Up from flatland: Business ethics in the age of divergence

Business Ethics Quarterly

Volumn 17, Issue 3, 2007, Pages 399-426

  Hasnas, John ^a  

^a NONE

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EID: 34547126001     PISSN: 1052150X     EISSN: None     Source Type: Journal    
DOI: 10.5840/beq200717339     Document Type: Article

References (91)

1. EDWIN A. ABBOT, FLATLAND (1884).
2. For a detailed account of this process, see John Hasnas, Ethics and the Problem of White Collar Crime, 54 AM. U. L. REV. 579, 588-630 (2005).
3. For purposes of concision, 1 speak exclusively in terms of for-profit enterprises. However, my point is general. Non-profits must still use resources as efficiently as possible in order to best achieve their goals. Charitable organizations that dissipate their resources while only poorly serving the ends of their donors will soon find themselves without donors. Although such organizations are not maximizing profits, their managers are still bound to strive to accomplish their organizations' missions at the lowest possible cost.
4. See Milton Friedman, The Social Responsibility of Business is to Increase its Profits, N. Y. TIMES MAG. Sept. 13, 1970. Note that Friedman's version of the stockholder theory is not that referred to in the text. Friedman does not assert that the only restrictions on the pursuit of profit are those embodied in law. He explicitly recognizes the additional normative obligations to refrain from rent-seeking and deceptive practices, i.e., "engage[] in open and free competition without deception or fraud."
5. See Thomas Donaldson & Thomas Dunfee, Toward a Unified Conception of Business Ethics: Integrative Social Contracts Theory, 19 ACAD. MGMT. REV. 252, 254-71 (1994).
6. See, e.g., CHRISTOPHER D. STONE, WHERE THE LAW ENDS: THE SOCIAL CONTROL OF CORPORATE BEHAVIOR 111-12 (1975); Norman E. Bowie, Fair Markets, 7 J. OF BUS. ETHICS 89 (1988); THOMAS DONALDSON & THOMAS DUNFEE, TIES THAT BIND 156-60 (1999).
7. Business ethicists recognize that this is not always the case, typically citing American Jim Crow, South African apartheid, or Nazi anti-Semitic legislation as illustrations of cases in which the law and ethics are at odds. However, once such obvious and egregious counter-examples have been excluded, analysis usually proceeds under the assumption that the law does not command unethical behavior. This is the assumption that is being challenged in this article.
8. See, e.g., mail fraud, 18 U.S.C. §§ 1341, 1346 (2005), wire fraud, 18 U.S.C. § 1343 (2005), bank fraud, 18 U.S.C. § 1344 (2005), health care fraud, 18 U.S.C. § 1347 (2005), computer fraud, 18 U.S.C. § 1030 (2005), and securities fraud, 18 U.S.C. § 1348 (2005).
9. 18 U.S.C. § 1341 (2005).
10. 18 U.S.C. § 1346 (2005).
11. Neder v. United States, 527 U.S. 1, 25 (1999).
12. United States v. Townley, 665 F.2d 579, 585 (1982).
13. United States v. Rybicki, 287 F.3d 257, 264 (2d Cir. 2002).
14. United States v. Brown, 79 F.3d 1550 (11th Cir. 1996).
15. United States v. Jain, 93 F.3d 436 (8th Cir. 1996).
16. United States v. D'Amto, 39 F.3d 1249 (2d Cir. 1994).
17. United States v. Czubinski, 106 F.3d 1069 (1st Cir. 1997).
18. Indictment at 37, United States v. Stewart, (S.D.N.Y. 2003) (No. 03 Cr. 717). This charge was dismissed at trial for lack of evidence.
19. United States v. Hanousek, 176 F.3d 1116, 1121 (9th Cir. 1999).
20. Rivers and Harbors Act of 1899 § 13, 33 U.S.C. § 407 (2005).
21. United States v. White Fuel Corporation, 498 F.2d 619, 621 (1st Cir. 1974).
22. United States v. Iverson, 162 F.3d 1015, 1025 (9th Cir. 1998).
23. 21 U.S.C. § 331(k) (2005).
24. 33 U.S.C. §§ 1319 (c)(1)(A) & 1321 (b)(3) (2005).
