LAW, ETHICS, AND DIVERGENT RHETORIC William S. Laufer Abstract: This response to Professor Hasnas recasts the apparent divergence between the legal and ethical obligations of managers in light of the rhetorical claims and counterclaims that accompany the interaction between regulators and the regulated. It is argued that this divergence is more apparent than real, and that the convincing but often empty rhetorical statements that accompany reforms should be seen in context and largely disregarded. This rhetoric is designed to claim integrity, and reclaim legitimacy with the hope that "burdensome" reforms will be minimized. /. Introduction It is important to see the apparent divergence between the legal and ethical obligations of managers, noted by John Hasnas, in historical context. In doing so, the efforts of Hasnas and other commentators to document a significant disconnect (e.g., conflicts of compliance and compromised confidences) appear to miss the more profound meaning found in the well-choreographed dance between regulators and the regulated, a dance that has modem roots dating back to the mid-1800s.' I argue below that the divergence or "wedge" between what the law seems to require and the perceived ethical obligations of managers is largely reducible to rhetorical claims and counterclaims that strategically accompany this dance. These claims are as old as the modem corporation and, if history is any guide, are not to be taken so literally. The dance itself reflects ambivalence with the very idea of corporate criminal liability, an ambivalence that stands in very sharp contrast to the strategic rhetoric.^ My conclusions may seem overly cynical, but support is found not only in the narrowly conceived and transient nature of corporate reforms that follow spates of "unprecedented" scandals every decade or so. It is also seen vividly in the convincing but often empty rhetorical statements that accompany reforms.' Rhetoric is carefully wrapped around actions by both corporate agents and criminal justice functionaries to assert or ensure compliance, claim integrity, and reclaim legitimacy. This rhetoric paints a convincing portrait of corporations committed to organizational integrity, extolling the virtues of a committed soul, making claims of social and environmental responsibility, embracing strategic philanthropy, and employing an effective brand of proactive compliance. At the same time, in spite of this apparent © 2007. Business Ethics Quarterly, Volume 17, Issue 3. ISSN 1052-150X. pp. 441-447 BUSINESS ETHICS QUARTERLY embrace of a new partnership to combat corporate crime, businesses lobby to roll back "burdensome" reforms, arguing that their excessive administrative costs compromise growth, curtail necessaryrisk-taking, and make public listing on exchanges less-than-desirable. Other costs are more worrisome, as Hasnas notes, including the fact that corporadons must now, it seems, compromise employee confidentiahty, privacy, and indetnnification. It is, in short, difficult if not impossible to be ethical and law abiding.'* Law enforcement and regulators, in turn, use words and symbolic actions to impress all observers that they are zealously guarding markets with new legislation and regulation as support. They demand that organizations act in close partnership and effectively self-police. Prosecutors speak strongly of a sea change in law enforcement as they single out corporate miscreants for unusually creative plea agreements that promise a renewed organizational comtnitment to compliance and ethics. Compliance expenditures, voluntary disclosure, and proactive cooperation are held out as regulatory currency. And, in spite of all the rhetoric of intolerance for corporate illegalities, corporate prosecutions are rare events. Critninal convictions of corporations, like that of Arthur Andersen, are that much more unusual. Large corporations with boundless resources fend off regulators, regulation, and the specter of prosecution for wrongdoing by maximizing the appearance of legal and ethical compliance. With means and with wise counsel they are diverted from formal prosecution, a fate wholly inconsistent with strong and convincing enforcement rhetoric. And expressions of remorse, a tender of apology, and a diluted brand of restorative justice allow the Fortune 1000 to bargain for integrity agreements and deferred prosecutions that, to complete my cynical account, support an industry of ethics and compliance consultants who feed slothfully off both rhetoric and strategy. The fate of small and medium-sized firms in the regulatory or criminal justice system are neither documented nor systematically studied. The same may be said of firms regulated and prosecuted under state law. //. Predictable Rhetoric The apparent divergence between ethics and law is explained, in large part, by a far more profound divergence between the rhetoric of regulators and law enforcement, and the realities of regulation and