Jail the corporation

Yesterday or the day before there was an article on too big to jail. It was another case of a settlement where a corporation paid a fine but the Justice department (I believe) declined to pursue charges against specific people at the corporation in the case. The happiest interpretation of this is that amongst all the murk at the corporation there is insufficient evidence to get a conviction against some person or persons. There are unhappier interpretations.

This headed me off on an odd notion. Why not prosecute and jail the corporation? Not examining the idea seemed like a failure of imagination.

What is a corporation? Well, we know some characteristics about them. They exist in our society as entities. They can own property and assets and incur liabilities. They can sue and be sued. They exist in a physical sense though not in the form of a body. They are created. They die.* Sometimes they commit criminal acts.

What is jail? Conceptually jail is a taking out of society or a suspension of freedoms**. We basically say that for having done X we remove an individual from society or suspend the individual’s freedoms for a period of time commensurate with their action.

So why can’t we jail a corporation?
Maybe it’s the case that it would be too hard to prosecute. But would it be? When you look at prosecuting individuals inside the corporation, establishing beyond a reasonable doubt seems pretty hard. The CEO says hey, this happened way down below me by some bad apples and I didn’t know what was going on. The lower level folks say hey, we were directed to do this by our bosses. Unless there is some pretty good found evidence (and found is important) it is pretty hard to not have a reasonable doubt that it might be on somebody else. The corporation on the other hand doesn’t have this ability to blame shift. We are sure, beyond a reasonable doubt, that the crime happened by/at the entity that is the corporation.

Maybe you can’t sentence a corporation. This seems improbable. Judges make sentencing decisions all the time and incorporate a variety of factors. We define severity of crimes and mitigating factors.

Maybe you can’t jail a corporation. Really? Assume for a moment a conviction and a sentence of say a month. As of the date of starting to serve the sentence the corporation is removed from society. All communications external to the corporation are shut down both physically and with the threat of any corporate activities taking place on say personal equipment (or by any counterparties) being punished as aiding and abetting a fugitive. No business is done, no sales are made, no product ships, no materials are received, no trades are performed, no contracts are created or performed. Any activity to occur from inside the corporation is managed through a third entity (a jailor if you will) that decides if that activity can occur.

Damaging, Devastating, Destructive? Absolutely. Going to jail is all this things. Hurts innocent people? Absolutely. Jailing impacts a swath of dependent and interrelated parties. Different scale? Yep. But the scale of the crimes are different as well. Ultimately killing the corporation? That depends both on the type of corporation and the sentence. You could see circumstances where a day or a week or a month might be survivable. You could also see where the same durations might be fatal.

Unimaginable? Why? Because things would be different? This mostly changes the risk landscape and frankly we are pretty good at adapting to that. Parties already deal with the possibility that a counterparty may up and disappear. There are risk mitigations for that. Maybe terms of employment would change. It seems to me that most of the countervailing issues are solvable.

Some additional thoughts:
1) You’d seriously change the dynamics of who was going to ‘take one for the team’. It might be in the best interests of the corporation to help prove that certain individuals committed the crime. To get the corporation off the hook with a prosecutor involved how high do you go? Those individuals have now had their incentives to commit the original crimes altered.
2) Charges being filed and a trial would likely cause the market (depending on severity and probability) to lop value off the firm. It creates uncertainty about the firm. That does several things. Your shareholders are not going to be happy. Management’s compensation as reflected in shares is going to take a hit. This seems like it would change the incentive structure for engaging in activities where you count on paying a fine as being the worst outcome and on finding activities in the firm that may be criminal.
3) Corporations on the one hand are able to act like a super individual doing things and acting in ways that normal individuals can’t. (Look at the resources they can bring to bear when someone infringes on their property) When it comes to culpability though they are able to act as non individuals and non entities. Whether the jailing the corporation is a good solution or not, this is a problem space worthy of attention.

* I’m certain there are more characteristics I should be mentioning. My strong temptation at this point was to call them artificial entities and I think there is an interesting parallel to other artificial entities like artificial intelligence.
** At a surface level those associated with an individual’s physical condition, though this only scratches the surface of the ultimate effects beyond the physical on the individual.

1 comment
  1. Chris said:

    Dude, that’s genius… Can’t insure against it. Means that “One or all of us” is going down.

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