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Up From Flatland: Business Ethics in the Age of Divergence

Published online by Cambridge University Press:  23 January 2015

John Hasnas
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Extract

The corporate scandals of the past few years have brought renewed attention to the problem of curtailing dishonest and fraudulent business practices, a problem on which strategic, ethical, and law enforcement interests should be aligned. Unfortunately, several features of federal criminal law and federal law enforcement policy have driven a wedge into this alignment, forcing managers to choose between their ethical obligations and their obligation to obey the law or aid law enforcement. In this article, I examine the nature and implications of the growing divergence between managers’ ethical and legal obligations. After describing the traditional approach to business ethics analysis, I identify the features of federal criminal law and law enforcement policy that are responsible for the divergence and show how they are undermining the efficacy of the traditional approach. I illustrate this effect with the issue of workplace confidentiality. I then argue that the traditional approach must be reformed to give explicit recognition to the legal dimension of normative analysis, and demonstrate how such a reformed approach would function by applying it to three illustrative issues—organizational justice, privacy, and ethical auditing—and supplying a case study—KPMG's allegedly abusive tax shelters.

Type
Research Article
Information
Business Ethics Quarterly , Volume 17 , Issue 3 , July 2007 , pp. 399 - 426
Copyright
Copyright © Business Ethics Quarterly 2007

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References

Notes

The author wishes to thank Dennis Quinn of Georgetown University for his absolutely essential help in the creation of this article; Ann C. Tunstall of SciLucent, LLC, for her insightful comments and literary guidance; and Annette Hasnas of the Montessori School of Northern Virginia and Ava Hasnas of Falls Church, Virginia, for showing him how to view ethical issues from a new perspective.

1. EDWIN A. ABBOT, FLATLAND (1884).

2. For a detailed account of this process, see John, Hasnas, Ethics and the Problem of White Collar Crime, 54 Am., U. L. Rev. 579, 588–630Google Scholar (2005).

3. For purposes of concision, I speak exclusively in terms of for-profit enterprises. However, my point is general. Non-profits must still use resources as efficiently as possible in order to best achieve their goals. Charitable organizations that dissipate their resources while only poorly serving the ends of their donors will soon find themselves without donors. Although such organizations are not maximizing profits, their managers are still bound to strive to accomplish their organizations’ missions at the lowest possible cost.

4. See Milton, Friedman, The Social Responsibility of Business is to Increase its Profits, N.Y. Times Mag. Sept. 13, 1970.Google Scholar Note that Friedman's version of the stockholder theory is not that referred to in the text. Friedman does not assert that the only restrictions on the pursuit of profit are those embodied in law. He explicitly recognizes the additional normative obligations to refrain from rent-seeking and deceptive practices, i.e., “engage[] in open and free competition without deception or fraud.”

5. See Thomas, Donaldson & Thomas, Dunfee, Toward a Unified Conception of Business Ethics: Integrative Social Contracts Theory, 19 Acad., Mgmt. Rev. 252, 254–71 (1994).Google Scholar

6. See, e.g., CHRISTOPHER D. STONE, WHERE THE LAW ENDS: THE SOCIAL CONTROL OF CORPORATE BEHAVIOR 111–12 (1975); Norman, E. Bowie, Fair Markets, 7 J. Of Bus. Ethics 89 (1988);Google Scholar THOMAS DONALDSON &THOMAS DUNFEE, TIES THAT BIND 156–60 (1999).

7. Business ethicists recognize that this is not always the case, typically citing American Jim Crow, South African apartheid, or Nazi anti-Semitic legislation as illustrations of cases in which the law and ethics are at odds. However, once such obvious and egregious counter-examples have been excluded, analysis usually proceeds under the assumption that the law does not command unethical behavior. This is the assumption that is being challenged in this article.

8. See, e.g., mail fraud, 18 U.S.C. §§ 1341, 1346 (2005), wire fraud, 18 U.S.C. § 1343 (2005), bank fraud, 18 U.S.C. § 1344 (2005), health care fraud, 18 U.S.C. § 1347 (2005), computer fraud, 18 U.S.C. § 1030 (2005), and securities fraud, 18 U.S.C. § 1348 (2005).

9. 18 U.S.C. § 1341 (2005).

10. 18 U.S.C. § 1346 (2005).