law enforcement; the rhetoric of corporate due diligence, and the realities of corporate due diligence. Through periods of regulatory laxity, heightened regulatory oversight, and corporate scandals, both retreat to familiar rhetorical grounds: law enforcement claims a fight for the legitimacy of the market, and corporations claim both burden and compromise by corporate reforms. Law compliance and ethical imperatives are, as Hasnas writes, no longer aligned. Both use stirring examples that convince all but the most stalwart critics. Both tnix a modicum of truth and facts with spin and dissimulation to confuse and confound, I believe, all but the most cynical. LAW, ETHICS, AND DIVERGENT RHETORIC A. The Language of Law and Regulatory Enforcement The language used by prosecutors and regulators about corporate crime serves multiple objectives, from efforts to convince stakeholders of the priority given to corporate fraud prosecutions to explicit threats of sanctions for harmful noncompliance. The first Chairman of the Corporate Fraud Task Force, Larry D. Thompson, captured much of this range in restating the admonition, originating from the Executive Branch, that his Task Force will send a "clear waming and a clear message to every dishonest corporate leader. You will be exposed, and you will be punished. No board room in America is above or beyond the law."^ The work of the Task Force is designed, we are told, "to remove the suspicion, doubt, and uncertainty that pervaded our financial markets over a year ago."* Suspicion, doubt, and uncertainty are to be replaced by strict accountability designed to prompt a renewal of confidence, a revival of trust, and a recognition of institutional integrity that are, in combination, conditions precedent to sound financial markets. The lexicon of law enforcement is one of intolerance for corporate malfeasance blended carefully with words that clearly remind corporations of their need to cooperate, in partnership, with authorities. In the Second Year Report of the Corporate Fraud Task Force, the incoming Chairman James B. Comey, revisited thefirst part of his mandate, "In establishing his Corporate Fraud Task Force, the President called on us to clean up corruption in the board room, restore investor confidence in our financial markets, and to send a loud and clear message that corporate wrongdoing will not be tolerated."^ To accomplish this objective, Comey maintains, "we will work like crazy until we have brought all corporate crooks to justice."* The justification and rationale for a proactive, even aggressive battle against corporate fraud are found in the simple conclusion that free markets and the free enterprise system, more generally, demand it. "Corporate responsibility," we are told by the President of the United States, "is essential to America. It is essential to shareholder. It is essential to investors."' The message sent by this banter reinforces a reactionary zeal by senior prosecutors and agency officials about their mission to route out, combat, and punish those committing corporate fraud. It results, however, in not much more than zealous rhetoric. B. The Language of Corporate Agents Corporate representations of ethics meet the apparent reactionary zeal of prosecutors and regulators in a classic adversarial manner. Heartfelt claims of corporate responsibility and organizational integrity join a mix of facts and spin that regulations and law are ever-expanding, making it difficult to be ethical and compliant at once. Ever-increasing compliance requirements make risk management overly burdensome. Complaints about tradeoffs between the risk management function and fundamental business ethics abound but are difficult to systematically assess.'" While heavily investing in ethics and compliance, businesses and business associations highlight the burdensome costs of both as they push back from corporate law reforms with predictable language. Under the guise of maintaining and improv BUSINESS ETHICS QUARTERLY ing the competitiveness of capital markets, for example, the Committee on Capital Markets Regulation (known as the Paulson Committee) emphasizes the regulatory costs and burdens of corporate reforms. Their Interim Report concludes that "the implementation of SOX 404 by the SEC and the PCAOB, together with the prospect of catastrophic liability faced by auditors, has produced a regime that is overly expensive."" A more recent study by McKinsey & Co., unveiled in shameless irony by Gov. Eliot Spitzer, highlights market share losses on Wall Street, and concludes sitnilarly—regulations must be "relaxed"'^ ///. The Pendulum Swings All of this rhetoric emerges during regular episodic shifts in regulatory scrutiny and liability risk. Over the past century and a half, the apparent divergence between law and ethics that Hasnas speaks of may be explained away, in large part, as rhetoric that marks the progress of these shifts.'