A Lot of Corporate Crime Goes Unreported
According to the website: Live Science, contrary to popular belief, ostriches don’t bury their heads in the sand, but they do lie down with their heads against the ground when they feel threatened. Inexplicably, ostriches are not extinct given their approach to self defense. Human executives cannot take this approach when faced with an organizational threat. Instead, they have to make good, ethics-based decisions in order to survive.
In September 2022, Deputy Attorney General Lisa Monaco said in a speech: “We cannot ignore the data showing overall decline in corporate criminal prosecutions over the last decade,. “We need to do more and move faster.” This statement apparently prompted three Democratic lawmakers to write Attorney General Merrick Garland “urging the Justice Department to more thoroughly track and publish agency-wide statistics on the number of actions taken by prosecutors against corporations and executives who engage in business crimes.” Without question, it would be great if there was better reporting about corporate prosecutions. A lot of corporate crime never sees the light of day for a different reason – it is never reported by the company. These are the ostriches of the business world.
Before the passage of Sarbanes – Oxley, referring a crime to law enforcement was far from a foregone conclusion – it was more of a discussion. A discussion that frequently ended in the decision not to disclose. SOX changed things somewhat with Section 302’s requirement that the CEO and CFO “… have disclosed to the issuer’s auditors and the audit committee of the board of directors … any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal controls…” While SOX may not be popular or perfect, that one change forever tipped the scales in favor of disclosure. Despite that shift, those discussions about whether the company should disclose still take place. Organizations still go through a list of risk / return considerations on whether to disclose a financial crime and possibly unleash a firestorm of consequences from shareholders, customers, business partners, lenders and the media. Of course, what can be overlooked during those discussions is that a failure to disclose can create new problems and the firestorm isn’t just delayed, but also compounded by the fact that the organization made a conscious decision not to disclose. Doing so likely amplified the original problem and created new ones. The new problems include a loss of shareholder confidence in leadership. Being dishonest with the company’s auditors which requires them to respond in kind. Increased likelihood of shareholder lawsuits. And the worst new problem is how the organization is perceived by law enforcement and prosecutors. Not favorably.
Company’s that make a conscious decision to “hide the ball” start their new relationship with the U.S. Government on the wrong foot. By not disclosing the problem to the government and instead have the government bring it to their attention, it causes the government to expend considerably more resources and lose valuable time learning what the company already knew. This contempt for the process and “organizational selfishness” means that when it comes time to sentence the company, it will receive no credit under the Federal Sentencing Guidelines for voluntarily disclosing the offense to the government. It also probably means the company will only receive partial Guidelines credit for providing material cooperation to the government’s investigation. Maybe. These two factors weigh heavily on the criminal sentence, fines, penalties and whether the government decides to appoint a monitor to oversee the company’s continued operation after sentencing. These are just some of the problems of the company’s own making that happen after the ill-fated decision of not disclosing the in the first place.
Organizational leadership must understand that the decision not to disclose that criminal offenses took place in the company can have long term, possibly irreparable consequences to the company. Part of what the government examines in these circumstances is the part of the company’s compliance program for which senior leadership bears responsibility: Commitment of Senior and Middle Management. In some of the guidance to the U.S. Department of Justice issues to its prosecutors, it uses the term “Conduct at the Top”. It refers to the knowledge and accountability of senior leadership in posing several questions.
“How have senior leaders, through their words and actions, encouraged or discouraged compliance, including the type of misconduct involved in the investigation?
What concrete actions have they taken to demonstrate leadership in the company’s compliance and remediation efforts? How have they modelled proper behavior to subordinates?
Have managers tolerated greater compliance risks in pursuit of new business or greater revenues?
Have managers encouraged employees to act unethically to achieve a business objective, or impeded compliance personnel from effectively implementing their duties?”
Consciously deciding not to disclose a criminal offense that occurred within your organization is a failure of leadership and one for which the company and the individual decision-makers will be held accountable. These decision-makers are whose “Conduct at the Top” the government is referring to and also the “throat to choke”. Human beings are flawed and we are tempted to make selfish, self-serving decisions every day. When you are in a position of leadership and the company has broken the law, the only decision is to do is what is right for the company, its employees, shareholders, customers, business partners and the communities which you serve.
It’s very simple. Figure out what happened as best you can. Then engage with law enforcement and prosecutors in a transparent and honorable way, fix the problems that contributed to the conduct in the first place and then move on. That is what ethical organizations do. Talented people want to work for you, institutional investors will invest in your stock and customers will remain loyal. Not just because of the strength of the brand but of what the brand and its leadership stands for. Even the most accomplished, storied organizations have had their share of problems but those that faced them with courage, conviction and filtered their decisions through an unwavering commitment to doing what’s right become more resilient and more successful over the long term.