Why Criminal Sanctions Still Matter in Corporate Governance

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Date

2009

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.

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