Corporations became full blown legal persons. They acquired legal standing (can sue and be sued), have been endowed with legal rights
(due process, equal protection, and free speech), and have acquired legal duties (such as tax liabilities). (See table below for the common law decisions through
which these corporate powers and rights have been established.) The powers of the corporation were regulated by the state through founding charters which served roughly the same function for a
corporation as a constitution did for a state. Initially, charters limited corporate powers to specific economic activities. Railroad companies, for example, had charters that restricted their
legitimate operations to building and operating railroads. When they sought to expand their operations to other activities they had to relate these to the powers authorized in the founding
charter. If a charter did not specifically allow an operation or function, then it was literally ultra vires, i.e., beyond the power of the corporation (Stone:
21-22). This method of control gradually disappeared as states, competing to attract business concerns to incorporate within their boarders, began to loosen charter restrictions and broaden
legitimate corporate powers in a process called charter mongering.
Eventually charters defined the legitimate powers of corporations so broadly that they ceased to be effective
regulatory vehicles.
Given this vacuum, governments have had to resort to other measures to control and direct corporations toward the public good. The practice of punishment, effective in controlling human
behavior, was extended to corporations. But Baron Thurlow (a British legal theorist) framed the central dilemma in corporate punishment with his oft quoted comment that corporations cannot be
punished because they have no soul to damn
and no body to kick.
The unique attributes of corporations has given rise to creative options for corporate control
and punishment: fining, stock dilution, court-mandated changes in corporate structure, adverse publicity orders, and community service. (See Fisse) Most recently, Federal Sentencing Guidelines
have sought to provide incentives for corporations to take preventive measures to avoid wrongdoing by developing ethics compliance programs. These guidelines adjust punishments in light of
ethics programs that the corporations have designed and implemented to prevent wrongdoing. Corporations found guilty of wrongdoing would still be punished. But punishments can be reduced when
guilty corporations show that they have developed and implemented compliance programs to promote organizational ethics and to prevent corporate wrongdoing. These include compliance codes,
ethics training programs, ethics risk identification measures, and corporate ethical audits.
History of Corporation
|
Problem |
Solution |
Organizational Form |
|
Successfully transferring stewardship over church holdings to new abbot |
Create a "passive device to hold property" |
Proto-corporation |
|
Control over and regulation of a practice or skill |
Create a device to (a) hold the privileges of some particular trade, (b) establish rules and regulations for commerce, and (c) hold courts to adjudicate grievances among members. |
Medieval guilds that evolve into regulated companies. |
|
Pooling capital and resources and directing complex ventures |
Create a device (a) to hold privileges of trade, (b) where investors provide capital, and (c) that delegates operations to managers |
Unchartered joint stock companies |
|
Limiting investor liability, limiting manager liability, and balancing the two |
Corporation evolves into a legal person with (a) legal rights and duties, (b) owned by shareholders, (c) run by managers, (d) regulated through state charter |
Limited corporation whose operations are defined in and limited by the charter |
|
Ultra Vires (charter prevents growth) and Charter Mongering |
Granted broad powers through more broadly defined charters |
Full Blown Corporation |
|
Finding agent responsible for wrongdoing |
(a) Due process, equal protection, and free speech rights, (b) legal duties, (c) legal standing, (d) Federal Sentencing Guidelines, and Sarbanes-Oxley Act |
Corporation as Legal Person |
Modified from Christopher Stone, Where the Law Ends
Options for Corporate Punishment (Fisse and French)
|
Description |
Example |
Target of Punishment |
Deterrence Trap Avoided? |
Non-financial Values Addressed? |
Responsive Adjustment |
Interference with Corporate Black Box |
|
|
Monetary Exaction |
Fines |
Pentagon Procurement Scandals |
Harms innocent |
Fails to Escape |
Few or None Targeted |
None |
No interference |
|
Stock Dilution |
Dilute Stock and award to victim |
Stockholders (Not necessarily guilty) |
Escapes by attacking future earnings |
Few or None |
Limited |
No interference |
|
|
Probation |
Court orders internal changes (special board appointments) |
SEC Voluntary Disclosure Program |
Corporation and its Members |
Escapes since it mandates organizational changes |
Focuses on management and subgroup values |
Passive adjustment since imposed from outside |
Substantial entry into and interference with corporate black box |
|
Court Ordered Adverse Publicity |
Court orders corporation to publicize crime |
English Bread Acts (Hester Prynne shame in Scarlet Letter) |
Targets corporate image |
Escapes (although adverse publicity indirectly attacks financial values) |
Loss of prestige / Corporate shame / Loss of Face/Honor |
Active adjustment triggered by shame |
No direct interference (corporation motived to restore itself) |
|
CommunityService Orders |
Corporation performs services mandated by court |
Allied chemical (James River Pollution) |
Representative groups/individuals from corporation |
Escapes since targets non-financial values |
Adds value to community |
Passive or no adjustment: sometimes public does recognize that cs is punishment |
None |
Citation for Table
This table provides a close summary of Fisse, B. (1985). "Sanctions Against Corporations: The Limitations of Fines and the Enterprise of Creating Alternatives" in Corrigible Corporations and Unruly Law, editors Brent Fisse and Peter A. French. San Antonio, TX: Trinity University Press, 137-157. Summary in tabular form of the taxonomy developed by Fisse to classify and compare forms of corporate punishment.
Requirements of Sarbanes-Oxley (Summarized by Dyrud: 37)
- Provide increased protection for whistle-blowers
- Adhere to an established code of ethics or explain reasons for non-compliance
- Engage in
full, fair, timely and understandable disclosure
- Maintain
honest and ethical
behavior. - Report ethics violations promptly
- Comply with
applicable governmental laws, rules, and regulations
- Dyurd cites: ELT, Ethics and Code of Conduct, n.d.; http://www.elt-inc.com/solution/ethics and code of conduct training obligations.html
Amended Federal Sentencing Guidelines (Taken from Dyrud: 37)
- Establishing standards and procedures to prevent and detect criminal conduct
- Promoting responsibility at all levels of the program, together with adequate program resources and authority for its managers
- Exercising due diligence in hiring and assigning personnel to positions with substantial authority
- Communicating standards and procedures, including a specific requirement for training at all levels
- Monitoring, auditing, and non-internal guidance/reporting systems
- Promiting and enforcing of compliance and ethical conduct
- Taking reasonable steps to respond appropriately and prevent further misconduct in detecting a violation
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