^ The rhetoric that surrounds alternating periods of scandals, reforms, heightened regulatory oversight, lax regulatory orientations, and then scandals reflects the tension between the regulatory power of government and corporate power.''' This tension is found when trying to strike a balance between government regulation and deference to the business community and its markets; the balance between the power to regulate corporations and the specter of regulatory overreaching. Reports of the roll-back of particularly onerous provisions of Sarbanes-Oxley, recent actions by the SEC to protect firms from shareholder lawsuits for fraud, and heroic efforts of the Paulson Commission, should come as no surprise. After the dust of the scandals settles regulators shy away once again from escalating the regulatory process even with a strong rhetorical fiont. Prosecutors, who investigated and indicted high profile white collar criminals with a combination of vigilance and sense ofrighteousness,find that corporate fraud no longer holds departmental priority. Memoranda from the Department of Justice designed to guide prosecutorial discretion suggest a vigilance that is now far from real. Before and after the scandals, corporate prosecutions are infrequent events. They are rare in some jurisdictions and extraordinary rare in others. And most of the regulatory activity with companies of any scale turn on audit and disclosure policies that snag some corporations that commit crimes, prompt seemingly law abiding companies to voluntarily disclose crimes, and deter others from crime commission. But the numbers of cases are still very small and, those subjected to the kind of strict vicarious liability highlighted by Hasnas, are so insignificant as to be symbolic.'^ IV. The Folly of Guidelines and Memoranda The power of the strategic rhetoric in this dance is seen most vividly when judicial guidelines and prosecutorial memoranda are unveiled and then hawked as uniform standards of corporate conduct. As corporations allocated vast resources LAW, ETHICS, AND DIVERGENT RHETORIC to be "in compliance with the Guidelines" in the mid- to late-1990s, the notion of corporate integrity assumed new and yet undeserved meaning."" The concept of organizational due diligence fashioned after the Guidelines became an overnight proxy for corporate ethics. Due diligence emerged as an organizing principle of behavior seemingly imposing both ethical and legal obligations on corporations and its agents. Diligent action apparently hinged on responsible proactive and reactive corporate behavior consistent with prescribed standards of conduct. But on whose authority? What did it mean for a corporation to be "in compliance" with guidelines given to federal judges in the extraordinary circumstance that a conviction of an organization required sanctions? Comparable questions were asked and answered by the United States Supreme Court, in reversing the mandatory nature of the Guidelines, after many years of uncritical acceptance and near boundless compliance expenditures. The Holder Memorandum and its progeny raise analogous questions about the legitimate effect and impact of guidelines given to constrain the discretion of criminal justice functionaries. In the absence of general principles of corporate criminal liability, good case law, and with a conflicting mix of agency rules and regulations, departmental memoranda for prosecutors seem to join judicial guidelines as the best available proxies for substantive corporate criminal law. They do so because that is how they are sold by prosecutors, corporate counsel, and the cottage industry of ethics and compliance consultants. The problem is that they are not necessarily good or realistic proxies. Compliance with the Sentencing Guidelines for Organizations seemed to mean little to nothing as corporate scandals emerged at the turn of this century. After a decade of massive compliance expenditures to meet the rhetoric of the Guidelines, failures of Guideline-compliance were simply re-conceptualized as corporate govemance failures. Well beyond the real meaning of these memoranda and guidelines is the language employed to pitch them, and our willingness to buy this rhetoric in the absence of substantive law. V. Taking Rhetoric Less Seriously There is anecdotal evidence for many of the concems raised by Hasnas. This evidence, though, is confounded and hyped by the strategies of key stakeholders. Both regulators and the regulated have a distinct interest in crafting language that will convince stakeholders of the need for more or less self-regulation, external regulation, and law. One important task for business ethicists, I believe, is to question individual cases and anecdotes from corporations that offer images of extraordinary burdens, compromises, betrayals, fears, and heart-felt efforts. The same may be said of the need to deconstruct the near-patriotic-fervor of prosecutors and regulators in the "battle" against corporate fraud and corruption. Without