Corporations, like humans, can be indicted for crimes, tried, and convicted. Punishment, however, is a different matter. Having, in the words of an 18th century commentator, “neither bodies to kick nor souls to damn,” corporate miscreants cannot be jailed or subjected to corporal punishment. They can be “executed,” in the sense of being driven out of business, but corporate deaths can do great harm to society. In extreme cases, forcing corporations out of business can undermine the health and welfare of entire communities and even threaten national security. Fines can be used to punish corporate misconduct, but there are practical limitations to their utility: if they are too light they may fail to deter wrongdoing, while draconian fines risk crippling or bankrupting organizations that, notwithstanding their misconduct, are valuable societal assets. Globalization has made these issues of corporate punishment even more complex and problematic. The international economic crisis that began in late 2008 has made all issues relating to corporate oversight more urgent.
The difficulty of applying to organizations sanctions originally designed for natural persons highlights the need for alternative ways of dealing with corporate misconduct – especially methods that focus more on reform and prevention than on punishment. An increasingly popular alternative involves the imposition of independent monitors to oversee organizational compliance with agreements to resolve allegations of corporate misconduct. Properly employed, such monitoring can be a cost-effective means of reforming, rather than destroying, corrupt organizations. It can leverage the ability of governments or other oversight agencies to regulate corporate behavior in the public interest without requiring large increases in public spending or politically unrealistic expansions of enforcement agencies. Corporations and their stakeholders can benefit by avoiding or mitigating the potentially ruinous consequences of criminal prosecutions, debarments, and other kinds of sanctions.
Government-imposed monitoring can, however, be abused. Currently, there is no coherent body of internationally recognized standards governing such basic issues as when monitors are appropriate, how they are to be selected and compensated, the scope of their authority, to whom they should be accountable, how grievances against them should be handled, and when the monitoring should end. In the absence of standards, the selection of monitors can degenerate into a patronage system, the cost become exorbitant, and the monitors become prone to exercising powers going far beyond the scope of the problem that led to their appointment. Organizations that fear an indictment equals a death sentence may submit to arbitrary, unfair, and imprudent actions — not to mention astronomical bills — rather than risk alienating a monitor who may be under few practical restraints and whose selection may have been influenced by a prosecutor or other official in a position to impose harsh sanctions against the organization.
Some standards, and the administrative models needed to implement them, are emerging. In the United States, for example, monitoring has become increasingly common as a means of ensuring that organizational misconduct, once proved, does not recur. In a March 2008 memorandum, the U.S. Department of Justice articulated principles to guide the selection of independent corporate monitors in the context of deferred prosecution and non-prosecution agreements.2 Monitoring can be used in a variety of other contexts, such as to allow companies found to have engaged in fraudulent or corrupt practices to avoid or be released from debarment sanctions. The World Bank, for example, provides for the imposition of independent monitors in such cases as a condition of being eligible to do business with the Bank.3
The increased use of corporate monitoring in the fight against corruption is welcome, but it must be accompanied by the evolution of standards governing the monitors themselves. Although the merits of specific proposals can and will be debated, some authoritative standards are urgently needed for several reasons. First, fair and generally recognized standards will help monitoring fulfill its potential as a major contributor to corporate rehabilitation and reform. Second, establishing standards for government-imposed monitoring will have an inevitable spillover effect on the equally if not more important realm of voluntary corporate compliance. Third, the increasing use of monitoring as a remedy for corporate misconduct in the United States occurs at a time when corruption and various kinds of criminal behavior by multinational entities are receiving more attention throughout the world than ever before. The United Nations, the Organization for Economic Cooperation and Development (OECD), and other international and regional organizations have within the past decade made unprecedented progress toward establishing standards of conduct applicable to practices such as the payment of bribes to foreign officials to gain business advantages. Much work needs to be done, but there has never been a better time – or a greater need – to identify workable solutions to the problem of corporate misconduct and to encourage their development internationally.
Monitoring standards should address, among other things, the following:
- Role of Monitor: Effective monitoring requires a balancing act akin to keeping one foot in a canoe and the other on a dock: the monitor must forge a constructive working relationship with the monitored organization yet maintain the independence needed to be credible with relevant government agencies and the public. The monitor cannot simply be a tough cop and certainly cannot become the organization’s advocate or representative. Well-constructed standards are needed to provide guideposts for monitors and help them keep the delicate balance required in this role.
- Selecting Monitors: A neutral, rational system is required to avoid the reality or appearance of cronyism, patronage, and self-dealing in the selection of monitors. The selection process should focus on the background, experience, and temperament needed to be an effective monitor, which cannot be reduced to a simple formula. Experience in law enforcement, litigation, auditing, and other relevant fields may be desirable, but even highly skilled practitioners in these professions may not be suitable for the unique role of monitor. Many lawyers, for example, may be unable to transcend the role of advocate, which is inconsistent with that of an independent monitor.
