Although the wisdom of these policies may be debated, a more pertinent question is why corporations comply with such demands. The answer is that they have no choice. Under federal law, a corporation is criminally liable for the actions employees take within the scope of their employment. It makes no difference whether the employees are acting in contravention of corporate policy, whether they have been specifically instructed not to act as they did, or whether the corporation did everything humanly possible to prevent the criminal activity. When an employee violates the law, the corporation is guilty as well.

Because corporations whose employees break the law have no defense, they can protect themselves only by convincing the Justice Department not to indict them. Yet, this often means knuckling under to the department’s demands. Thus, the legal standard for corporate criminal liability essentially conscripts corporations into becoming deputy prosecutors.

Guilt by Association
Rather than criticizing the Justice Department for using the tools the law puts into its hands, perhaps we should ask why we punish corporations in the first place. It cannot be for purposes of retribution: A corporation cannot be imprisoned, only fined. Corporate fines are ultimately paid by the corporation’s shareholders. But the defining characteristic of the modern publicly traded corporation is the separation of ownership and control. Shareholders do not control the actions of corporate employees. So, imposing criminal punishment on a corporation, rather than on the employees who committed the offense, is punishing the innocent.

As the citizens of most tyrannical regimes can tell you, great deterrent value lies in threatening to punish the innocent. There is no doubt we could reduce the amount of crime committed by teenagers by threatening to punish their parents for their offenses, a tactic that some Americans advocate today. Threatening to punish not only a firm’s shareholders, but all of its employees (whether guilty of wrongdoing or not) may reduce the incidence of employee lawbreaking. But in our system of criminal justice, deterrence is supposed to come from punishing the guilty, not the innocent.

Most people love the abstract idea of punishing greedy, impersonal corporations. The legal travails of fallen Enron executives unfold like morality plays on the evening news, validating their suspicions of powerful corporate cadres. They might feel differently, however, if they reflected on the fact that corporate entities cannot be punished. Only people can be punished. The question before us is never what, but always who, to punish.

While most Americans agree that the guilty deserve punishment, surely we also agree that those who not only did not violate the law themselves, but did everything in their power to prevent the lawbreaking, do not. Yet this is precisely what we do when we authorize the punishment of entire corporations for the actions of individual employees. This may or may not be effective, but it is certainly inconsistent with the principles of a free society.

If we must prosecute corporations, we should at least require corporate wrongdoing for corporate punishment. For a corporation to be guilty of an offense, we could require that that corporation encouraged, or at least failed to discourage, its employees’ criminal behavior. Ethical corporations would then have a defense when charged with a crime. Such corporations could decide whether to help the Justice Department prosecute its employees on the basis of objective criteria rather than on fear of an indictment, against which, if its employees have misbehaved, there is no defense.

In the current political climate, a proposal to relax the standard of corporate criminal liability is a radical one. But it says something about the anticorporate nature of the contemporary zeitgeist that a proposal to allow corporations to defend themselves by showing that they did everything they could to prevent their employees from breaking the law could be regarded as radical.

John Hasnas teaches ethics and law at Georgetown University and is the author of Trapped: When Acting Ethically Is Against the Law.