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Controlling Corporate Misconduct: An Analysis of Corporate Liability Regimes


Jennifer Arlen


New York University School of Law

Reinier Kraakman


Harvard Law School; European Corporate Governance Institute

April 26, 2012

NYU Law Review, Vol. 72, No. 1 (1997)
NYU Law and Economics Research Paper

Abstract:     
In this article we examine the structure of the legal regime that should govern a corporation's liability for crimes and intentional torts committed by its managers and other employees. This issue has gained much salience recently as reform initiatives increasingly replace strict liability with nuanced regimes that mitigate liability when firms undertake to monitor employees, and to investigate and report wrongdoing. In addition to inducing optimal activity levels, this article identifies four enforcement functions that corporate liability must often discharge: (1) inducing firms to sanction culpable agents; (2) inducing firms to thwart wrongdoing through preventive technologies and procedures; (3) inducing optimal policing measures such as monitoring, investigating, and reporting misconduct; and (4) and ensuring that employees find credible threats by firms to implement these policing measures. Our analysis reveals that neither traditional strict liability nor duty-based liability can induce firms to monitor, investigate or report wrongdoing optimally. We recommend that the law impose a mixed regime on firms instead. In the special case where firms can always credibly threaten to police their employees, a kind of sliding -- or adjusted -- form of strict liability appears to be the optimal mixed regime. In the general case, however, the optimal mixed regime is a form of composite liability, which holds firms strictly liable for all their agents' wrongs but substantially reduces this liability whenever firms satisfy their monitoring, investigation, and reporting duties. Employing our analysis, we analyze recent liability reform efforts, including the United States Sentencing Guidelines Governing the Sentencing of Organizations, prosecution guidelines for environmental crimes, and environmental audit privileges. We show that although the Guidelines are a step in the right direction, they do not provide firms with optimal incentives to police their employees. In addition, we are critical of the Environmental Protection Agency's new guidelines governing prosecutions of environmental crimes for similar reasons. Finally, we demonstrate that a composite liability regime is likely to be superior to the solution favored by some states of combining an environmental audit privilege with traditional vicarious strict liability for environmental wrongdoing.

Number of Pages in PDF File: 94

JEL Classification: G38, K22

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Date posted: September 3, 1997 ; Last revised: April 27, 2012

Suggested Citation

Arlen, Jennifer and Kraakman, Reinier, Controlling Corporate Misconduct: An Analysis of Corporate Liability Regimes (April 26, 2012). NYU Law Review, Vol. 72, No. 1 (1997); NYU Law and Economics Research Paper. Available at SSRN: http://ssrn.com/abstract=11341

Contact Information

Jennifer Arlen (Contact Author)
New York University School of Law ( email )
40 Washington Square South
New York, NY 10012-1099
United States
Reinier H. Kraakman
Harvard Law School ( email )
1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States
617-496-3586 (Phone)
617-496-6118 (Fax)
European Corporate Governance Institute ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
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