Government-Imposed Monitoring of Private Organizations:
A Need for Standards

By Howard T. Anderson

Corporations, like humans, can be indicted for crimes, tried, and convicted. Punishment, however, is a different matter. Having, in the words of an 18th century commentator, “neither bodies to kick nor souls to damn,” corporate miscreants cannot be jailed or subjected to corporal punishment. They can be “executed,” in the sense of being driven out of business, in an attempt to vindicate traditional criminal law objectives such as retribution and deterrence; indeed, as the demise of the Arthur Andersen accounting firm demonstrates, an indictment alone can amount to a corporate death sentence. But corporate deaths can do great harm to society. In extreme cases, forcing corporations out of business can undermine the health and welfare of entire communities and even threaten national security. Fines can be used to punish corporate misconduct, but there are practical limitations to their utility: if they are too light they may fail to deter wrongdoing, while draconian fines risk crippling or bankrupting organizations that, notwithstanding their misconduct, are valuable societal assets. Globalization has made these issues of corporate punishment even more complex and problematic. The international economic crisis that began in late 2008 has made all issues relating to corporate oversight more urgent.

The difficulty of applying to organizations criminal law sanctions originally designed for natural persons highlights the need for alternative ways of dealing with corporate crime – especially ones that focus more on reform and prevention than on punishment. An increasingly popular alternative involves the imposition of government-approved independent monitors to oversee organizational compliance with agreements to resolve allegations of corporate misconduct. Properly employed, such monitoring can be a cost-effective means of dealing with business crime and corrupt organizations. It can leverage the government’s ability to regulate corporate behavior in the public interest without requiring large increases in public spending, politically unrealistic expansions of enforcement agencies, or undue interference in the operations of private entities. Corporations and their stakeholders can benefit by avoiding the potentially ruinous consequences of criminal prosecutions.

Government-imposed monitoring can, however, be abused. Currently, there is no coherent body of standards governing such basic issues as when monitors are appropriate, how they are to be selected and compensated, the scope of their authority, to whom they should be accountable, how grievances against them should be handled, and when the monitoring should end. In the absence of standards, the selection of monitors can degenerate into a patronage system, the cost become exorbitant, and the monitors become prone to exercising powers going far beyond the scope of the problem that led to their appointment. Organizations that fear an indictment equals a death sentence may submit to arbitrary, unfair, and imprudent actions -- not to mention astronomical bills -- rather than risk alienating a monitor who may be under few practical restraints and whose selection may have been influenced by personal, political, or professional ties to the prosecutor. Concerns such as these have received considerable publicity within the past year: questions were raised in the media and Congress, for example, about the awarding of one monitoring assignment – said to be worth more than $50 million – to the firm of former Attorney General John Ashcroft. In a March 2008 memorandum, the U.S. Department of Justice articulated principles to guide the selection of independent corporate monitors in the context of deferred prosecution and non-prosecution agreements, and bills are pending in Congress to mandate further reforms in this area.

These attempts to establish standards for corporate monitoring are welcome. Although the merits of specific proposals can and will be debated, some authoritative standards are urgently needed for several reasons. First, fair and generally recognized standards are needed if monitoring is to fulfill its potential as a major contributor to corporate rehabilitation and reform. Second, establishing standards for government-imposed monitoring will have an inevitable spillover effect on the equally if not more important realm of voluntary corporate compliance. Third, the increasing use of monitoring as a remedy for corporate misconduct in the United States occurs at a time when corruption and various kinds of criminal behavior by multinational entities are receiving more attention throughout the world than ever before. The United Nations, the OECD, and other international and regional organizations have within the past decade made unprecedented progress toward establishing standards of conduct applicable to practices such as the payment of bribes to foreign officials to gain business advantages. Much work needs to be done, but there has never been a better time – or a greater need – to identify workable solutions to the problem of corporate misconduct and to encourage their development internationally.

Monitoring standards should address, among other things, the following:

Traditional methods of dealing with corporate misconduct have always been fraught with problems and are rooted in legal and economic models that are fast becoming outmoded. New methods are developing in practice at a rapid pace – which may accelerate under current economic conditions -- but there has not been a commensurate development in their theoretical and legal underpinnings. It is time for the theory to begin catching up. Setting standards for government-imposed monitoring is a good place to start.