dimensions. Furthermore, he contends that corporate civil liability avoids the undesirable features of corporate criminal liability. Such undesirable features include criminal procedural protections and criminal sanctions' stigma effects. Mr. Khanna concludes that a modified form of corporate civil liability could make corporate criminal liability obsolete by capturing the advantages of corporate criminal liability while avoiding or mitigating its disadvantages.
Synopsis: Corporate exposure to criminal and civil penalties has grown in recent years. Many corporations have responded by strengthening their compliance programs to reduce the potential for violations, but these programs also present risks because they detect and reveal violations that would not otherwise be uncovered by the government. Many federal regulators have recognized this dilemma and adopted policies that reduce (or, in some cases, eliminate) penalties for corporations that adopt effective compliance programs. The Federal Energy Regulatory Commission (FERC) recently moved in this direction by articulating certain general factors on penalty mitigation for effective compliance programs. This article urges the FERC to go one step further and adopt a more formalized policy on penalty mitigation. Specifically, it suggests a policy under which the FERC would decline to impose a penalty for a nonserious violation if the corporation: (i) adopted reasonable preventive measures to deter misconduct, (ii) detected and reported the violation promptly, and (iii) took appropriate remedial action in response to the violation. As this article was being printed, the Commission adopted a formal policy on compliance programs that is, in many important respects, consistent with this recommendation.
Corporate criminal liability has grown rapidly over the last two decades both in the United States and overseas. Although the imposition of criminal liability on corporations, as opposed to managers or employees, has generated considerable debate, few have questioned in depth the fundamental basis for imposing criminal liability on corporations. After all, corporations cannot be imprisoned. Furthermore, it is not clear that corporate criminal liability is the best way to influence corporate behavior. This paper compares the costs and benefits of corporate criminal liability with the costs and benefits of other possible liability strategies, including various forms of corporate civil liability, managers' personal liability, third-party liability, and administrative sanctions, in an effort to determine the best strategy or mix of strategies for society. After summarizing the historical development of corporate criminal liability and surveying the current legal landscape, the paper examines the justifications for corporate criminal liability liability. The paper argues that corporate civil liability can obtain the desirable features of corporate criminal liability (e.g., criminal liability's powerful enforcement and information-gathering dimensions) while largely avoiding its undesirable features (e.g., criminal procedural protections and criminal sanctions' stigma effects). The paper concludes that a modified form of corporate civil liability could make corporate criminal liability obsolete by garnering the advantages of corporate criminal liability while avoiding or mitigating its disadvantages.
The concept of corporate criminal responsibility has long been accepted in common law jurisdictions and has more recently
spread to several other national criminal law systems. Germany is one of a few hold-outs limiting criminal responsibility
to natural persons, although financial sanctions can be imposed on a corporation when one of its officers has acted criminally
on behalf of the corporation. Corporate criminal responsibility can be based on transferring the corporate officer's responsibility
to the corporation, or alternatively, on finding fault with the legal person's internal organization. Neither approach is
completely convincing in theoretical terms. More importantly, introducing full corporate criminal responsibility requires
a re-definition of what constitutes a criminal act as well as the concept of criminal culpability. The author cautions against
taking this step too quickly because it might well change the specific nature of criminal law.
The proposed Restatement Third, Torts: General Principles takes the position that there is no general conception of strict liability, only special instances of such liability. This paper argues that there is indeed a general conception of strict liability, namely, enterprise liability, and that enterprise liability is a conception of responsibility for harm done equal to and competitive with the fault principle. Enterprise liability emerges early in the 1900's and expands in influence throughout most of the twentieth century. At the very moment when fault theorists like Ames and Jeremiah Smith were proclaiming the triumph of the fault principle in the common law of torts, enterprise liability burst full-blown on the legal landscape, with the enactment of the first Worker's Compensation Acts. These Acts, as Jeremiah Smith saw, were "founded largely upon a theory inconsistent with the common law of torts." That theory - the theory of enterprise liability - went on to spread throughout the tort law of accidents, reshaping preexisting forms of strict and vicarious liability and blossoming in the products liability regime inaugurated by Section 402A of the Second Restatement. Enterprise liability played an important role in tort accident law throughout the twentieth century, expanding the domain of strict liability relative to negligence and increasing the strictness with which certain doctrines (such as res ipsa loquitur) were interpreted. Even during the current renaissance of negligence liability, enterprise liability continues to exert a powerful subterranean influence on the way negligence doctrine is formulated in such disparate areas as medical malpractice, special relationships and duty. The proposed Restatement, Third's portrayal of strict liability as a set of isolated exceptions to a general regime of fault liability is thus untrue to the history and theory of the tort law of accidents as it has come down to us at the start of this century. More disturbingly, this slighting of enterprise liability and celebration of fault liability covertly contributes to its own realization. By writing enterprise liability out of our law and treating all instances of strict liability as special cases with particular histories and peculiar rationales, the proposed Restatement, Third fosters the triumph of negligence over strict liability, a triumph it purports merely to find.