11. Neder v. United States, 527 U.S. 1, 25 (1999).

12. United States v. Townley, 665 F.2d 579, 585 (1982).

13. United States v. Rybicki, 287 F.3d 257, 264 (2d Cir. 2002).

14. United States v. Brown, 79 F.3d 1550 (11th Cir. 1996).

15. United States v. Jain, 93 F.3d 436 (8th Cir. 1996).

16. United States v. D'Amto, 39 F.3d 1249 (2d Cir. 1994).

17. United States v. Czubinski, 106 F.3d 1069 (1st Cir. 1997).

18. Indictment at 37, United States v. Stewart, (S.D.N.Y. 2003) (No. 03 Cr. 717). This charge was dismissed at trial for lack of evidence.

19. United States v. Hanousek, 176 F.3d 1116, 1121 (9th Cir. 1999).

20. Rivers and Harbors Act of 1899 § 13, 33 U.S.C. § 407 (2005).

21. United States v. White Fuel Corporation, 498 F.2d 619, 621 (1st Cir. 1974).

22. United States v. Iverson, 162 F.3d 1015, 1025 (9th Cir. 1998).

23. 21 U.S.C. § 331(k) (2005).

24. 33 U.S.C. §§ 1319 (c)(1)(A) & 1321 (b)(3) (2005).

25. United States v. Hanousek, 176 F.3d 1116, 1121 (9th Cir. 1999).

26. 31 U.S.C. § 5322 (2005) makes it a felony to willfully fail to file required currency transaction reports (CTRs). 31 U.S.C. § 1313 (2005) requires banks and financial institutions to report transactions of more than $10,000. 31 U.S.C. § 1316 (2005) requires casinos and person persons moving currency in and out of the country to report transactions or currency movements of more than $10,000. 26 U.S.C. § 6050I(a) (2005) requires all persons receiving more than $10,000 in cash in the course of one's business to file a report. 31 U.S.C. § 5324 (2005) makes it a felony for anyone to structure his or her financial transactions to avoid federal reporting requirements.

27. See 18 U.S.C. §§ 1956, 1957 (2005); United States v. Jackson, 935 F.2d 832 (7th Cir. 1991) (in which the court upheld the money laundering conviction of an alleged drug dealer for writing checks to purchase cell phones and pay his rent and for cashing checks for small amounts at his local bank).

28. See 18 U.S.C. § 1001 (2005). The reach of § 1001 is so broad that it makes it a new federal offense to falsely deny one's guilt of another substantive offense, Brogan v. United States, 522 U.S. 398 (1998).

29. See 18 U.S.C. §§ 1503, 1505, 1510, 1512, 1519–20 (2005); United States v. Shotts, 145 F.3d 1289 (11th Cir. 1998); United States v. Thompson, 76 F.3d 442 (2d Cir. 1996).

30. For a more detailed account of the difficulties of enforcing federal anti-fraud legislation, see Hasnas, supra note 2 at 588–95 (2005).

31. See, e.g., Peter, French, The Corporation as a Moral Person, 16 Am., Phil. Q. 207 (1979);Google Scholar LARRY MAY, THE MORALITY OF GROUPS, chs. 1—1 (1987); PATRICIA WERHANE, PERSONS RIGHTS, AND CORPORATIONS, chs. 1–2 (1985); Kennth, E. Goodpaster & John, B. Matthews Jr.,, Can a Corporation Have a Conscience? Harv., Bus. Rev., Jan.-Feb., 1982, at 132–11.Google Scholar

32. See, e.g., Pamela, Bucy, Corporate Ethos: A Standard for Imposing Corporate Criminal Liability, 75 Minn., L. Rev. 1095, 1103–05 (1991);Google ScholarJennifer, Moore, Corporate Culpability Under the Federal Sentencing Guidelines, 34 Ariz., L. Rev. 743, 767–73 (1992);Google ScholarAnn, Foerschler, Corporate Criminal Intent: Toward a Better Understanding of Corporate Misconduct, 78 Cal., L. Rev. 1287 (1990).Google Scholar

33. Although corporate character is not relevant to a corporation's guilt or innocence, it may be relevant to the severity of punishment. See infra Part III(B)(2).

34. New York Central & Hudson River Railroad Co. v. United States, 212 U.S. 481 (1909); Standard Oil Co. v. United States, 307 F.2d 120 (5th Cir. 1962); Steere Tank Lines, Inc. v. United States, 330 F.2d 719 (5th Cir. 1964).

