Why ‘Throwing the Bums in Jail’ Won’t Solve Corporate America’s Problems
Don Blankenship, the former CEO of Massey Energy, was recently convicted of conspiring to violate federal safety standards. Blankenship’s actions are believed to have created the conditions that led to the explosion that killed 29 people at the Upper Big Branch coal mine in April 2010. In a verdict widely viewed as a disappointment to prosecutors, the “Dark Lord of Coal Country” was exonerated on three more serious felony charges. Convicted on all charges, Blankenship would have faced up to 31 years in prison. As it stands, his current conviction has a maximum sentence of one year in prison. His attorneys have already stated their intention to appeal.
However, the fact that Blankenship faced criminal charges at all was surprising. Blankenship was the first top executive in the coal industry to be criminally charged with violating safety regulations. Moreover, Blankenship was widely believed to be ‘untouchable’ in the state of West Virginia, having successfully intervened in multiple legislative and judicial campaigns to protect his business interests. Upper Big Branch was referred to as an ‘outlaw coal mine’, racking up more than 500 safety violations and nearly $1 million in fines in 2009 alone. Yet, the explosion represented a tipping point of sorts. The incident and resulting fallout represented the end of Blankenship’s virtual stranglehold on power in the Appalachians. He resigned as CEO of Massey in December 2010 (and received a $12 million retirement package). Alpha Natural Resources bought Massey in 2011, and subsequently paid $209 million in criminal penalties to settle with the Department of Justice.
The prosecution and conviction of Don Blankenship raises interesting questions about the practice of charging corporate officers with criminal violations. These questions have taken on a greater importance in light of the Department of Justice (DOJ) memo, released in September 2015, which promised a new emphasis on holding individuals criminally responsible for the actions taken in their role as corporate officers. Sally Yates, the deputy attorney general and author of the memo, was quoted as saying:
“It’s only fair that the people who are responsible for committing those crimes be held accountable. The public needs to have confidence that there is one system of justice and it applies equally regardless of whether that crime occurs on a street corner or in a boardroom.”
The memo was at least partially motivated by the harsh criticism of the Obama Administration for its failure to seek individual criminal prosecutions of business leaders involved in the financial crisis. In his 2014 book, The Divide, investigative reporter Matt Taibbi, who famously referred to Goldman Sachs as a ‘vampire squid,’ condemned a criminal justice system highly adept at prosecuting low-income minorities for offenses such as jaywalking and loitering, but incapable of prosecuting individuals responsible for the greatest financial crisis since the Great Depression.
Taibbi’s argument resonated with many Americans who instinctively perceive that there is something wrong with our justice system. Scholars have traced the evolution in Americans’ attitudes on the harm caused by white-collar crime. In the 1970s most Americans appeared to be relatively apathetic about harms posed by actions of corporate malfeasance; however, attitudes began to shift in the 1980s for several reasons related to declining trust in both public and private institutions as well as the growth of investigative reporting, which catalogued big businesses’’ offenses against individuals and the environment. By the 2000s, these trends hardened and now included distrust of corporate leaders. There is no longer a belief that business leaders, unlike common street criminals, are ‘like us’, rather corporate officers are perceived to be acting with an almost depraved indifference to the welfare of their communities. These are ‘bad people’ and they deserve to go to prison for their offenses.
Finally, convicting corporate officers and sentencing them to prison time sends a powerful message about the ‘wrongness’ of their actions. As scholars note, punishment can also have an expressive function — it is a language that communicates what and who we value as a society. By depriving corporate officers of their liberty for their bad acts, the government clearly stands on the side of the victims and makes it clear that this behavior will not be tolerated. Sending people to prison is a qualitatively different punishment than imposing a fine, which can send the message that such behavior is acceptable, as long as the organization is willing to pay the penalty.
