Loyola University Chicago School of Law, JD 2024
The Justice Department introduced a new pilot program last week that encourages companies to center their compensation policies around rewarding good behavior and punishing those partaking in criminal activity. Deputy Attorney General, Lisa Monaco, previewed the program at an American Bar Association conference in Miami.
What are the goals behind the program?
The program is built on the idea that corporate wrongdoing should not be the burden of shareholders and must be the burden of those directly responsible, namely corporate executives. While shareholders are not entirely immune from liability, they are not responsible for wrongdoing most of the time. More often, United States authorities often allow companies to pay fines to resolve questions of wrongdoing, resulting in excusing executives and harming shareholders since majority of the fines is provided by their finances. The notion of using corporate compensation in fighting corporate crime has been discussed by Monaco in the past year to address misconduct by companies and their executives. ‘
John Carney, co-leader of the White Collar, Investigations and Securities Enforcement and Litigation team at BakerHostetler, said that “Monaco’s strong warning to ‘step up and own up’ is a clear shot across the bow of corporate America for non-disclosing companies.”
How will the program work?
The United States Securities and Exchange Commission (SEC) is currently able to force executives and chief financial officers to give back bonuses and other incentives when the companies they work for violate accounting regulations, otherwise known as clawbacks. There does not have to be misconduct for a clawback to occur, but only a significant financial statement error. The SEC has been avidly fighting for greater power in this arena and the expansion of these regulations. In response, the Justice Department has explained that this new initiative will assist in creating more effective and consistent practices among a larger range of companies.
Each settlement negotiated by the Justice Department will have a requirement that the company must create compensation policies encouraging compliant behavior from executives. To be most successful in these settlements, the Justice Department is planning on hiring more than 25 new prosecutors and a chief counsel for corporate enforcement under the national security division. These prosecutors will focus on companies evading sanctions, exporting control violations and other economic crimes. This will force companies to essentially write clawbacks and threatening the paychecks of executives into their own policies, to strongly encourage regulatory compliance.
Further, the agency’s criminal division intends to provide discounts on fines for companies attempting to collect compensation from executives partaking in corporate crime.
Can anything ever completely stop corporate misconduct?
The modern corporation is the world’s most successful engine of wealth and innovation. Notwithstanding those abilities, the corporation is structured in a way to insulate their executives from liability. While corporations were created with the idea of shareholder primacy, times have shifted that notion to work more like CEO/director/executive primacy. Corporations play an oversized role in society, often making them “too big to jail.” It has been said by corporate law professor, Samuel W. Buell, that it may be prudent to look at other remedies, possibly establishing that corporations have duties to the public and not just to shareholders. It is worth wondering whether the corporation has grown to a size that is beyond the capacity of individuals to manage, and Buell says that “the problems are a result of the incentives and effects of the corporate institution at its current size and scope.”
It is possible that attempting to hit corporate executives where it will hurt the most – their paychecks – will target the root of the issue, that being the incentives and effects of the corporate institution and its current size and scope. The United States agencies responsible for enforcement of these policies must utilize all their resources in order to see the potential of these policies.
Further, another way to assist regulation in this area could be to automate the tasks that are currently being manually performed. Co-director of the Global Financial Markets Center, Lawrence Baxter, argues for the use of emerging technologies, including automation, big data, and artificial intelligence to monitor financial institutions. This would mirror FinTech, and deliver services faster, more efficiently, and more flexibly. The government currently monitors currency transactions and high frequency trading, making it more difficult to commit misconduct and evade liability. Applying this technology to financial institutions would allow the regulators to exercise real discretion on the reports that come in from the automated monitoring, and less people would be sitting and staring at the books all day. That idea is definitely food for thought in addition to clawbacks and corporate paycheck incentives.