25. United States v. Hanousek, 176 F.3d 1116, 1121 (9th Cir. 1999).
26. 31 U.S.C. § 5322 (2005) makes it a felony to willfully fail to file required currency transaction reports (CTRs). 31 U.S.C. § 1313 (2005) requires banks and financial institutions to report transactions of more than $10,000. 31 U.S.C. § 1316 (2005) requires casinos and person persons moving currency in and out of the country to report transactions or currency movements of more than $10,000.26 U.S.C. § 6050I(a) (2005) requires all persons receiving more than $10,000 in cash in the course of one's business to file a report. 31 U.S.C. § 5324 (2005) makes it a felony for anyone to structure his or her financial transactions to avoid federal reporting requirements.
27. See 18 U.S.C. §§ 1956, 1957 (2005); United States v. Jackson, 935 F.2d 832 (7th Cir. 1991) (in which the court upheld the money laundering conviction of an alleged drug dealer for writing checks to purchase cell phones and pay his rent and for cashing checks for small amounts at his local bank).
28. See 18 U.S.C. § 1001 (2005). The reach of § 1001 is so broad that it makes it a new federal offense to falsely deny one's guilt of another substantive offense, Brogan v. United States, 522 U.S. 398 (1998).
29. See 18 U.S.C. §§ 1503, 1505, 1510, 1512, 1519-20 (2005); United States v. Shotts, 145 F.3d 1289 (11th Cir. 1998); United States v. Thompson, 76 F.3d 442 (2d Cir. 1996).
30. For a more detailed account of the difficulties of enforcing federal anti-fraud legislation, see Hasnas, supra note 2 at 588-95 (2005).
31. See, e.g., Peter French, The Corporation as a Moral Person, 16 AM. PHIL. Q. 207 (1979); LARRY MAY, THE MORALITY OF GROUPS, chs. 1-4 (1987); PATRICIA WERHANE, PERSONS RIGHTS, AND CORPORATIONS, chs. 1-2 (1985); Kennth E. Goodpaster & John B. Matthews, Jr., Can a Corporation Have a Conscience? HARV. BUS. REV., Jan.-Feb., 1982, at 132-41.
32. See, e.g., Pamela Bucy, Corporate Ethos: A Standard for Imposing Corporate Criminal Liability, 75 MINN. L. REV. 1095, 1103-05 (1991); Jennifer Moore, Corporate Culpability Under the Federal Sentencing Guidelines, 34 ARIZ. L. REV. 743, 767-73 (1992); Ann Foerschler, Corporate Criminal Intent: Toward a Better Understanding of Corporate Misconduct, 78 CAL. L. REV. 1287 (1990).
33. Although corporate character is not relevant to a corporation's guilt or innocence, it may be relevant to the severity of punishment. See infra Part III(B)(2).
34. New York Central & Hudson River Railroad Co. v. United States, 212 U.S. 481 (1909); Standard Oil Co. v. United States, 307 F.2d 120 (5th Cir. 1962); Steere Tank Lines, Inc. v. United States, 330 F.2d 719 (5th Cir. 1964).
35. United States v. Hilton Hotels Corp., 467 F.2d 1000, 1007 (9th Cir. 1972).
36. United States v. Bank of New England, 821 F.2d 844, 856 (1 st Cir. 1987).
37. UNITED STATES SENTENCING COMMISSION, GUIDELINES MANUAL, ch. 8 (1992) (Sentencing of Organizations) [hereinafter U.S.S.G.].
38. Jennifer Moore, Corporate Culpability Under the Federal Sentencing Guidelines, 34 ARIZ. L. REV. 743, 785 (1992).
39. See U.S.S.G. § 8C2.5 (2005).
40. See supra note 18 and accompanying text.
41. The offense would have an offense level of 32 comprised of 6 for the Base Offense Level (U.S.S.G. § 2B1.1(a) (2005)), 18 for the Specific Offense Characteristics (§ 2B1.1(b)), 4 for the number of victims (§ 2B1.2(B)), and 4 for a violation of securities law by a director of a publicly traded company (§ 2B1.15(A)). Offenses with an offense level of 32 are assigned a base fine of $17.3 million (§ 8C2.4).
42. See U.S.S.G. § 8C2.5(b) (2005).
43. Id. § 8C2.6.
44. Id.
45. The impact of the Guidelines is so significant that Professor John Coffee of Columbia University law school has declared that "[f]or a general counsel to ignore these guidelines is professional malpractice." Michele Galen, Keeping the Long Arm of the Law at Arm's Length, BUS. WK., Apr. 22, 1991, at 104.
