Is it time for a corporate 'death penalty'? Some strategies to counter moral bankruptcy in corporations

 Meredith Edelman, legal academic and lecturer at Monash University argues for a ‘moral bankruptcy’ proceeding to respond to corporate wrongdoing.  This proceeding would make two remedies available: equity stripping and a corporate death penalty.  Her post explains why these remedies may be an effective means to combat corporate wrongdoing. 

Moral bankruptcy proceedings with equity stripping and a corporate death penalty as potential remedies for grave harm, would be a means to secure greater corporate accountability.  Original photo by  Melinda Gimpel  on  Unsplash

Moral bankruptcy proceedings with equity stripping and a corporate death penalty as potential remedies for grave harm, would be a means to secure greater corporate accountability.

Original photo by Melinda Gimpel on Unsplash

 In a globalized world where corporate activity is linked to climate change, harms to human health, economic repression, and a range of other harms, calls for corporate accountability are urgent.  The conundrum of how to balance accountability between corporations and the individuals who work for them, benefit from their profits, and make decisions on their behalf echoes complaints heard for centuries.  

But corporate accountability is not just about finding individuals to punish.  As corporations are granted legal personality (meaning that they are given the capacity to act and be treated as a ‘person’ under law), they must face justice for the wrongs they commit.  But, whereas people who commit crimes can be subject to physical and social forms of punishment, imprisonment, corporal punishment, social isolation, and the disapproval of loved ones, these are not effective punishments for corporations.  

John Coffee’s 1981 article, ‘"No Soul to Damn: No Body to Kick": An Unscandalized Inquiry into the Problem of Corporate Punishment,’ argues for the adoption of similar remedies to the two discussed here, drew its title from a quotation famously attributed to eighteenth century Lord Chancellor of England, Edward Thurlow, 1st Baron Thurlow.   The central problem Coffee and Thurlow identified is that, while corporations are granted  many rights that humans have in our legal system—the right to own property, the right to enter into contracts,—they are legal fictions, and cannot be subject to the moral authority of the State or the people the State is meant to represent as are human beings.  Without the power of the state to imprison, or the threat of an angry deity’s punishment of an immortal soul, corporations have the rights granted individuals, but few of the responsibilities.  

Corporations are made up of individuals—shareholders who have the right to elect directors, directors who set corporate agendas and hire management, management who make day-to-day decisions, and employees who implement the decisions.  For companies to act responsibly, directors need to feel a sense of moral obligation to all corporate stakeholders and the wider community in which it operates that extends beyond the capacity of law to enforce specified duties that they owe to the company itself (and to creditors in some contexts).  Shareholders have right to elect board members, and while they can bring actions against companies to enforce directors’ duties, board members are not agents of shareholders, nor do they owe obedience to any interest group within the firm. 

Margaret Blair and Lynn Stout wrote that boards of directors enjoy ultimate control over the firm’s assets and outputs and who are charged with the task of balancing the sometimes-conflicting claims and interests of the many different groups that bear residual risk and have residual claims on the firm.

Directors’ acting in trustworthy (morally right) ways is key to a corporation that appropriately balances the interests of stakeholders, including by refraining from recklessness or negligence that could harm employees, customers, or other parties. A corporation’s character for trustworthiness, compliance with law, and care for community reflects the character of its management, which is appointed by the board. 

           I argue that, in cases of significant corporate wrongdoing, cases should be sent to proceedings to determine the extent of the moral bankruptcy, and the appropriate remedy. Specifically, in cases where harms cannot be adequately addressed by fines and awards of damages, there should be two new remedies: 

1)   Mandated issuance and cancellation of equity.  This would provide for corporate stock to be either diluted or entirely replaced by a mandated stock issuance, which can be distributed to victims of wrongdoing or a trust established for their benefit.  Depending on the severity of the wrongdoing and the value of the firm, this could mean anywhere from 15-100% of the value of the company taken from the existing body of shareholders and distributed to or for the benefit of victims;

2)   A formal corporate death penalty whereby a company who has engaged in wrongful conduct severe enough to taint all future activity with corruption and/or guilt is liquidated, with any assets remaining after distribution to creditors (including awards of damage to victims) would be distributed for the benefit of those harmed by the wrongdoing.

Equity stripping and a corporate death penalty target the one stakeholder group that has leverage over boards of directors—shareholders.  Shareholders’ one real power is the power to elect directors. A remedy that awards victims of wrongdoing shares in the company allows victims or a trustee appointed to represent their interests, to participate as shareholders who can elect directors who will act to end and prevent corporate wrongdoing. 

            A corporate death penalty might sound extreme, but if corporate wrongdoing is so pervasive that the corporation is morally bankrupt, there is little reason to treat it differently from a financially insolvent company.  Furthermore, insolvency law provides an example about how a moral bankruptcy proceeding can be accomplished with minimal harm to third parties.  Insolvency law has structures in play that ensure fair treatment for innocent stakeholders—employees, creditors, and customers in a case of a morally bankrupt company should benefit from the kinds of protections they are afforded in any other insolvency proceeding. 

            Such a regime would incentivise good corporate behaviour insofar as it also encourages investors to look more closely at the moral behaviour of companies before they invest, thus an answer to calls for ‘mechanisms for encouraging director accountability that ultimately could prove more effective than a crude “carrot-and-stick” approach emphasising external incentives.’  

             In presenting these ideas to colleagues, I have been asked why shareholders are the right stakeholder group to target, and in what circumstances I think they are appropriate.  First, the remedies should be reserved for serious corporate wrongdoing—wrongdoing that, were the corporation a human being, courts might reasonably consider imprisonment as a response.  Further, although shareholders (other than those in a closely held company) are unlikely to have directly caused or agreed to the wrongdoing, and so it may seem unfair that they would be penalised alongside the company, it is worth remembering that investing in equity securities is a risk—stocks lose their value all the time.  Finally, pleas for mercy for innocent stockholders ring hollow alongside the innocence of a child whose parent is incarcerated.  Imprisoning a human being who has done wrong is a severe penalty, not just for the individual, but for their family, and so long as our society tolerates imprisonment as a response to individual wrongdoing, there is little reason to think causing a loss of value in an investor’s portfolio when a company commits similar malfeasance is intolerable. 

            A corporate death penalty cannot be compared to the death penalty applied to humans. The right to life is fundamental to human rights, but corporations are not alive, and so, cannot have a right to continued existence in the same way that humans have a right to life.  If a corporation does not have a right to life, then legal actions depriving the corporation of continued existence does not required the same kind of protections that similar actions depriving a human of continued existence does.  Moral bankruptcy proceedings with equity stripping and a corporate death penalty as potential remedies for grave harm, would be a means to secure greater corporate accountability.