Prosecutors in the Boardroom: Using Criminal Law to Regulate Corporate Conduct

3. Removing Prosecutors from the Boardroom: Limiting Prosecutorial Discretion to Impose Structural Reforms

62 | 3 Removing Prosecutors from the Boardroom Limiting Prosecutorial Discretion to Impose Structural Reforms Jennifer Arlen Prosecutors in the United States are no longer content to sanction corporations for their employees’ crimes. They also now regularly intervene in corporations’ internal affairs by pressuring firms to adopt structural reforms ostensibly designed to reduce the likelihood of future wrongdoing. Moreover, prosecutors do not restrict their structural reform mandates to corporations convicted of federal crimes. They also use DPAs and NPAs to pressure firms that are merely potentially subject to conviction to agree to structural reforms in order to avoid indictment or conviction. Through these DPAs and NPAs, prosecutors have required firms to adopt prosecutor-approved compliance programs, alter the structure of the board of directors, accept and pay for an outside monitor, and, in some cases, change their business practices. Prosecutors’ use of DPAs and NPAs to intervene in the internal affairs of nonprosecuted corporations represents a change in strategy. The DOJ developed its nonprosecution policy to help federal authorities detect and sanction individuals responsible for corporate crime. To accomplish this goal, the DOJ abandoned its adherence to traditional vicarious criminal liability and adopted a policy governing corporate indictment and conviction designed to encourage corporations (and their directors)1 to report detected wrongdoing , identify individual wrongdoers, and cooperate with federal prosecutions of individual wrongdoers. To encourage reporting and cooperation, the DOJ offers to exempt from prosecution firms that report wrongdoing and cooperate with prosecutors, while threatening firms that do not do so with enormous criminal sanctions.2 Traditionally, prosecutors took a relatively hands-off approach to firms eligible for nonprosecution. The boards of directors of these firms were free Removing Prosecutors from the Boardroom | 63 to decide how best to deter and detect wrongdoing in the future. This is no longer the case. Today, prosecutors regularly inject themselves into the internal affairs of firms eligible for nonprosecution by requiring them to accept prosecutor-approved compliance programs, corporate monitors, and other corporate governance reforms in return for prosecutors’ agreement not to indict or prosecute them. In so doing, prosecutors substitute their own judgment about what internal corporate governance reforms are needed for the judgment of both the firm’s board of directors and civil federal regulators. Federal prosecutors’ propensity to require publicly held firms to agree to structural reforms as a condition of nonprosecution raises two important questions. The first is: Should federal authorities ever impose structural reforms on publicly held firms? The second is: When direct federal oversight is needed, should this oversight be exercised by prosecutors, or should it instead be the exclusive purview of federal civil regulatory authorities whenever possible? This chapter is concerned with the latter question. This chapter contends that prosecutors should not impose structural reforms on nonindicted corporations. Instead, civil regulatory authorities should exercise sole authority over mandated corporate governance reforms, in those situations where it is appropriate for federal authorities to require firms to accept structural reforms (including outside monitors). Prosecutors generally should not use DPAs and NPAs to induce firms to adopt structural reforms, such as compliance programs, because compliance program design involves difficult judgments about when and where to centralize decision making and to collect and channel information. Industries and firms vary enormously as to whether, and in what areas, the compliance benefits of decision-making centralization and oversight exceed the costs. Prosecutors rarely have sufficient experience working in any business, much less adequate industry-specific expertise, to make these decisions reliably. By contrast, civil federal regulatory authorities are more likely to have this expertise, at least with respect to the industries they regulate. In addition, prosecutors are subject to little, if any, external oversight when they intervene in internal corporate affairs. Moreover, prosecutors’ offices do not have a formal process for assembling and evaluating data on different compliance programs and monitoring plans to assess their effectiveness. By contrast, regulatory agencies are subject to greater oversight; moreover, they have the informationgathering abilities needed to assess compliance decisions. Agencies’ ability to gather information and collect public comments reduces the risk that federal authorities will mandate expensive, but ultimately ineffective, measures. Finally, regulatory agencies are in a position to conduct more widespread, 64 | Jennifer Arlen industry-specific, and formal assessments of compliance to determine if any firm-specific mandated reforms should be adopted on a more widespread basis. Delegating authority over governance reforms and corporate monitoring to civil authorities would enable the federal government...