35. United States v. Hilton Hotels Corp., 467 F.2d 1000, 1007 (9th Cir. 1972).

36. United States v. Bank of New England, 821 F.2d 844, 856 (1st Cir. 1987).

37. UNITED STATES SENTENCING COMMISSION, GUIDELINES MANUAL, ch. 8 (1992) (Sentencing of Organizations) [hereinafter U.S.S.G.].

38. Jennifer, Moore, Corporate Culpability Under the Federal Sentencing Guidelines, 34 Ariz., L. Rev. 743, 785 (1992).Google Scholar

39. See U.S.S.G. § 8C2.5 (2005).

40. See supra note 18 and accompanying text.

41. The offense would have an offense level of 32 comprised of 6 for the Base Offense Level (U.S.S.G. § 2B1.1(a) (2005)), 18 for the Specific Offense Characteristics (§ 2B1.1(b)), 4 for the number of victims (§ 2B1.2(B)), and 4 for a violation of securities law by a director of a publicly traded company (§ 2B1.15(A)). Offenses with an offense level of 32 are assigned a base fine of $17.3 million (§ 8C2.4).

42. See U.S.S.G. § 8C2.5(b) (2005).

43. Id. § 8C2.6.

44. Id.

45. The impact of the Guidelines is so significant that Professor John Coffee of Columbia University law school has declared that “[f]or a general counsel to ignore these guidelines is professional malpractice.” Michele, Galen, Keeping the Long Arm of the Law at Arm's Length, Bus., Wk., Apr. 22, 1991, at 104.Google Scholar

46. U.S.S.G. § 8B2.1(a)(1) (2005).

47. Id. § 8C2.5 cmt. 12.

48. Id.

49. Memorandum from Deputy Attorney General Paul J. McNulty to Heads of Department Components, Principles of Federal Prosecution of Business Organizations (Dec. 16, 2006), [hereinafter McNulty Memorandum] available at http://www.usdoj.gov/dag/speech/2006/mcnulty_memo.pdf.

50. The memorandum was originally known as the Holder Memorandum, after Deputy Attorney General Eric Holder who first issued it in 1999. It subsequently became known as the Thompson Memorandum when Deputy Attorney General Larry Thompson revised and reissued it in 2003. Deputy Attorney General Paul McNulty issued the current version of the Memorandum in December of 2006 to supercede the Thompson Memorandum, which had been subject to intense criticism for instructing United States attorneys that a corporation's refusal to waive its attorney-client and work product privileges or its willingness to advance its employees’ legal fees could be regarded as a lack of cooperation with the government. In reaction to court rulings holding that the Thompson Memorandum's instruction regarding legal fees violated the Fifth and Sixth Amendments, (See U.S. v. Stein (Stein I), 435 F.Supp.2d 330 (S.D.N.Y. 2006); U.S. v. Stein (Stein II), 440 F.Supp.2d 315 (S.D.N.Y. 2006)), the McNulty Memorandum rescinded the latter instruction. In addition, the McNulty Memorandum softened the Department of Justice's position on the waiver of the attorney-client and work product privileges by requiring United States attorneys to obtain the approval of the Assistant Attorney General for the Criminal Division before requesting such a wavier.

51. Id. § III(A)(4).

52. Id. § III (A)(5).

53. Id. §§ VII-VIII. At the time of this writing, legislation is pending before the Senate Judiciary committee that would bar DOJ from asking for waivers of attorney-client. If ultimately adopted, such legislation would alter the DOJ's definition of cooperation.

54. Little, perhaps, but not necessarily none. For example, if the level of monitoring required to prevent intentional wrongdoing improperly invades employees’ privacy, a manager's ethical and legal obligations may conflict. See infra Part VII(B).

55. This requirement is strongly reinforced by the responsible corporate officer doctrine under which supervisors may themselves be criminally punished for the unintentional crimes of their subordinates.

56. See infra Part VII.

57. See infra Part VII.

58. See James, A. Waters, Catch 20.5: Corporate Morality as an Organizational Phenomenon, in Contemporary Moral Controversies In Business 160 (Pablo Iannone, A. ed., 1989);Google Scholarsee also THOMAS DONALDSON, CORPORATIONS AND MORALITY 154–55 (1982) (describing how many United States companies utilize “hot-lines” and “operator” policies to encourage employees to speak truthfully).