46. U.S.S.G. § 8B2.1(a)(1) (2005).
47. Id. § 8C2.5 cmt. 12.
48. Id.
49. Memorandum from Deputy Attorney General Paul J. McNulty to Heads of Department Components, Principles of Federal Prosecution of Business Organizations (Dec. 16,2006), [hereinafter McNulty Memorandum] available at http://www.usdoj.gov/dag/speech/2006/mcnulty_memo .pdf.
50. The memorandum was originally known as the Holder Memorandum, after Deputy Attorney General Eric Holder who first issued it in 1999. It subsequently became known as the Thompson Memorandum when Deputy Attorney General Larry Thompson revised and reissued it in 2003. Deputy Attorney General Paul McNulty issued the current version of the Memorandum in December of 2006 to supercede the Thompson Memorandum, which had been subject to intense criticism for instructing United States attorneys that a corporation's refusal to waive its attorney-client and work product privileges or its willingness to advance its employees' legal fees could be regarded as a lack of cooperation with the government. In reaction to court rulings holding that the Thompson Memorandum's instruction regarding legal fees violated the Fifth and Sixth Amendments, (See U.S. v. Stein (Stein I), 435 F.Supp.2d 330 (S.D.N.Y. 2006); U.S. v. Stein (Stein II)...
51. Id. § III(A)(4).
52. Id. § III (A)(5).
53. Id. §§ VII-VIII. At the time of this writing, legislation is pending before the Senate Judiciary committee that would bar DOJ from asking for waivers of attorney-client. If ultimately adopted, such legislation would alter the DOJ's definition of cooperation.
54. Little, perhaps, but not necessarily none. For example, if the level of monitoring required to prevent intentional wrongdoing improperly invades employees' privacy, a manager's ethical and legal obligations may conflict. See infra Part VII(B).
55. This requirement is strongly reinforced by the responsible corporate officer doctrine under which supervisors may themselves be criminally punished for the unintentional crimes of their subordinates.
56. See infra Part VII.
57. See infra Part VII.
58. See James A. Waters, Catch 20.5: Corporate Morality as an Organizational Phenomenon, in CONTEMPORARY MORAL CONTROVERSIES IN BUSINESS 160 (A. Pablo Iannone ed., 1989); see also THOMAS DONALDSON, CORPORATIONS AND MORALITY 154-55 (1982) (describing how many United States companies utilize "hot-lines" and "operator" policies to encourage employees to speak truthfully).
59. U.S.S.G. § 8C2.5 cmt. 12 (2005).
60. The Supreme Court has explicitly recognized this fact in the context of the attorney-client privilege, stating "if the purpose of the attorney-client privilege is to be served, the attorney and client must be able to predict with some degree of certainty whether particular discussions will be protected. An uncertain privilege ... is little better than no privilege at all." Upjohn Co. v. United States, 449 U.S. 383, 393 (1981).
61. U.S.S.G. § 8B2.1(b)(5)(C) (2005).
62. Indeed, in the Sarbanes-Oxley Act of 2002, Congress required publicly traded companies to establish procedures for "the confidential, anonymous submission by employees of issues or concerns regarding questionable accounting or auditing practices." Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 301, 116 Stat. 745, 776.
63. These findings were compiled by the author by individually reviewing ethics and compliance policies for each of the Fortune 200 companies, which are available on each company's website. Research results are on file with the author.
64. Page 13, ¶ 27 of both Kaplan and Rivard indictments (available at http://www.usdoj. gov/dag/cftf/chargingdocs/kaplaninfo.pdf and http://www.usdoj.gov/dag/cftf/chargingdocs/ rivardinfo.pdf and page 16, ¶ 33 of Zar indictment (available at http://www.usdoj.gov/dag/cftf/ chargingdocs/zarinfo.pdf).
65. See Laurie P. Cohen, Prosecutor's Tough New Tactics Turn Firms Against Employees, WALL ST. J., June 4,2004, at A1; E. Lawrence Barcella, Jr., et al., Cooperation with Government is a Growing Trend, NAT'L L.J., July 19, 2004, at S2.
