Jennifer Arlen on the Battle for Our Souls and Deterring Corporate Crime

Ask Chicago school economists, steeped in classical deterrence theory, about how to deter corporate crime and they will say – fine them. No need for criminal prosecution.

Jennifer Arlen
NYU School of Law

Ask NYU Law Professor Jennifer Arlen and she will say – corporate criminal prosecution is still needed.

“We were asked at a symposium on corporate crime to address – why not just use civil liability instead of corporate criminal liability?” Arlen told Corporate Crime Reporter in an interview last week. “And many people had different answers to that.  Most economists would say – you don’t need corporate criminal liability. You are just imposing a fine on the company and who cares whether the fine is criminal or civil.”

“I made the argument that you need criminal liability because we have a problem of capture. You are seeing that right now in the House of Representatives – they are pushing to reduce the enforcement intensity on corporations. You are seeing pushback on the Internal Revenue Service (IRS) and the Securities and Exchange Commission (SEC). 

“I went through the ways in which political actors – both the President and Congress – can impact the intensity of the enforcement. And it’s much easier for them to do so with civil enforcement than with criminal enforcement.”

“If you want enforcement against corporations, you need to make sure that prosecutors are involved, because they are less vulnerable to political pressure. I’m not saying they are invulnerable, but they are less vulnerable to Congress being able to knee cap them through budgetary intervention or other methods.”

Arlen is co-author, with Lewis Kornhauser, of a new paper titled – Battle for Our Souls:  A Psychological Justification for Corporate and Individual Liability for Organizational Misconduct.

How did Battle for Our Souls come about?

“Not in a linear way,” Arlen said. “I was invited to write a paper for a symposium in honor of Robert Cooter, who is on the faculty at Berkeley Law School. The article was on the question – can the law change preferences? And I knew it was a topic that NYU Law Professor Lewis Kornhauser had thought about a lot. Lewis was one of my dissertation advisors for my PhD. So I asked him to co-author the article with me.”

“We started fleshing out the arguments for that paper. In the middle of my thinking about it, he was pursuing one line of inquiry. And I suddenly started thinking – wait a second, how can the law change preferences when most people’s sense of norms and culture, or even understanding the law, comes through corporations?  The law is not the one pulling the lever. Corporations are.”

“We drafted a paper for the conference that had some of his ideas and this idea, and then we realized that we actually had two papers. 

We wrote a narrower paper just one – Does the Law Change Preferences? – for the conference. And then we decided to do a whole separate paper on the question – how do you deter corporate misconduct once you recognize that norms play a role in deterring misconduct and that the corporations influence almost every facet of decision-making bearing on the question of whether norms impact behavior?”

“I probably spent a whole semester reading experimental and empirical psychology and giving myself a mini-graduate course in psychology. It was a tremendous amount of fun.”

Did working on these two papers change your view on corporate crime and deterring corporate crime?

“Yes and no. It reaffirmed my long standing view that you just have to make sure crime doesn’t pay. The underlying message of the work on behavioral ethics is that as long as people stand to benefit personally, their whole psychology is structured to enable them to cross the line for personal benefit without noticing. Ethics has a hard time in that environment.” 

“We see this at work potentially in the Sam Bankman-Fried case. I can’t pre-judge whether he’s guilty or not because I do not know all of the facts. But if he did what people say he did, it’s pretty clear that part of what enabled people to cross the line, other than just raw greed, is that greed was serving a social purpose. They were very focused on how good everything they were doing was. And that can make you morally blind.”

“It has underlined for me the importance that when a criminal thinks of crossing the line, their second thought is – oh, is this really going to bite me?”

“It also made much more salient to me the importance of making sure there is a high probability of getting caught. I’ve always thought this. But this paper really got me to understand why. It’s made me much more conscious of the fact that that is one of the central weaknesses of our system.” 

“If you commit a white-collar crime, odds are you are going to get away with it. And that is a big problem. If you are thinking of doing something to save your job, or get a big bonus and the chances of being caught is remote enough that it won’t even be salient at the moment you cross the line, you are going to get quite a lot of crime.” 

“That is a central problem. Corporate misconduct is very unlikely to be detected. And it’s very hard to prosecute. And so a majority are not getting caught.”

“If you want to deter employee behavior, you need to put corporations on the side of making the illegal nature of the misconduct extremely salient,” Arlen says. 

“You make it so employees can’t ignore that it’s illegal. You don’t do training once a year. You do constant reminders that crossing the lines is not just illegal, but unethical, that it’s against our cultural norms. You constantly affirm that what the company cares about is being ethical. It’s a daily thing. If you think about crossing the line, you couldn’t escape noticing that it’s unethical. You make it so that it’s less profitable crossing the line. You don’t have everyone given bonuses for productivity no matter how they get the productivity. You might also give them bonuses for turning down a bribe.”

“It’s important that we do a lot to make sure corporations are trying to detect, self-report and cooperate. That matters. If we can’t detect the misconduct and punish it, we are not going to be able to deter it. Individual liability is a random lightning strike that almost never happens. We are just not going to deter that way. We have to get companies detecting and self-reporting.” 

“That means companies have to have a predictable large benefit for doing so. And the Department of Justice is moving in that direction. But it’s still not predictable enough.”

“Also, we have to make it more costly for corporations to not self-report. That means the government needs a better ability to detect even if they don’t self-report. To that end, we need to revise and improve our whistleblower programs.” 

“Right now, the SEC is getting a ton of whistleblower complaints, but it appears to be more than they can process. And only a tiny portion of their cases are resulting in awards. And I don’t think that is creating enough of an incentive for employees to blow the whistle. You need more employees coming forward. And you need more firms coming forward.”

Let’s take the 100 largest corporations in the United States. How many of them have the corporate culture you were explaining earlier that emphasizes not crossing the line?

“I would expect that most of them are sending very strong profit oriented messages.”

Only a small minority would reflect your ethics based model?

“Yes, but right now, we haven’t created a high enough probability of detection to make it so that companies are financially motivated to ensure that employees don’t do crime. An awful lot of misconduct from which companies profit is not detected or punished. We are not in a situation where a line manager would say – I see some misconduct over there. I can’t let that happen at any cost because it’s going to harm my bottom line.”

[For the complete q/a format Interview with Jennifer Arlen, see 37 Corporate Crime Reporter 3(11), January 16, 2023, print edition only.]

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