8 years, 1 month ago

Should companies go to jail?

Link: http://weblog.tetradian.com/2013/03/17/should-companies-go-to-jail/

Could companies go to jail? An odd-seeming question, I know, but I’ve been musing somewhat on the deeper implications of that strange legal fiction of ‘corporate person’…

What started this off was that I went to the local HMV video-store, bought a couple of DVDs for an occasional session of escape-from-thinking-for-a-while, and noticed this chunk of text (with real names that I’ve edited out) printed out on the receipt:

On 15 January 2013, Xx Xxx, Yy Yyy and Zz Zzz of Deloitte LLP were appointed Joint Administrators of HMV Group plc, HMV Music Limited, HMV UK Limited, HMV (IP) Limited and Fopp Entertainments Limited (together the ‘Companies’). The affairs, business and properties of the Companies are being managed by the Joint Administrators. The Joint Administrators act as agents of the Companies only and contract without personal liability.

All fair enough, of course. As I remember, this is roughly the equivalent of what the US folks call ‘Chapter 11′, a kind of not-quite-bankruptcy where the respective company gets a chance to restructure itself to stave off – and, if possible, prevent – a real and final end-of-business.

Yet what struck me there was the repeated point about absence of liability. It’s not just that the Joint Administrators “contract without personal liability”: the company itself largely claims to have the ‘right’ to do so in the first place. And a parent company seems to have a kind of redoubled absence of liability: it’s liable neither for what it does, or for what any of its ‘child’-companies do. Which, when we think about it, is a bit odd.

In corporate law, at least, a company is supposedly a ‘legal person’, with most of the purported ‘rights’ of all legal persons – including, in the US at least, the legal right to provide any amount of funds to a preferred political candidate – yet somehow with far, far fewer responsibilities or liabilities. In fact the whole point of a registered company or corporation is that it has an artificially-reduced liability: that’s why it’s called a ‘limited company’, after all. And yes, within the somewhat-bizarre rules of a possession-based economy, that does make it more possible to do certain types of business that tend to entail certain specific types of risk. Useful, sure.

Yet compare that with the responsibilities faced by real people. If they commit a misdemeanor, they’re likely to get hit with a relatively-hefty fine; if they commit a felony, they’re likely to go to jail. In some countries, they may even face execution for certain more-extreme ‘crimes against the person’ or ‘crimes against the state’. By contrast, the worst that a company is likely to face for any ’irresponsible act’ is a monetary fine – and often a relatively-paltry fine at that, relative to the potential or actual damage done to other people’s lives. And the fine is paid to the state, not to the people or others hurt in the past, present or future by the crime.

In extreme cases, the company-executives or company-directors might face some personal risk of punishment – but not the company itself, the supposed ‘legal person’ here.

So let’s take that metaphor one step further, and imagine that the company is a legal person in its own right – rather than just an over-convenient legal-fiction about ‘corporate-person’. And let’s play for a while with some of the implications that arise from doing this…

If a company is a ‘legal person’, can it have an owner? If we compare it to the human-rights context, the answer would have to be a very strong ‘No’: one person owning another is slavery, which is definitely against the law. Even if we drop the ‘legal-person’ fiction, the idea of external ‘ownership’ of a company is seriously problematic in terms of the existing common-law on ‘natural-justice’: sure, in a possession-economy it makes sense to have ‘ownership’ of physical-assets, but when – as in many current companies – the main ‘assets’ are the knowledge, skills and experience of the people who work there, external-’ownership’ of those ‘assets’ likewise looks perilously close to slavery. Oops…

– If a company is a ‘legal person’, should it therefore be able to own another ‘company-as-legal-person’? If we apply the same logic as for a natural-person, it should be obvious that the answer is ‘No’ – because again it would be a kind of slavery, even if in virtual form. Interestingly, the answer used to be ‘No’, in the US at least; but that was changed for some reason somewhen around a century ago, which has brought us to the current thickets of semi-covert ‘ownership’ via shell-companies and the like. If we apply the ‘slavery’ analogy above, that kind of cross-ownership should definitely be illegal: it’s kind of odd that it isn’t…

– If a company is a ‘legal person’, can it hold contracts on the lives of other people? Once more, if we compare it to the human-rights context, the answer would again have to be a strong ‘No’: that’s called ‘bonded servitude’, which is supposedly not even legal in prisons, let alone anywhere else. Look again at that common phrase about “our people are our greatest asset!”: sure, it’s usually well-meant, but it’s actually tantamount to an assertion in law that the company believes that it has a ‘right’ to possess the lives of those people. The blunt fact is that it doesn’t work: the relationship is the asset – not the person. And without that relationship, there’s no access to the knowledge, skills and experience of those people. Not a good idea…

– If a company is a ‘legal person’ that commits what would, for a ‘natural person’, be a major crime, could it go to jail? As above, if we compare it to the equivalents for a ‘natural person’, the answer would have to be ‘Yes’: in terms of natural-justice, it would be unjust (or technically, ‘unconscionable privilege’) if the two types of persons did not face the same risks of punishment. Yet if we compare actual punishments  for natural-persons versus corporate-persons, the latter not only face vastly lower punishment for an equivalent offence, but the company itself remains unpunished: a few selected scapegoats might suffer – perhaps even at executive level – but the company itself will continue on, often entirely unscathed. Likewise the ‘external-’owners’, who bear no personal liability for offences carried out in their name and for their personal profit – yet they certainly should be liable, if core themes of international law such as the Nuremberg Principles were to apply. Again, very odd – or at the very least, oddly inconsistent…

– If a company were to face jail, what would ‘jail’ for a company look like? Following legal logic, it would look much the same as for as for a ‘natural person’: a graded scale from supervised ‘community service’ for relatively-minor crimes, to open-prison where liberty is constrained but can still maintain contact with the outer world, to full incarceration, and even execution for capital-crimes.

