Criminalizing agency costs

Today's WSJ was virtually a police gazette on corporate crime. In addition to this roundup, also discussed by Tom Kirkendall, there were others referred to below in this post.   

As I’ve said repeatedly (see my Corporate Crime archive), there’s a big difference between prosecuting agency costs and prosecuting other crime. A lot of this goes to the nature of the evidence involved, the relevance of contracts, and the subtleties of dividing responsibility.

Suppose somebody lifts your wallet or strongarms you on the street. There’s no question that’s wrong. What if they ask you first if they can borrow your wallet and then don’t give it back in time?  What if they ask your employee who’s running the store for you?  What if the “thief” is another employee who says the manager gave him the money as compensation?

Wrongness in these situations turns on the contracts among the various parties.  Proof depends on who said what to whom.  Can we rely on what the witnesses say about this? What if the prosecutor tells the guy who’s minding the store that he’ll get off if he spills the beans on the “thief”?

This W$J story on interviews with the Tyco jurors has one juror saying about the defense argument that a deceased director had approved the payment:

Most of us thought, if these guys had asked for the moon, [the directors] would have given it to them. They were giving them compensation hand over fist as it was. If they asked for it, I didn't understand why it wouldn't be in writing.

So the jurors convict in part because they assume the directors were so firmly in the defendants’ pockets that they would have provided a writing if the defendants had asked for it, and therefore it follows that the defendants didn’t ask for it. But why wouldn’t the defendants ask for it if they surely would have gotten approval?  Not because they wanted to hide the bonuses, because there was evidence they were well known in the company. Under this version of the facts, shouldn’t the directors be in the dock too? And while we're at it, why isn’t the auditor (Richard Scalzo) going to jail?

The jurors also said, about the defense evidence that the bonuses were widely known about and recorded in the books:

You don't necessarily need to coerce somebody to have them do something for you. All you have to do is infer they'll get x amount of dollars.

So apparently the problem is everybody at Tyco, including the directors, was getting a piece of the action from Kozlowski and Swartz.  So why just nail those two?

And while we’re at it, what about all those other firms where more clever and subtle managers have arranged to be overpaid?  Professors Bebchuk and Fried see this as a systemic failure, which is seemingly not something for which criminal sentences of individual defendants are appropriate.

So Kozlowski and Swartz are headed to Riker’s Island, where they’ll mingle with people who did stuff that seems more obviously bad.  And they may get 30-year sentences.  I wonder what they would have gotten for a first offense selling heroin to schoolkids.

While we’re on the subject of justice, if they get much less how does this square with Jamie Olis’ 24-year sentence?

Of course, it all squares perfectly if we view the criminal law as a way to bludgeon corporate agents into cooperating.  See this W$J story on KMPG and this story about how a federal prosecutor is running Bristol-Myers under a deferred prosecution agreement.

We need to have some punishment and accounting.  Clearly Kozlowski and Swartz were not engaging in good governance.  But as this W$J story points out, the shareholder suits are still pending.  These suits aren’t ideal (lots of money to lawyers) but they can sweep in all the people involved, including the directors who approved the wrongful payments. Unless, of course, the shareholders contracted to indemnify them against liability, in which case we’re back to wondering whether this is wrong.

I can't help thinking that this apparent irrationality masks an underlying rationality -- that this isn't about good corporate governance at all, but about ensuring that mighty corporate bosses are brought to heel.  From that perspective, it all makes sense.

Comments

[Otto Nielsen]

Ideoblog......
having read *Criminalizing agency costs*.... (and not being an interested reader of blogs in general).... it comes to mind .. that blogs seem to have a strong preference for not shoving the writers, authors name, background and attitude .... and so all comments get a kind of anonymous objective halo .... instead of opinion ... for whatever considered right or wrong.

Agency costs in this connection is a kind of fraud and *theft* from shareholders, who rely singlewise and in solidum on expected serious governance from management .. and open evaluation of performance and enumeration.....(as opinion)

sincerely
Otto Nielsen