Confronting the Two Faces of Corporate Fraud

Some criminals engage in meticulous planning. Others commit crimes in the heat of the moment. Corporate fraud incorporates both planned and spur-of-the-moment misconduct. Although law and economics scholars have traditionally viewed corporate fraud as a manifestation of opportunism among the corporation’s agents, a new generation of scholars, influenced by findings in behavioral psychology, has focused on the temporal aspects of corporate misconduct. Wrongdoing comes about, not simply because an agent opportunistically takes advantage of her principal, but also because her short-term self falls prey to temptations and cognitive biases that effectively disable her law-abiding long-term self. Although the law and economics and behavioral psychology accounts separately offer important lessons for observers of corporate fraud, neither theory addresses the regulatory implications confronting opportunistic behavior and temporal inconsistency at the same time. How can an internal corporate enforcer best respond to the “two faces” of corporate fraud? This Article explores this question, first by analyzing the interaction between the two dispositions, and then by considering the relative merits of various enforcement approaches. INTRODUCTION 88 I. OPPORTUNISTIC AGENTS AND TEMPORALLY INCONSISTENT DECISION MAKERS 94 A. Opportunistic Agents 98 B. Deterring Opportunistic Behavior 102 * Associate Professor, Brooklyn Law School. J.D., Harvard Law School; A.B., Princeton University. The author was an Assistant United States Attorney in Manhattan from 1999–2004, and an Assistant General Counsel for Compliance at Verizon Communications from 2004–2005. This Article was greatly improved by feedback from Jennifer Arlen, Derek Bambauer, Rachel Barkow, Dana Brakman Reiser, Samuel Buell, Bennett Capers, Michael Cahill, Edward Cheng, James Fanto, Brandon Garrett, Edward Janger, Eric Johnson, Rebecca Kysar, Donald Langevoort, Dan Markel, Minor Myers, James Park, Omari Scott Simmons, Urska Velikonja, David Zaring, Adam Zimmerman, and workshop attendees at Michigan Law School, Cardozo School of Law, the NYU Criminal Theory Workshop, Canadian Law and Economics Association’s Annual Meeting, National Business Law Scholars Conference, ABA/AALS Criminal Law Educators Roundtable, and the Brooklyn Law School Junior Faculty Workshop. Jacqueline Dombroff and Joanna Menillo provided outstanding research assistance. The author further wishes to thank Dean Nicholas Allard and Brooklyn Law School, whose generous summer stipend supported the writing of this Article. 1 Baer: Confronting the Two Faces of Corporate Fraud Published by UF Law Scholarship Repository, 88 FLORIDA LAW REVIEW [Vol. 66 C. Temporally Inconsistent Decision Makers 104 1. Hyperbolic Discounting 104 2. Willpower and Self-Control Problems 106 D. Reducing Temporal Inconsistency 108 II. HOW OPPORTUNISM AND TEMPORAL INCONSISTENCY INTERACT 115 A. The Corporate Firm as a Locus of Misconduct 116 B. Theorizing the Interaction 117 III. THE CORPORATE ENFORCER’S TOOLBOX: POLICING AND ARCHITECTURE 125 A. Three Strategies 126 1. Screening 127 2. Transforming 128 3. Structuring 130 B. Two Approaches 132 C. Substitutes and Complements 135 IV. CORPORATE COMPLIANCE AND THE PREFERENCE FOR POLICING 140 A. The Emergence of Corporate Compliance and Risk Management 141 B. Understanding the Preference for Policing 148 1. Moral Objectors and Government Enforcers ......... 148 2. Monitoring Boards 151 3. Managers 153 4. Compliance Officers 153 CONCLUSION 154