Corporate Crime and Law Violations

Examples include failing to install or properly operate pollution control equipment as required by environmental laws, defrauding the government on a military supply contract, exposing workers to unsafe workplaces in violation of occupational safety and health laws, selling dangerous or defective products in violation of consumer protection laws, and conspiring with competitor firms to charge higher prices to customers than would be possible under true competition in the marketplace.

Although misconduct in pursuit of business purposes has been committed throughout commercial history, in the United States it first became a matter of wide public concern in the late nineteenth century, during the peak era of American industrialization. The aggressive and often corrupt business practices of the so-called Robber Barons created virtual monopolies (trusts) in such industries as oil and sugar, whereas railroads engaged in price discrimination that favored large companies over small producers. These trusts and behaviors spurred popular opposition that led ultimately to the creation of the first independent federal regulatory agency in 1887-the Interstate Commerce Commission to regulate railroads’ rates-and to the passage of the first major corporate crime law in the United States in 1890: the federal Sherman Antitrust Act, which outlawed monopolies and conspiracies that limited competition.

Other early federal legislation included the Pure Food and Drug Act and the Meat Inspection Act, both passed by Congress in 1906. These laws were spurred by scandals in the medicinal drug and food industries and by such exposés as Upton Sinclair’s best-selling novel The Jungle (1906), which described the unsanitary conditions of production in the Chicago meatpacking industry.

The law of corporate crimes has expanded dramatically in the decades since, typically following either growing recognition of standard business practices that harmed the public interest, or what the media labeled as corporate crime waves of illegal activity by numerous business firms. An example of the first situation is the creation in the early 1970s of the federal Environmental Protection Agency and of new federal laws outlawing air and water pollution in response to growing public concern over industrial pollution. An example of the second is the spur to action caused by such major financial frauds as those discovered at the Enron and Worldcom companies in the early years of the twenty-first century. This pattern of widespread fraud led Congress in 2002 to pass the Sarbanes-Oxley law, legislation that created new standards of top-management responsibility for honest financial accounting and that increased penalties for defrauding investors in shares of corporate stock.

The Study of Corporate Lawbreaking

The systematic examination of lawbreaking by corporations did not develop until the middle of the twentieth century. Although Edward A. Ross, writing in The Atlantic Monthly magazine, had drawn attention in 1907 to what he labeled criminaloids operating in American business, it was not until the 1949 publication of Edwin Sutherland’s pioneering book White Collar Crime that the world had its first comprehensive study of corporate offending. The book examined the violations of law by several dozen of the largest American corporations and discovered high rates of offending, typically answered by lenient government penalties. Coming early in an era dominated in the United States by the conservative, anti-Communist culture of the Cold War, the book prompted many in positions of power to call Sutherland’s research an unjustified attack on business, and some labeled him a radical. Not surprisingly, his ambitious lead was followed by only a handful of smaller-scale research studies during the 1950s and 1960s. However, the social conflict and political turmoil of the 1960s and early 1970s provided fertile ground for such research, and the study of corporate lawbreaking took firmer root. In particular, the divisive Vietnam War and the Watergate-era crimes of the Nixon administration and 1972 presidential campaign, including illegal campaign contributions by corporations, focused public concern on abuses of power in both business and government. One consequence of this new political climate was the first federal funding for research on white collar crime and its regulation. The research arm of the U.S. Department of Justice funded three major research programs in the 1970s, at Yale University and at the universities of Wisconsin and Minnesota. Although the latter project dealt with employee theft from businesses rather than with corporate lawbreaking, the Yale and Wisconsin researchers took up key questions of the misconduct of businesses and of government policies for controlling it.

The Wisconsin research produced the first and only comprehensive updating of Sutherland’s study, analyses of the violations of federal law by several hundred of the nation’s largest industrial corporations that were published in two volumes: Illegal Corporate Behavior (1979) and Corporate Crime (1980).

Although research in this area has now established its legitimacy in both academic and government circles, it proceeds at a slower pace and at lower levels of government funding than do studies of street crime. While several reasons account for this difference, a principal one is the relatively constant high public and political concern over the dangers posed by such crimes as robbery, burglary, and murder, even when rates of such crimes decline substantially as they did in the 1990s. In contrast, public and political concern over corporate crimes rises and falls with media attention to periodic “crime waves,” such as with the recent series of financial frauds in both American and foreign companies.

Another distinction between research on street crime and that on corporate lawbreaking is definitional. Whereas the definition of street crimes is straightforward-violations of criminal laws-definitions have been more controversial for corporate crime. Some scholars argue that researchers should limit their studies only to those cases in which companies have been prosecuted under criminal laws. Others disagree. They argue that, because of the political influence especially of big business, the government treats the vast majority of corporate offenses as non criminal violations of regulatory or civil laws in order to spare companies the stigma of criminal prosecution. These scholars conclude that there is no fundamental difference between crimes as conventionally defined and corporate violations of law handled by the government as non criminal offenses. Studies that have used this broader definition of corporate crimes include Sutherland’s and the Wisconsin research. Other scholars sidestep this debate by avoiding the terminology of crimes and speaking instead of corporate violations, offenses, and lawbreaking.