- Compensating Monitors: Even though independent monitors are typically paid by the organizations they monitor, they are intended to serve a public purpose. Compensation should reflect this. Monitoring assignments cannot be perceived as lucrative windfalls for elite insiders. While compensation standards should not be so low as to impede the recruitment of qualified persons, neither should they reflect the highest commercial rates for legal, accounting, and related services. Properly set compensation standards will attract well qualified persons and entities motivated at least in part by the prospect of performing a valuable public service.
- Monitoring the Monitors: Both the monitored organization and the relevant public agencies should have meaningful recourse against abusive or incompetent monitors, with appropriate procedures that ensure fairness without unduly restricting the monitor’s ability to function effectively. A neutral authority – a court would be one option – should be designated for this purpose to avoid the potential for abuse inherent in the current system under which an organization’s only recourse may be to the prosecutor responsible for the charges against it.
- Training: Being an independent monitor is a unique role that has become widespread only recently and is still evolving. Preparing lawyers and others to fill this role has not been part of traditional undergraduate and graduate curricula, and monitoring skills do not flow naturally from subjects that are routinely taught, such as advocacy in litigation. Training in the requirements of this role should be incorporated into a new set of standards. For monitoring to achieve maximum effectiveness, it is important that its theory and practice be understood not only by the monitors themselves, but also by the agencies or courts that will oversee them and the organizations being monitored.
- Ending the Monitoring: One of the most important issues in any system of monitoring is deciding when it should end. Standards should be flexible enough to accommodate the widely varying situations that can lead to monitoring, but in nearly all cases an important test will be whether the organization’s internal controls or self-policing mechanisms can provide a satisfactory level of confidence that the misconduct in question will not be repeated. Determining the adequacy of such mechanisms is a process that will require its own set of standards.
- Role of Monitor: Effective monitoring requires a balancing act akin to keeping one foot in a canoe and the other on a dock: the monitor must forge a constructive working relationship with the monitored organization yet maintain the independence needed to be credible with relevant government agencies and the public. The monitor cannot simply be a tough cop and certainly cannot become the organization’s advocate or representative. Well-constructed standards are needed to provide guideposts for monitors and help them keep the delicate balance required in this role.
- Selecting Monitors: A neutral, rational system is required to avoid the reality or appearance of cronyism, patronage, and self-dealing in the selection of monitors. The selection process should focus on the background, experience, and temperament needed to be an effective monitor, which cannot be reduced to a simple formula. Experience in law enforcement, litigation, auditing, and other relevant fields may be desirable, but even highly skilled practitioners in these professions may not be suitable for the unique role of monitor. Many lawyers, for example, may be unable to transcend the role of advocate, which is inconsistent with that of an independent monitor.
- Compensating Monitors: Even though independent monitors are typically paid by the organizations they monitor, they are intended to serve a public purpose. Compensation should reflect this. Monitoring assignments cannot be perceived as lucrative windfalls for elite insiders. While compensation standards should not be so low as to impede the recruitment of qualified persons, neither should they reflect the highest commercial rates for legal, accounting, and related services. Properly set compensation standards will attract well qualified persons and entities motivated at least in part by the prospect of performing a valuable public service.
- Monitoring the Monitors: Both the monitored organization and the relevant public agencies should have meaningful recourse against abusive or incompetent monitors, with appropriate procedures that ensure fairness without unduly restricting the monitor’s ability to function effectively. A neutral authority – a court would be one option – should be designated for this purpose to avoid the potential for abuse inherent in the current system under which an organization’s only recourse may be to the prosecutor responsible for the charges against it.
- Training: Being an independent monitor is a unique role that has become widespread only recently and is still evolving. Preparing lawyers and others to fill this role has not been part of traditional undergraduate and graduate curricula, and monitoring skills do not flow naturally from subjects that are routinely taught, such as advocacy in litigation. Training in the requirements of this role should be incorporated into a new set of standards. For monitoring to achieve maximum effectiveness, it is important that its theory and practice be understood not only by the monitors themselves, but also by the agencies or courts that will oversee them and the organizations being monitored.
- Ending the Monitoring: One of the most important issues in any system of monitoring is deciding when it should end. Standards should be flexible enough to accommodate the widely varying situations that can lead to monitoring, but in nearly all cases an important test will be whether the organization’s internal controls or self-policing mechanisms can provide a satisfactory level of confidence that the misconduct in question will not be repeated. Determining the adequacy of such mechanisms is a process that will require its own set of standards.
Traditional methods of dealing with corporate misconduct have always been fraught with problems and are rooted in legal and economic models that are fast becoming outmoded. New methods are developing in practice at a rapid pace–which may accelerate under current economic conditions–but there has not been a commensurate development in their theoretical and legal underpinnings. It is time for the theory to begin catching up. Setting standards for government-imposed monitoring is a good place to start.
2Memorandum from Craig S. Morford, Acting Deputy Attorney General, to Heads of Department Components, United States Attorneys (March 8, 2008) (“Morford Memorandum”). The Morford Memorandum was supplemented by a May 25, 2010 memorandum from Acting Deputy Attorney General Gary G. Grindler. The full texts of both memoranda are available on the U.S. Department of Justice website.
3See World Bank Sanctions Procedures, Section 9.03 (Jan. 1, 2011) available on World Bank website.