July 13, 2004
Let's make CEO negligence criminal
Enron's excesses and the unprecedented media firestorm over the company's collapse have muddled the reasoning of even normally clear thinking business columnists.
The latest to be afflicted is the Wall Street Journal's ($) Alan Murray, who comes up with this doozy in his column today:
Mr. Lay spent more time schmoozing with politicians and picking fabric swatches for his Gulfstream V corporate jet than studying special-purpose enterprises. As a result, his footprints inside the energy company are shallow, and his fingerprints few. Conviction will be difficult.
In the case of Enron, we already know a giant financial fraud lay at the heart of the enterprise. The convictions of former Chief Financial Officer Andrew Fastow and former Treasurer Ben Glisan established that. At stake in the Lay case isn't whether fraud was committed but whether the chief executive should be held [criminally] responsible.
For the sake of American capitalism, he should.
Mr. Murray then goes on to base this rather startling expansion of criminal liability on the anecdotal experience of Federal Reserve Chairman, Alan Greenspan:
In unusually clear testimony in July 2002, Chairman Greenspan railed against the "infectious greed" that had invaded American business, arguing that the best antidote was strong and ethical CEOs. "It has been my experience on numerous corporate boards that CEOs who insist that their auditors render objective accounts get them," Mr. Greenspan said, "and CEOs who discourage corner-cutting by subordinates are rarely exposed to it."
"Although we may not be able to change the character of corporate officers," he concluded, "we can change behavior through incentives and penalties." That is what is at stake in the Lay case.
So, let's see here. Mr. Murray reasons that, in the "special" case of a business executive, we should treat them like bank robbers in the criminal justice system even though the business executive did not intentionally commit a crime. If the CEO is simply lazy and negligent, then Mr. Murray reasons that she is intentionally neligent and lazy and, therefore, should have the same degree of criminal liability as the bank robber.
As one of my former professors used to say whenever confronted with such muddled reasoning: "Pooh-pah."
First, using the criminal justice system to remedy the problem that Mr. Murray addresses is akin to using an ax where a scalpel is needed and available. Extending criminal laws that penalize intentional crimes to penalize lazy and negligent businesspeople has the primary effect of confusing and ultimately undermining society's confidence in the rule of law. Indeed, such application of criminal laws may deter a few folks from becoming CEO's in the first place (although there is no empirical data supporting such a proposition), but it will not deter laziness or negligence.
However, even more important is the slippery slope. If Mr. Lay should be convicted for being lazy and negligent, then why should Enron's directors not also be convicted of the same crime? Or should they not be held criminally responsible for their laziness and negligence because they only flew commercial while Mr. Lay flew in the company's Gulfstream V? Or because their stock options were considerably less than Mr. Lay's? Or is it because they could not have reasonably known that Mr. Fastow was a crook while Mr. Lay should have?
Similarly, what does the system do with the CEO who is not lazy or negligent, but is truly undermined by crafty underlings who figure out a way to defraud the company despite the CEO's diligence? Convict the CEO anyway? Or carve out an exception to the crime if the jury finds that the CEO is not lazy or negligent? And if that exception is crafted, can you imagine the procedures and systems that CEO's would establish so that they would appear not to be lazy and negligent, particularly if they really were lazy and negligent? What webs Mr. Murray would have us weave!
Part of the cost of a free and productive economy is the risk of Enron-type failure. Misapplying criminal law neither will nor should deter such failures, and is much more likely to promote societal cynicism than responsible business practices. As Professor Ribstein notes in his post on Mr. Murray's column, "we have the tools within our current system. Responding to Ken Lay's irresponsibility with equivalent excesses in criminal prosecutions is not the answer."
Posted by Tom at July 13, 2004 8:54 AM |
After reading the above post, I must say that it is a very sad day that we simply call a crook lazy and negligent rather than deceitful and malicious. Kenneth Lay will wiggle out of going to prison no matter how much evidence is presented at his trial, and that is what is really sad here. Because he is a wealthy white male who did not go into a convenience store and stick a gun in someone's face while being videotaped by the security camera, he will walk out of the courtroom a free man. Never mind that he has caused incredible hardship for thousands of hard working people who have lost their entire pensions. And never mind that he intentionally misled investors to invest while he was selling his stock. What we have here is a pathetic excuse for a legal system.
Posted by: David Saddler at April 23, 2006 1:14 PM
Post a comment
Thanks for signing in, . Now you can comment. (sign out)(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)