Litigation against corporate defendants under the Alien Tort Statute is largely an effort to enlist multinational business interests in a laudable effort to reign in the human rights abuses of repressive regimes. The hard question is whether the costs of this now extensive litigation (and related litigation under state tort law) are worth the benefits. This essay offers number of reasons for skepticism in that regard, although I stipulate that the ultimate answer to this question turns on empirical judgments. Courts considering the difficult issues that arise in these cases should at least be mindful of the possibility that corporate liability may impose great costs on firms subject to suit in the United States while accomplishing little or nothing to improve human rights. And if the door to corporate liability is to remain open, careful attention to the standards for aiding and abetting liability, to the requirements for vicarious liability, and to the measure of damages can both cabin and calibrate corporate liability in ways that enhance its potential to afford constructive incentives.
This article examines the proposal that, in order to overcome the comparative law problem of diverse national positions in relation to corporate criminal liability, a scheme involving administrative or civil liability should be adopted if corporations are to be included in the jurisdiction of the International Criminal Court. It is argued that, despite the obvious practical appeal of such a solution, a criminal liability scheme should be preferred as perpetrators of international crimes – both natural and legal – should be subject to the full expressive and stigmatising capacities of the criminal law. However, recent international developments in corporate liability suggest a possible middle ground that may provide an acceptable solution to a majority of states.
Neither the academic literature nor the tort reform lobby has observed a deep irony in the American law of enterprise liability. The intellectual roots of enterprise liability lie in a late nineteenth-century movement to reengineer the workplace, a movement whose best known exponent was scientific manager Frederick Winslow Taylor. Along with a generation of managerial engineers, Taylor popularized broad ideas about managerial responsibility for the operations of enterprise - ideas that when loosed on the decentralized institutions of American tort law ultimately found one of their strongest expressions in the law of enterprise liability. Enterprise liability thus stands as one of the great twentieth-century examples of the unanticipated consequences of social action.
This report will provide a brief overview of the concept of corporate criminal liability in the Netherlands. Following a description
of the historic development of this concept, attention will be paid to the substantive law regarding corporate liability –
including the concept of secondary liability and defenses – and to specific rules for the trial and the punishment of legal
persons. Special attention will also be paid to the position in Dutch criminal law of the public law legal person, such as
the provinces. The report will be completed with a short evaluation of the concept of corporate criminal liability in the
Netherlands.
Contents
In general terms, German law recognizes corporate liability as a consequence of legal personality: contract and tort law provide
that corporations are liable for the wrongdoing of their representatives or employees, and special concepts of civil liability
(e.g., product liability) can result in the liability of corporations as well. A form of corporate liability can also be found
in German administrative law, for example, in provisions dealing with the protection of the environment. By contrast, the
German Penal Code does not provide for the imposition of criminal sanctions on corporations. In drafting the code in 1870,
the German legislator adhered to a notion of personal guilt that could not be applied to corporations; following the ancient
rule, societas delinquere non potest, it limited criminal liability to natural persons. However, according to § 30 (1) Regulatory Offenses Act an administrative
fine can be imposed on a corporation.
We live in an era defined by corporate greed and malfeasanceâone in which unprecedented accounting frauds and failures of compliance run rampant. In order to calm investor fears, revive perceptions of legitimacy in markets, and demonstrate the resolve of state and federal regulators, a host of reforms, high-profile investigations, and symbolic prosecutions have been conducted in response. But are they enough? In this timely work, William S. Laufer argues that even with recent legal reforms, corporate criminal law continues to be ineffective. As evidence, Laufer considers the failure of courts and legislatures to fashion liability rules that fairly attribute blame for organizations. He analyzes the games that corporations play to deflect criminal responsibility. And he also demonstrates how the exchange of cooperation for prosecutorial leniency and amnesty belies true law enforcement. But none of these factors, according to Laufer, trumps the fact that there is no single constituency or interest group that strongly and consistently advocates the importance and priority of corporate criminal liability. In the absence of a new standard of corporate liability, the power of regulators to keep corporate abuses in check will remain insufficient. A necessary corrective to our current climate of graft and greed, Corporate Bodies and Guilty Minds will be essential to policymakers and legal minds alike. â[This] timely work offers a dispassionate analysis of problems relating to corporate crime.ââHarvard Law Review
Corporate criminal liability is a relatively new development in American law, although it has been expanding rapidly. We argue that there is no need for corporate criminal liability in a legal system with appropriate civil remedies and that corporate criminal liability in practice produces serious problems of overdeterrence. Copyright 1996 by the University of Chicago.
The aim of this article is to compare strict liability and negligence rules on the basis of the incentives the provide to "appropriately" reduce accident losses. It will therefore be both convenient and clarifying to abstract from other issues in respect to which the rules could be evaluated. In particular, there will be no concern with the bearing of risk - for parties will be presumed risk neutral - nor with the size of "administrative costs" - for the legal system will be assumed to operate free of such costs - nor with distributional equity - for the welfare criterion will be taken to be the following aggregate: the benefits derived by parties from engaging activities less total accident losses less total accident prevention costs.
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