Yet everyone acknowledges that there are real challenges in seeking criminal prosecutions of individuals. A cautionary tale involves the cases of Ralph Cioffi and Matthew Tannin, the Bear Sterns hedge fund managers accused of lying to investors about the funds they managed — whose actions led to their clients losing $1.6 billion when the funds collapsed. In November 2009, after a three-week trial, jurors found that Tannin and Cioffi were not guilty of conspiracy, securities and wire fraud. While it was clear that they had made bad investments, the jurors did not find beyond a reasonable doubt that the duo had attempted to defraud their clients. In 2012, Cioffi and Tannin settled a civil case brought by the Securities and Exchange Commission (SEC) for what the presiding US District judge, Judge Frederic Block referred to as ‘chump change’.
But, notwithstanding these difficulties, shouldn’t we try to throw as many of these bums in jail as possible?
Well, that depends.
The element of the DOJ memo that attracted the most attention was the stipulation that in order to qualify for any ‘cooperation credit’, corporations must provide all relevant facts related to the individuals responsible for the misconduct. This raises concerns about attorney-client privilege (for example, if an individual sought counsel from a corporate attorney, would that attorney be required to disclose this information to the government?) In addition, commentators have noted that it could have a ‘chilling effect’ on corporate self-reporting of wrongdoing. If senior leaders fear criminal charges, there will be a heightened incentive for leaders to mislead investigators and cover up wrongdoing when, and if, it is discovered.
There is also the concern that lower-level individuals will become ‘scapegoats’ for the actions of their superiors. It is typically the senior level employees of an organization who are negotiating with the Department of Justice and it is certainly possible that they will construct a narrative and documentation to place the blame on others rather than on themselves.
But, in general, I think that the danger is more subtle. The punishment of individuals tends to eliminate ambiguity and provides an easily understood narrative; the harm was the result of a ‘bad apple’, and once the corrupt element is removed, the harm will cease. But this is far too simple and offers a false sense of security. In some business ethics scandals it is easy to identify clear villains; but in many cases searching for the individual ‘bad apple’ obscures the structural problems within an organization or an industry.
An illuminating example is the ‘rogue trader’ — such as Nick Leeson, the trader who famously broke Barings Bank with his losses. These traders were often superstars until their trades went south and their losses mounted. The appellation ‘rogue’ and the attendant approbation are assigned based on the consequences of their actions (i.e. the trades lost money) rather than on the actions themselves. Moreover, the terms ‘rogue’ is also problematic insofar as it implies that the trader acted outside of the norms and expectations of the organization. But the rogue traders’ actions, driven by an aggressive form of entrepreneurial risk taking particularly prized on Wall Street, are usually very much in alignment with the tacit expectations and norms in an industry in which both profits and reputations are made by pushing the boundary of acceptable risk taking. They only thing particularly ‘roguish’ about them is that they were losing a lot of money. By demonizing the trader, the organization is able to restore its credibility as a ‘good actor’ who was also the victim of this bad apple. However, in order to prevent rogue traders and the harm they cause, we need to look at the culture of the organization.
Clearly the need to look at the organization does not entail that we should not aggressively pursue individual wrongdoers. However, there is a final challenge and this is found in the wide body of work (a field known as behavioral ethics) that explores how generally ethical people can be corrupted through poor organizational culture. This research tends to support the view that actually many of the people involved in corporate malfeasance are, disconcertingly, ‘just like us’. If this were the case, then it would tend to mitigate at least the moral culpability of the individuals involved.
However, this does not mean that a focus on individuals is not appropriate. What it does mean is that attention should be focused not only on the individuals who committed the offensive actions, but also (and perhaps even more so) on the individuals who created the organizational culture that allowed these actions to take place. Too often senior leaders set unrealistic expectations and impose incredible pressure on people to meet them, and yet express a self-righteous shock when confronted with the means used to achieve them. The German philosopher Immanuel Kant famously wrote, “if you will the end, you will the means”; I would add that if you will the end, you are also responsible (at least in part) for the means.
So long as a focus on individual offenders does not obscure a serious look at organizational and industry-level dysfunction, and so long as the right people are the target, then this new emphasis of the DOJ is a welcome development. With any luck, the prisons will welcome a new influx of ‘elite bums’ to join Mr. Blankenship.
Julie Ragatz is the Director of the Cary M. Maguire Center for Ethics in Financial Services. Please see http://ethics.theamericancollege.edu/
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