66. See, e.g., THOMAS DONALDSON, THE ETHICS OF INTERNATIONAL BUSINESS 45 (1989) (describing the theory as "corporate Neanderthalism... with morally pernicious consequences"); ROBERT C. SOLOMON, ETHICS AND EXCELLENCE 45 (1992) (describing the position as "not only foolish in theory, but cruel and dangerous in practice" and misguided "from its nonsensically one-sided assumption of responsibility to his pathetic understanding of stockholder personality as Homo economicus"); William M. Evan & R. Edward Freeman, A Stakeholder Theory of the Modern Corporation: Kantian Capitalism, in ETHICAL THEORY AND BUSINESS 75, 77 (Tom L. Beauchamp & Norman E. Bowie eds., 4th ed., 1993); Thomas Donaldson & Lee E. Preston, The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications, 20 ACAD. MGMT REV. 65, 81-82(1995).
67. See Dennis P. Quinn & Thomas M. Jones, An Agent Morality View of Business Policy, 20 ACAD. MGMT. REV. 22, 25-30 ( 1995). This position is almost always articulated by corporate executives when they are asked to comment on ethical matters. See, e.g., Comments of Benjamin W. Heineman, Jr, Senior Vice-President for Law and Public Affairs, General Electric, in Corporate Social Responsibility: Good Citizenship or Investor Rip-off?, WALL ST. J., January 9, 2006, at R6-R7.
68. THOMAS DONALDSON, THE ETHICS OF INTERNATIONAL BUSINESS 45 (1989).
69. See supra note 6 and text accompanying.
70. See, e.g., Gary R. Weaver and Linda Klebe Treviño, Compliance and Values Oriented Ethics Programs: Influences on Employees 'Attitudes and Behavior, 9 BUS. ETHICS Q. 315 (1999) (identifying legal compliance and ethics programs); Eugene Szwajkowski, Organizational Illegality: Theoretical Integration and Illustrative Application, 10 ACAD. MGMT. REV. 558, 558-60 (1985); Anthony J. Daboub, et al., Top Management Team Characteristics and Corporate Illegal Activity, 20 ACAD. MGMT. REV. 138, 146-48 (1995); Donna M. Randall, Commitment and the Organization: The Organization Man Revisited, 12 ACAD. MGMT. REV. 460, 466 (1987).
71. See NORMAN BOWIE, BUSINESS ETHICS 140-143 (1982); Sissela Bok, Whistleblowing and Professional Responsibilities, 11 N.Y.U. EDUC. Q. 2, 3 (1980).
72. Fox's lack of knowledge that he was acting illegally does not relieve him of liability. With only a few exceptions, see Cheek v. United States. 498 U.S. 192 (1991), knowledge of the law is not a required element of a criminal offense.
73. U.S.S.G. § 8C2.5 cmt.12 (2005); McNulty Memorandum supra note 49 § VI(B).
74. How much more would this be the case if the employee had innocently or inadvertently committed a public welfare offense or was charged as a responsible corporate officer?
75. See Tom R. Tyller, Promoting Employee Policy Adherence and Rule Following in Work Settings, 70 BROOK. L. REV. 1287 (2005). See also Andrew A. King & Michael J. Lenox, Industry Self-Regulation Without Sanctions: The Chemical Industry's Responsible Care Program, 43 ACAD. MGMT. J. 698 (2000); Clifford Rechtschaffen, Deterrence vs. Cooperation and the Evolving Theory of Environmental Enforcement, 71 S. CAL. L. RE v. 1181 (1998); Marius Aalders & Ton Wilthagen, Moving Beyond Command and Control: Reflexivity in the Regulation of Occupational Safety and Health and the Environment, 19 L. & POL'Y 415 (1997); Darren Sinclair, Self-Regulation Versus Command and Control? Beyond False Dichotomies, 19 L. & POL'Y 529 (1997); Mark Suchman, Managing Legitimacy: Strategic and Institutional Approaches, 20 ACAD. MGMT. REV. 571 (1995).
76. See Tom R. Tyler, Promoting Employee Policy Adherence and Rule Following in Work Settings, 70 BROOK. L. REV. 1287, 1290-93 (2005).
77. Tom R. Tyler & Stephen L. Blader, Can Business Effectively Regulate Employee Conduct?: The Antecedents of Rule Following in Work Settings, 48 ACAD. MGMT. J. 1143, 1154 (2005).