Factors in Corporate Lawbreaking

Whatever the definitions used in research, certainly the social harms caused by corporate lawbreaking are massive in the aggregate. Although a single price-fixing conspiracy can net colluding corporations millions of dollars in illegal profits, the financial frauds that led to the bankruptcies of Enron, Worldcom, and other corporations in 2002 alone resulted in dozens of billions of dollars of losses to investors, including many Americans’ pension funds. Financial losses of this scale dwarf the annual losses due to conventional street crimes, such as robbery, burglary and auto theft. Corporate violations can also cause substantial physical harm: to workers on the job, to consumers from unsafe medicines and other consumer products, and to citizens from industrial pollution. For example, each year several thousand employees die from injuries, and several million more are injured or made ill while at work. Tens of thousands of additional deaths from chronic exposure to hazardous work environments are estimated to occur annually. Although it is not known what proportions of these injuries, illnesses, and deaths are caused by companies’ violations of worker safety laws, federal Occupational Safety and Health Administration (OSHA) data suggest that corporate violations are responsible for a considerable number. OSHA data show that federal and state inspections during a single fiscal year (2004), discovered more than 121,000 serious violations of worker safety laws, violations in which there was a substantial likelihood of death or serious physical harm.

There is similar uncertainty about the frequency with which corporations break laws and how many offenses they commit annually. Unlike the federal government’s annual compilations of street crimes, no regular accounting system tracks corporate violations of law in the United States. What exists instead are a handful of studies, none of recent vintage, that suggest rates at which corporations break laws. They are all limited by their reliance on samples of companies and on available government data on firms found in violation of law. Of necessity, the studies, therefore, do not include offenses unknown to law enforcement officials or not pursued by them.

Sutherland’s study in the 1940s of the offense histories of seventy large corporations found that all had committed at least one violation, averaging fourteen violations each over the course of their business lifetimes (which averaged forty-five years), or roughly one case of lawbreaking every three years for the average firm. The violations included price fixing, financial fraud, false advertising, and illegal treatment of workers. His study also found that 60 percent of the companies had been convicted of criminal offenses and that these forty-two firms had averaged four criminal convictions each.

The Wisconsin research compiled legal actions taken by the federal government in 1975 and 1976 against 477 of the largest industrial corporations in the United States. Almost half of the companies were charged with violations of law that were not minor in the areas of unfair competitive practices, worker safety, product safety, and environmental protection, among others; the companies so charged averaged three such cases in the two-year period. Of the enforcement actions taken against these companies, only 3 percent involved criminal prosecutions. Relatedly, a study of more than 1000 major corporations by Fortune magazine found that 10 percent of them had committed substantial violations during the decade of the 1970s.

Because corporations break laws at different rates and violate different types of law, and because rates of such lawbreaking vary over time as well, it is apparent that motivations and opportunities for violating laws vary. Understanding these variations has been the goal of considerable social science research. In their search for explanations of corporate lawbreaking, the studies suggest the importance of a number of factors, including the aggressive pursuit of profit, the nature of product markets, the cultural values of individual companies, and corporate officials’ perceptions of the legitimacy of the laws that prohibit misconduct. These factors do not operate independently; instead they appear to interact with each other to produce a greater or lesser likelihood that companies will break laws.

For example, there is a slight tendency for companies experiencing relatively low profitability to commit more offenses, but more profitable firms often commit them as well. This tendency suggests that the pursuit of profit is more likely to produce lawbreaking when the corporate culture emphasizes the importance of profitability over other social values, such as corporate responsibility to the community, workers, consumers, and the natural environment. The values established by top corporate executives are key in establishing cultures that are either law-abiding or violation-prone. But executives’ values are themselves shaped by such factors as the culture of the industries in which companies compete, the design of compensation systems for management performance, pressure from stock markets to show consistent short-term profit growth, and whether or not the government enforces the laws consistently and aggressively.

The Control of Corporate Offenses

Several mechanisms have been used and proposed to limit lawbreaking by corporations. Legal approaches figure most prominently among these mechanisms, but they also include improved ethics training for both business students and active managers and compliance and ethics programs operated inside companies. Law may inhibit wrongdoing in either of two ways. It may deter offenses through fear of criminal punishment and costly financial penalties, or it may morally educate citizens to avoid prohibited harmful behaviors. To date, research on the deterrent effects of law for corporate offenses generally suggests that punishment has only modest effects on future compliance with legal rules. Especially for large companies, deterrence will be limited when fines are small relative to the firms’ wealth and when companies can use their financial resources and legal expertise to prevent government from provoking or seeking harsh sanctions. Under some circumstances fines and prison terms for individual corporate executives and managers may deter future offenses.

Some scholars, most prominent among them the sociologist John Braithwaite, have advocated the greater use of cooperative methods of legal response to violations in the first instance, rather than an initial reliance on punishment. Such methods include negotiations between government regulators, a law-violating business, and affected third parties (e.g., workers, investors, and community members) toward compliance with legal requirements; if the company continued to violate the laws, the government would then apply increasingly stringent penalties. Advocates of this approach argue that it would produce better compliance with law because company personnel would be more likely to accept the moral importance of socially responsible behaviors. Other scholars are skeptical, and such approaches have yet to be widely applied and assessed for their effectiveness. In the meanwhile, the U.S. Sentencing Guidelines for Organizations, implemented in 1991, have helped spur the development of compliance and ethics programs in many companies; under the guidelines, violating companies that can show good-faith compliance programs may receive reduced penalties upon conviction. National patterns of enforcement for corporate lawbreaking remain dynamic. These patterns include the imposition of criminal, civil, and regulatory law penalties by both national and state-level government units as well as class-action lawsuits brought by victims of corporate wrongdoing. Over time, enforcement varies in its intensity and in the severity of punishments and costs imposed upon violating companies. Especially in the wake of the numerous financial frauds by corporations in recent years, there have been many cases in which individual companies have paid financial penalties and court settlements of tens and even hundreds of millions of dollars. The effects of such costs on future corporate compliance with law remain to be seen.