Battle for Our Souls: A Psychological Justification for Corporate and Individual Liability for Organizational Misconduct

70 Pages Posted: 19 Jul 2022

See all articles by Jennifer Arlen

Jennifer Arlen

New York University School of Law; European Corporate Governance Institute (ECGI)

Lewis A. Kornhauser

New York University School of Law

Date Written: July 3, 2022

Abstract

In this article, we undertake the first analysis of optimal individual and corporate liability for organizational misconduct that incorporates crucial insights from psychology about people’s motivations, their decision-making processes, and how laws and organizations affect people’s behavior. Specifically, we develop an evidence-based deterrence theory predicated on empirical evidence from psychology that people have other-regarding preferences, the law can deter by expressing social condemnation as well as through sanctions, people rely on intuitive decision-making processes to make most decisions, and organizations influence deterrence by shaping employees’ decision-making environment. Employing this framework, we show that the law cannot deter organizational misconduct through expressive channels or otherwise unless corporations are held liable for all their employees’ misconduct, and subject to sanctions that eliminate their expected profit from misconduct. Corporate liability also must induce companies to self-report and fully cooperate. We also show that deterrence through expressive law requires that individual wrongdoers face a substantial risk of conviction, contrary to claims of prior scholars who have considered deterrence through expressive law without recognizing the importance of intuitive decision-making and the factors that influence it. Our framework has implications beyond liability for organizational misconduct.

Keywords: Corporate Liability, Compliance, Corporate Governance, Norms, Expressive Law, Behavioral Law and Economics

JEL Classification: K10, k14, K20, K24, K42, K23, M14, D03, D21, L21

Suggested Citation

Arlen, Jennifer and Kornhauser, Lewis A., Battle for Our Souls: A Psychological Justification for Corporate and Individual Liability for Organizational Misconduct (July 3, 2022). Available at SSRN: https://ssrn.com/abstract=4152960 or http://dx.doi.org/10.2139/ssrn.4152960

Jennifer Arlen (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

HOME PAGE: http://its.law.nyu.edu/facultyprofiles/profile.cfm?personID=20658

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Lewis A. Kornhauser

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States
(212) 998-6175 (Phone)
(212) 995-4341 (Fax)

HOME PAGE: http://rb.gy/so17n0

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