A New Era for Corporate Ethics, Reform and Responsibility?
The Final Report by the Advisory Group on the Sentencing Guidelines for Corporations and Other Organizations

By MARK H. ALLENBAUGH

Thursday, Oct. 09, 2003

This past Tuesday, October 7, in New York, the first in a string of high-profile white-collar criminal cases arising from the recent spate of corporate scandals began. The defendants - L. Dennis Kozlowski, the former CEO of Tyco, and Mark Swartz, the company's ex-CFO - are accused of stealing upwards of $600 million from Tyco and its shareholders.

That same day, the ad hoc Advisory Group on Organizational Sentencing - comprised of some of this nation's leading experts on corporate crime - released its final report to the U.S. Sentencing Commission. The report suggested several changes that could enhance the ability of organizations, including corporations, to promulgate more effective internal programs "to prevent and detect violations of law."

In this column, I will explain the Advisory Group's suggestions, and argue that they should be adopted by the Commission and put into practice by the private sector. If this is done, I believe this reform could herald a new era for corporate ethics, reform and responsibility - an era where corporate scandals are the rare exception, not increasingly the rule.

How Can Corporations Be Punished? The Issue of Organizational Sentencing

In 1984, Congress created the U.S. Sentencing Commission and directed it to promulgate federal Sentencing Guidelines, which federal judges now must follow when imposing sentences on individual offenders.

But what does a judge do if the offender happens to be a legal fiction - that is, a corporation? In 1987, when the Guidelines initially were issued, the Commission deferred answering that question pending further study.

The question of how to punish corporations, and deter future corporate misdeeds was a thorny one: As the oft-quoted Eighteenth Century British jurist Edward, First Baron Thurlow quipped, "Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked?"

As it turns out, corporations do have consciences, or as it is more popularly put, cultures. As the recent scandals attest, some corporate cultures breed unethical behavior among the individuals who make up the organization; in contrast, other corporate cultures include ethical rules that stop wrongdoing before it starts. So the question the Commission considered was how best to address the phenomenon of corrupt corporate cultures through the vehicle of sentencing.

Pairing a Stick with a Carrot When It Comes to Corporate Sentencing

One way to do so, of course, is to impose stiff fines - and the Sentencing Commission did so. But it recognized it would have to do more, as well. Although such fines potentially could have a deterrent effect, many believed that such penalties only would be absorbed as costs of doing business - and thereby ultimately have little effect on changing the corporate culture.

After convening an ad hoc advisory group in the early 1990s, the Commission thus decided to pair the "stick" of fines with a carrot. If organizations would implement suitable internal auditing or legal compliance programs to police themselves - thus preventing crime - the Commission decided it would give them a break on their fines, even if they were convicted.

At first glance, this may sound a bit strange - as if the Commission were promising individual offenders who go into rehab that they will get a break on drug sentences when they relapse later. But an understanding of corporate liability shows that it makes sense. Because the actions of individuals within a corporation can be imputed (through agency doctrines) to the corporation itself, it is true that "one bad apple can spoil the barrel."

Or, to put it more precisely and less metaphorically, a good corporation with one bad officer can find itself being criminally prosecuted for that officer's misdeeds in his role as agent. The Sentencing Guidelines give corporations an incentive to be good corporations - so that if crimes are committed, the perpetrators will not be the typical inside-the-culture employee, but the atypical outside-the-culture rogue.

On November 1, 1991, the Sentencing Guidelines for Organizations finally were promulgated. Since that time, their influence and impact on corporate culture and business law has been enormous. Indeed, failure to implement a compliance program may be considered a breach of a director's fiduciary duty to the corporation - and thus may subject the director to liability.

Admirably, the Commission did not rest on its laurels. Instead, in February 2002, the Commission presciently decided - especially in light of Sarbanes-Oxley, as I discussed in a prior column - to convene another ad hoc advisory group.

The group's mission was to study the effectiveness of the organizational guidelines (particularly the criteria for when a compliance program should result in a fine reduction); review commentary from the public on them; and suggest changes where necessary.

That is the group that - after 18 months of study and analysis - reported back to the Commission this month with suggestions for reform of the sentencing guidelines for corporations.

The Advisory Group's Recent Suggestions Regarding Corporate Sentencing

The Advisory Group has suggested ten major changes, which I will briefly discuss.

Some of the changes seem geared to preventing another Enron from occurring. For instance, the Advisory Group recommends that the Guidelines should specifically emphasize the importance of an organizational culture that encourages a commitment to compliance with the law - as opposed to, say the devil-may-care atmosphere that seems to have pervaded Enron.

The Advisory Group also recommends that the Guidelines spell out what compliance responsibilities fall to an organization's governing authority and organizational leadership. This is a smart suggestion that ought to help avoid buck-passing and burying-of-heads-in-the-sand on the part of corporate leadership.

In addition, the Group recommends that the Guidelines emphasize the importance of adequate resources and authority for those individuals within organizations response for implementation of the compliance program. That's smart too; it makes sure the compliance office isn't a mere mask for a culture of wrongdoing, and instead has real power within the company.

The Group also recommends certain terminology changes geared to add specificity and enforceability. It suggests a specific definition of "compliance standards and procedures." It recommends replacing vaguer language with specifics as to what exactly an organization has done to determine if a individual has a reason to know of, or history of engaging in, violations of law.

The Group also recommends that, within the definition of an "effective program," the Guidelines should cover requirements for training and for the dissemination of training materials and information. Similarly, it recommends including the phrase "seek guidance about potential or actual violations of law" within the criteria for an effective program. (The idea - and it's a good one - is to more specifically encourage prevention and deterrence of violations of law as part of compliance programs.)

Finally, the Group had some excellent suggestions to help make sure compliance programs really work. One is for the Guidelines to add "periodic evaluation of the effectiveness of a program" to the requirement for monitoring and auditing systems. Another is to require a mechanism for anonymous reporting. (That is a terrific idea, since employees reasonably may fear consequences when they turn their employers in, despite the fact that such consequences would be illegal.) Yet another suggestion by the Group that is both simple and insightful, is that the Guidelines should require that an "effective program" include ongoing risk assessments.

These principles, if adopted by the Commission, will go far toward improving the Guidelines' already successful enterprise of encouraging organizations not just to comply with the law, but become good corporate citizens. As corporate cultures continue to change, the ideal of the organizational sentencing guidelines--to prevent corporate crime in the first place--will be better realized.


Mark H. Allenbaugh is an attorney in private practice in Washington, D.C., and an adjunct professor at the George Washington University where he teaches Ethics in Business and the Professions. Prior to entering private practice, he served as a Staff Attorney for the United States Sentencing Commission. He has published numerous articles on sentencing and criminal justice, and is a co-editor of Sentencing, Sanctions, and Corrections: State and Federal Law, Policy, and Practice (2d ed., Foundation Press, 2002). The views expressed herein are his own. He can be reached at AllenbaughLaw@aol.com.

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