Why Criminal Sanctions Still Matter in Corporate Governance
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Date
2009
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
International Company and Commercial Law Review
Abstract
The general concern about the adequacy of self-regulation as a mode of policing corporations has
once again come to the forefront of the corporate governance debate following the current economic
crisis. Irresponsible lending to individuals who cannot afford to repay loans has resulted in the near
collapse and nationalisation of banks such as Northern Rock and Bradford & Bingley in the United
Kingdom and Fannie Mae and Freddie Mac in the United States.1 Once again, the Government has
had to intervene to prevent an economic crisis, by nationalising failing financial institutions to avoid
them falling into liquidation.
Government intervention in the regulation of markets, particularly through the use of criminal
sanctions, has not been popular in recent years. The use of criminal sanctions to regulate business
activities is generally perceived as being an overreaction that is likely to discourage directors from
taking the risk that is necessary to run a business, thereby slowing down economic growth and
interfering with profitability. It is frequently argued that criminal sanctions are not necessary in the
regulation of business and corporate governance in particular. Among the arguments made against
the use of criminal sanctions in corporate governance is the procedural argument which perceives the
use of criminal sanctions as being an expensive way of enforcing regulation,2 which has a high
burden of proof and as such is prohibitive to those seeking remedies for expropriation, as
shareholders are required to demonstrate the director's culpability.3
In addition, it is argued that
criminal sanctions cannot provide restitution to shareholders and employees who have lost their jobs.4
On top of that, the use of criminal sanctions is likely to result in over-deterrence of prospective
directors, making them risk averse which is detrimental to the long-term benefit of the company.5
Others simply claim that not everyone is deterred by the criminal sanction6
and therefore using
criminal sanctions will not deter a self-interested director.
However, government intervention, hitherto a mechanism of last resort, would now seem to be an
inevitable consequence of the failure of markets to regulate themselves, and the only method likely to
guarantee at least a modicum of financial stability during the current crisis. Stability is important as the
success of any economy in the 21st century lies in its ability to create and maintain successful
corporations. The survival and long-term profitability of corporations is no longer a private interest
which merely affects those who deal with the corporation at a primary level, for instance investors, but
also a public interest affecting the welfare of stakeholders such as employees to whom it provides
jobs and pensions. When financial scandals occur, employees stand to lose their livelihoods not only
in the form of jobs but also of life-long pensions. The Government therefore has a responsibility to
ensure that employees as well as other stakeholders of the corporation are protected from the
fraudulent acts of managers who do not act in the best interests of the company. The success of the
corporation is therefore a public interest that, to a certain degree, ought to be protected through state
regulation.
This article considers the role of law in corporate governance, as legislation is one of *I.C.C.L.R. 134
the key ways in which the Government has intervened in previous crises, such as Enron in the United
States. The focus of this article is an investigation into whether government intervention in corporate
governance through criminal sanctions is necessary and to what extent it affects the ability of
directors to perform their entrepreneurship function of risk-taking. This article begins by addressing
the function of national legislation in corporate governance, which might be thought of as hard law, as
contrasted with the soft law of the various City codes of practice, and then explains how criminal
sanctions apply to the corporate environment.
Description
Journal Article
Keywords
Civil law, Corporate governance, Criminal law
Citation
Musikali, L. M. (2009), ‘Why Criminal Sanctions Still Matter in Corporate Governance’, International Company and Commercial Law Review 20(4), 133-141.