[Don’t panic! :-) – remember, this is the company itself I’m talking about, not the executives, directors or ‘owners’ of the company – though some of us might be happier if the same more-honest scales of punishment would apply to them too…]

‘Community-service’ could, for example, be a court-mandated action to serve some appropriate community-need: helping to rebuild a public-hospital, perhaps, or repair a road or some other public-infrastructure.

‘Open-prison’ would be where the company continues to trade, but only under tight supervision, and not for its own profit. In practice it might look much like ordinary ‘under administration’ or ‘receivership’, as in the HMV example with which I started this, but imposed by a criminal-court rather than by a bankruptcy-court.

‘Incarceration’ would be where the company is not allowed to trade at all, for the duration of the sentence. As for incarceration of ‘natural persons’, some public protection should be available to minimise risk or harm to the company’s dependents – such as its employees and immediate communities. That protection could be paid for by fines – perhaps including fees levied against the company’s ‘owners’ , since they profited personally at first from the company’s misdemeanours.

‘Execution’ in this case would literally mean an execution: termination of the company itself.

‘Remand’ applies an interesting twist on this, because a remand-prisoner is a person who has been charged with a major crime but who has not yet been committed to trial. Probably the nearest equivalent would be suspension of trading of stock: since the ‘owners’ would in effect also be legally liable in part for the company’s actions, the logic suggests that it would be in itself a personal criminal offence to attempt to sell stock of a company that is ‘on remand’ or whilst serving any kind of sentence after conviction for a misdemeanour, felony or crime.

The same logic suggests court-mandated seizure of company-assets in the case of major crime – equivalent, for example, to seizure of personal-assets for drug-related offences or organised-crime.

– Should a parent-company be legally-liable for the actions of a ‘child’-company? Following the same legal logic as for ‘natural-persons’, the answer again would seem to be ‘Yes’. Different countries have different expectations for the relative responsibilities of adults and their children, but the general principle that adults have more responsibilities than children, and at least some responsibility and liability for the actions of their children, is almost universal everywhere. It would seem that the same therefore ought to apply to ‘parent/child’-relationships between companies: that it usually doesn’t – in fact that that kind of relationship is often used to reduce the liabilities of the parent is definitely somewhat odd…

– Should there be varying liabilities at different maturity-stages in the corporate life-cycle? Again following the same logic as for ‘natural persons’, the answer in this case should probably be ‘Yes’. A start-up is kind of like an infant or, at times, a tantrum-laden toddler in the midst of the ‘terrible-twos’; somewhat later in the lifecycle, a company might well be more like an adolescent struggling with growing-pains and a distracting overdose of hormones and general pre-adult confusion. At some point, for real children, there’s a separation, moving out on one’s own: the same should be true of ‘child’-companies too, setting out to make their way in the world, yet with the full legal responsibilities of an adult. We don’t allow children to drink alcohol, drive cars, operate heavy machinery, take on loans or credit-cards: and the reason we don’t is because we know they have a reduced ‘response-ability’, the ability to choose appropriate responses to sometimes-difficult challenges. That we somehow assume that companies will be ‘instant adults’ in every sense is perhaps a little strange…

This suggests, too, a subtle yet important difference between a start-up versus a ‘spin-off’ from an existing company. In the latter case, the parent-company should literally take on the role of the parent – including the equivalents of the natural-parent’s legal responsibilities and liabilities. A start-up is perhaps more like a parentless orphan – in which case there’s a definite role there for a public legal-guardian ‘in loco parentis‘. It also suggests that the role of an investor to a start-up should involve quite a lot more responsibilities – and more active responsibilities – than just putting in a small amount of money and then sitting back and waiting to cash in (or cash-out, rather) on the IPO…

Anyway, maybe best to leave it at that for now. We could amuse ourselves further by pondering about the point at which a company might achieve its legal ‘age of majority’; or key social ‘rites of passage’, its metaphoric bar-mitzvah or christening or prom-night; or what scale of punishments might apply to this strange pseudo-person for different types of misdemeanour or offence. But perhaps the main point is to get clear that the legal-fiction of ‘corporate person’ cannot be allowed to have it both ways: it doesn’t make any kind of sense, either in terms of other law or of natural-justice, to allow an artificial construct to have far greater ‘rights’ yet far lower liabilities than those assigned to natural-persons – especially as that skewed set of responsibilities is then made available to be leveraged solely by and solely for the personal short-term benefit of a relatively-small self-selected subset of humankind. Oops indeed…

So yeah, definitely odd, definitely not-okay… And I fear that we can expect some serious troubles to start happening soon in the political arena – and, in turn, in the contexts within which all companies and corporations currently operate – if this socially-absurd and socially-insane disparity is not addressed and resolved Real Soon Now. Definitely a ‘really-big-picture’ theme for enterprise-architects, business-architects and the like, that we need to watch with care: the phrase ‘You Have Been Warned’ might well apply?