Because That's Where the Money Is: Toward a Theory and Strategy of Corporate Legal Compliance

134 Pages Posted: 7 Jan 2007

Date Written: January 1, 2007


Upon his capture in 1934, the legendary bank robber Willie Sutton was asked by FBI agents, Why do you rob banks, Willie? Sutton, who believed the question to be rhetorical, replied, dryly, Because that's where the money is. In other words, Sutton understood his interrogator to be inquiring as to why he robbed banks rather than, say, homes, or gas stations, or church offering plates. Had he understood the query as intended - i.e., what was it about Willie Sutton the impelled Willie Sutton to crime when many others, struggling to survive the Great Depression, were not? - Sutton could not likely have offered as pithy a response. This Article indirectly poses a similar question - Why do you rob corporations? - to seven chief executive officers [CEOs] recently ensnared in circumstances not unlike Sutton's in the hope of generating answers more useful to the explanation, prediction, and suppression of corporate crime than simply, Because that's where the money is.

In the last decade, a series of scandals involving insider trading, fraudulent accounting, fictional business entities, bribery, lavish executive perquisites, and outright theft destroyed over $1 trillion in shareholder value, eliminated hundreds of thousands of jobs, and felled corporate giants such as Enron, WorldCom, Arthur Andersen, and Adelphia. Outrage at these breaches of the public trust, which some liken to a "corporate 9/11," prompted prosecutors to imprison many senior executives and Congress to impose yet stricter obligations upon public firms and the executives who run them.

Although the Sarbanes-Oxley Act is now associated in the public mind with a sordid parade of handcuffed executives perp walking their way to prison, in years to come SOX may be better remembered as the machine that privatized public corporations. As much as a quarter of every dollar a public firm earns is consumed complying with a panoply of laws and regulations, and in the first four years since its passage SOX alone has cost firms $1.8 trillion. While some commentators hail SOX as a significant weapon in the battle against corporate crime, others believe its price for reducing managerial malfeasance is far too dear.

Many post-Enron Era firms now tout their compliance management programs [CMPs], which typically consist of written codes of ethics, new lines for chief compliance officers, internal systems for protecting whistleblowers, and mandated employee training, as proof against future corporate criminality. For their part, government regulators have encouraged and rewarded CMPs, reducing firms' liability upon violations of laws and regulations to the extent to which firms have actually implemented them. Still, many commentators remain skeptical, viewing CMPs as symbolic attempts to pose firms as corporate good citizens when in fact they are merely cheap ploys to reduce regulatory oversight without real behavioral transformation. Indeed, many of the most egregious offenders had implemented well-articulated CMPs and earned high independent corporate governance ratings even as the tangled webs of their secret misdeeds were unraveling.

It should come as scant surprise that enhanced penalties and CMPs are inadequate to induce firms to comply consistently with corporate law. Indeed, as the “Enron Era” has proven, noncompliance - at long as it goes undetected - can be profitable. One would be naïve to believe that SOX or any other legislation could relive these pressures. Still, despite its persistence noncompliance is an ethical cancer that shakes public faith in the integrity of the free market, imposes negative externalities upon stakeholders, and fosters corruption. As recent experience demonstrates, in the long run noncompliance drives away investment and destroys noncompliant firms. Simply put, noncompliance is bad for business, for the firm, and for the nation.

Yet as injurious as noncompliance is, and despite all the measures instituted to combat it, the phenomenon is ubiquitous. Studies suggest that at least two-thirds of public firms have engaged in serious illegal conduct in the past decade. Is law simply epiphenomenal to firm behavior? Is illegality part of the business of business? Or can a well-designed legal regime, buttressed by CPMs and other instrumentalities, induce a degree of corporate compliance sufficient to protect the integrity of the market and the state? Why, and under what conditions, will firms comply with the legal regime governing corporate conduct, particularly when rules run contrary to their parochial interests? These are among the most pressing questions, and enhancement of compliance is one of the most important tasks, in the realm of public governance.

Accordingly, Part I surveys and critiques existing theories of corporate legal compliance [CLC]. Part II develops an alternative theory that traces associations between the personalities of CEOs and firm compliance with or violation of obligations arising under corporate law. Part III surveys historical data to test heuristically the proffered theory and offer explanations and predictions of firm behaviors regarding CLC. Part IV, followed by a Conclusion, summarizes the associative relationships between CEO personalities and CLC, anticipates criticisms, and suggests future research to build upon evidence that evaluation and selection of CEOs on the basis of their CLC propensities is an important constituent of corporate strategy that bears heavily on firm survivability and prosperity.

Keywords: legal compliance, business law, corporate strategy, ethics, Sarbanes-Oxley, personality, CEO

JEL Classification: D21, D63, D78, D81, K14, K21, K22, K31, K32, K42

Suggested Citation

Bradford, William C., Because That's Where the Money Is: Toward a Theory and Strategy of Corporate Legal Compliance (January 1, 2007). Available at SSRN: or

William C. Bradford (Contact Author)

Chiricahua Apache Nation ( email )

Alexandria, VA 22312
United States
703 517 5719 (Phone)


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