78. To be regarded as cooperating, a corporation must demonstrate "affirmative acceptance of responsibility for its criminal conduct," U.S.S.G. § 8C2.5(g) (1) (2005). Because a corporation that "puts the government to its burden of proof at trial by denying the essential factual elements of its guilt" is regarded as not having accepted responsibility for its conduct, id. § 8C2.5 cmt. 13, cooperation requires a corporation to be willing to plead guilty. But a corporation is guilty of an offense only when its employees are. Therefore, cooperation requires a corporation to presume its employees are guilty. Hence, no corporation that accords its employees a presumption of innocence can satisfy the legal requirements for cooperation.
79. Laura B. Pincus & Clayton Trotter, The Disparity between Public and Private Sector Employee Privacy Protections: A Call for Legitimate Privacy Rights for Private Sector Workers, 33 AM. BUS. L.J. 51, 88 (2001).
80. See George Brenkert, Privacy, Polygraphs, and Work, in BUSINESS ETHICS: READINGS AND CASES IN CORPORATE MORALITY 294, 295 (W. Michael Hoffman & Jennifer Mills Moore eds., 2d ed. 1990); Joseph R. Des Jardins & Ronald Duska, Drug Testing in Employment, in BUSINESS ETHICS: READINGS AND CASES IN CORPORATE MORALITY 301, 302 (W. Michael Hoffman & Jennifer Mills Moore eds., 2d ed. 1990).
81. Id.
82. See supra, text accompanying notes 34-36.
83. U.S.S.G. § 8B2.1(b)(5)(A) (2005).
84. For example, Deloitte & Touche now offers to create psychological profiles of employees designed to help employers identify those likely to engage in illegal conduct as one of its services. See Karen Richardson, Find the Bad Employee: A Tool Can Do It, Privacy Issues Aside, WALL ST. J., Feb. 1, 2006, at C3.
85. See James A. Waters, Catch 20.5: Corporate Morality as an Organizational Phenomenon, in CONTEMPORARY MORAL CONTROVERSIES IN BUSINESS 160 (A. Pablo Iannone ed., 1989); Robert Jackall, Moral Mazes: Bureaucracy and Managerial Work, HARV. BUS. REV. Sept.-Oct. 1983, at 118-30.
86. Courts do not recognize the doctrine of selective waiver. Waiving the privilege for one purpose, e.g., cooperation with a criminal investigation, waives it for all purposes. See United States v. Massachusetts Institute of Technology, 129 F.3d 681, 685 (1st Cir. 1997).
87. David A. Nadler, Don't Ask, Don't Tell, WALL ST. J., Nov. 25, 2003, at B2.
88. This was in conformity with the provision in Thompson Memorandum (the McNulty Memorandum's predecessor) that permitted prosecutors to consider the payment of such fees as a lack of cooperation. As noted above, this provision was removed from the McNulty Memorandum. See supra, note 50.
89. In conformity with this agreement, KPMG has agreed to settle a class action lawsuit brought by purchasers of its tax shelters for $225 million and is in the process of settling other outstanding suits. Nathan Koppel, Law Firm Offers an Unusual Fee in KPMG case, WALL ST. J., Jan. 27, 2006, at C1.
90. The facts of this account of the KPMG case are taken from Laurie P. Cohen, Prosecutor's Tough New Tactics Turn Firms Against Employees, WALL ST. J., June 4, 2004; Leonard Post, Deferred Prosecution Deal Raises Objections, Nat'l. L. J. Jan. 30, 2006, at 4; KPMG in Wonderland, WALL ST. J., Oct. 6, 2005, at A14; Deferred Prosecution Agreement (Re: KPMG) from David N. Kelley, US Attorney for the Southern District of New York (Aug. 26, 2005), available at http://www.usdoj.gov/usao/nys/Press%20Releases/August%2005/KPMG%20dp%20AGMT .pdf; Press Release, Internal Revenue Service, KPMG to Pay $456 Million for Criminal Violations (Aug. 29, 2005), available at http://www.irs.gov/newsroom/article/0,,id=146999,00.html.
91. As previously noted, this requires the corporation to be willing to plead guilty, which in turn requires it to regard its employees as guilty. See supra note 78. Hence, the corporation must make no public statements inconsistent with this assumption.