Cost Benefit Analysis and Prosecuting Executives
So… The Economist is saying that lawyers won’t prosecute corporate crime if it will reduce share price: here.
Our rule: if a criminal prosecution is likely to hurt a company’s share price, then don’t prosecute.
The idea is based on the absence of prosecution of Steve Jobs in the recent options back-dating scandal. Other people involved in the scandal were harshly prosecuted, but Jobs, being iconic and popular was kept safe. Someone less popular, like Conrad Black for example, is fine to prosecute.
Law Professor Larry Ribstein originally called a similar phenomenon the Apple Rule on his blog.
The Apple Rule provides for an exception from corporate criminal liability when a popular business executive is accused of, or presides over a company that is accused of, misconduct. "Popular" is defined as "liked by journalists." In the event of allegations of criminal misconduct touching a "popular" business executive, said executive or his company may avoid trouble by aiming the investigation toward an underling.
What happened to everyone being equal under the law? Is it naive to talk about that at this point? I admire Steve Jobs so I am saddened by this whole thing… but not so much that he should be shielded from the consequences that the rest of us have to live with.
While I don’t endorse the rule proposed by the Economist, in all fairness it’s a little more nuanced than suggested. The proposed rule is fundamentally about victims rights. The quote, in its context, is as follows:
“…rule to guide prosecutors… where the main supposed victim is a company’s shareholders. Our rule: if a criminal prosecution is likely to hurt a company’s share price, then don’t prosecute.”
The proposed rule is intended to protect the victim, and if the criminal gets off as a result, so be it. The focus is on what’s best for the victim.
Do I agree with this approach? I don’t think so. First, the victim is only “supposed.” It’s not like an assault case where the victim is clearly identified. Second, shareholders are owners of the company and ultimately responsible for the executives of the company and as such, should bear any financial burden of executive malfeasance. And finally, if this rule is a good rule, legislatures should enact it as a rule instead of allowing prosecutors to do an end-run around the Rule of Law.
The point of criminal law is to protect the public at large and not just individual victims. Criminal penalties are concerned mainly with deterrence rather than compensation for loss. The justification for prosecuting executive dishonesty is that this type of conduct undermines public confidence in the public companies as a whole. In theory, a criminal penalty against a dishonest executive protects every investor in every other company by deterring their exeuctives from similar misconduct.
If you do not agree that deterrence is a major factor in prosecutions of executives and are mainly concerned with protection of victims, then the appropriate mechanism is civil law rather than criminal law. Cost-benefit analysis is a perfectly appropriate consideration in a civil action.
It is one of the myths that everyone likes to believe–it makes us feel good. Its not true and should be brought to everyone’s attention when it shown, as you have. But no one should get real hysterical.
~Becky
You’ve asked a huge question here. I think most of the problems being faced by companies in the US are caused by the lack of a concept of “True and Fair” that exists elsewhere – meaning creative accounting can extend far further than it should
I’ve just discovered your blog btw – excellent… I’ll be back