a concerted effort, we are all too vulnerable to the seductive and convincing rhetoric that has, historically, marked the progress of business regulation. This vulnerability should concem anyone seeking transparency, integrity, and ethical BUSINESS ETHICS QUARTERLY leadership in business. The pitch, spin, and hype of corporate ethics mixed together with the battle hymn of the war against corporate crime do more than distract. At best, scholars and practitioners of business ethics inadvertently fuel the rhetoric. At worst, they join the dance. Notes 1. This commentary draws heavily from William S. Laufer, Corporate Bodies and Guilty Minds (Chicago: University of Chicago Press, 2006). There I examined the historical stages in the development of corporate criminal law, revealing episodic enforcement and regulatory laxity, with significant strategic positioning by all stakeholders along the way. 2. In Corporate Bodies (p. 3), I conclude that "The history of substantive corporate criminal law reveals a profound ambivalence with the idea of a criminal corporation that is both elementary and seemingly intractable: (a) corporations are aggregates of innocent stakeholders who unfairly suffer from a criminal investigation, indictment, and conviction, but serious consequences must result from corporate deviance, (b) markets encourage corporate risk taking and innovation, but corporations—particularly in certain sectors and industries—require vigilant regulation and faithful compliance, (c) civil and administrative law remedies for organizational deviance already exact a huge toll on corporafions, but few doubt the unique role of the criminal law to encourage law abidance or voluntary disclosure of wrongdoing, and (d) the government must support and maintain close ties to the business community, but this may inhibit regulation or make resort to the criminal law problematic." 3. I use the notion of rhetoric throughout this commentary to reflect words from key stakeholders that are designed, strategically, to prompt more or less regulation; more or less law. The longstanding dance that I speak of reflects the complex, interactive strategies employed by both corporations and their regulators. These strategies were seen as early as the mid-1800s where corporafions expressed concerns over the personification of the business enterprise. Prosecutors responded, in kind, with strong public policy arguments that, in the absence of a regulatory state, the criminal law is indispensable. Business organizations responded in ways that resemble, remarkably, their very concerns today. Due diligence, it was claimed, should satisfy the law (Laufer, Corporate Bodies), 4. In the conclusion to this brief commentary I concede the anecdotal evidence of the apparent divergence that concerns Hasnas. That said, systematic evidence of this divergence is lacking. Consider, as just one example, that efforts by the Campbell Collaboration to document any deterrent effect of corporate crime policies was limited by the absence of systematic evidence. The research simply has yet to be conducted. Beyond systematic evidence, the examples used by Hasnas, from Andersen to KPMG, are extraordinary and quite likely far from representative. In the absence of evidence that extends well beyond symbolic prosecutions or notable non-prosecutions of Fortune 100 firms, I conclude that the rhetoric surrounding competing claims by stakeholders may be as important. 5. First Year Report to the President, Corporate Fraud Task Force (Washington, D.C: Department of Justice, 2003), iii. 6. Ibid. 7. Second Year Report to the President, Corporate Fraud Task Force (Washington, D.C.: Department of Justice, 2004), iii. 8. Ibid, 2.2. 9. Ibid. LAW, ETHICS, AND DIVERGENT RHETORIC 10. A cynic would say that the real costs come less from the compromise of ethics than the appearance of ethicality. 11. Interim Report of the Committee on Capital Markets Regulation (2006), xiii, available at http://www.capmktsreg.0rg/pdfs/l 1.30Committee_Interim_ReportREV2.pdf. 12. Mapping the Global Capital Markets: The Third Annual Report (NewYork: McKinsey, 2007), available at http://www.mckinsey.com/mgi/publications/third_annual_report/index.asp. 13. See Laufer, Corporate Bodies, 9-43. 14. See Craig Haney, "Criminal Justice and Nineteenth-Century Paradigm: The Triumph of Psychological Individualism in the 'Formative Era,'" Law & Human Behavior 6 (1982): 191; John M. Clark, Social Control of Business (NewYork: McGraw-Hill, 1939). 15. The general principles of corporate criminal liability that emerged in the late 1800s— principles of vicarious fault—remain the prevailing federal law in the United States. They are, however, the very, very last resort of federal prosecutors. Corporations may be threatened with this strict form of liability, but are rarely prosecuted. 16. See William S. Laufer and Diana C. Robertson, "Corporate Ethics as Social Control," Journal of Business Ethics 16(1997): 1029.