59. U.S.S.G. § 8C2.5 cmt. 12 (2005).

60. The Supreme Court has explicitly recognized this fact in the context of the attorney-client privilege, stating “if the purpose of the attorney-client privilege is to be served, the attorney and client must be able to predict with some degree of certainty whether particular discussions will be protected. An uncertain privilege … is little better than no privilege at all.” Upjohn Co. v. United States, 449 U.S. 383, 393 (1981).

61. U.S.S.G. § 8B2.1(b)(5)(C) (2005).

62. Indeed, in the Sarbanes-Oxley Act of 2002, Congress required publicly traded companies to establish procedures for “the confidential, anonymous submission by employees of issues or concerns regarding questionable accounting or auditing practices.” Sarbanes-Oxley Act of 2002, Pub. L. No. 107–204, § 301, 116 Stat. 745, 776.

63. These findings were compiled by the author by individually reviewing ethics and compliance policies for each of the Fortune 200 companies, which are available on each company's website. Research results are on file with the author.

64. Page 13, ¶ 27 of both Kaplan and Rivard indictments (available at http://www.usdoj.gov/dag/cftf/chargingdocs/kaplaninfo.pdf and http://www.usdoj.gov/dag/cftf/chargingdocs/rivardinfo.pdf and page 16, ¶ 33 of Zar indictment (available at http://www.usdoj.gov/dag/cftf/chargingdocs/zarinfo.pdf).

65. See Laurie, P. Cohen, Prosecutor's Tough New Tactics Turn Firms Against Employees, Wall, St. J., June 4, 2004, at A1;Google ScholarLawrence Barcella, E. Jr.,, et al., Cooperation with Government is a Growing Trend, Nat'l, L.J., July 19, 2004, at S2.Google Scholar

66. See, e.g., THOMAS DONALDSON, THE ETHICS OF INTERNATIONAL BUSINESS 45 (1989) (describing the theory as “corporate Neanderthalism … with morally pernicious consequences”); ROBERT C. SOLOMON, ETHICS AND EXCELLENCE 45 (1992) (describing the position as “not only foolish in theory, but cruel and dangerous in practice” and misguided “from its nonsensically one-sided assumption of responsibility to his pathetic understanding of stockholder personality as Homo economicus”); William, M. Evan & Edward Freeman, R., A Stakeholder Theory of the Modern Corporation: Kantian Capitalism, in Ethical Theory and Business 75, 77Google Scholar (Tom L. Beauchamp & Norman E. Bowie eds., 4th ed., 1993); Thomas, Donaldson & Lee, E. Preston, The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications, 20 Acad. Mgmt Rev. 65, 81–82 (1995).Google Scholar

67. See Dennis, P. Quinn & Thomas, M. Jones, An Agent Morality View of Business Policy, 20 Acad., Mgmt. Rev. 22, 25–30Google Scholar (1995). This position is almost always articulated by corporate executives when they are asked to comment on ethical matters. See, e.g., Comments of Benjamin W. Heineman, Jr, Senior Vice-President for Law and Public Affairs, General Electric, in Corporate Social Responsibility: Good Citizenship or Investor Rip-off?, Wall St. J., January 9, 2006, at R6-R7.

68. THOMAS DONALDSON, THE ETHICS OF INTERNATIONAL BUSINESS 45 (1989).

69. See supra note 6 and text accompanying.

70. See, e.g., Gary, R. Weaver and Linda, Klebe Trevino, Compliance and Values Oriented Ethics Programs: Influences on Employees’ Attitudes and Behavior, 9 Bus., Ethics Q. 315 (1999)Google Scholar (identifying legal compliance and ethics programs); Eugene, Szwajkowski, Organizational Illegality: Theoretical Integration and Illustrative Application, 10 Acad., Mgmt. Rev. 558, 558–60Google Scholar (1985); Anthony, J. Daboub, et al., Top Management Team Characteristics and Corporate Illegal Activity, 20 Acad., Mgmt. Rev. 138, 146–48Google Scholar (1995); Donna, M. Randall, Commitment and the Organization: The Organization Man Revisited, 12 Acad., Mgmt. Rev. 460, 466 (1987).Google Scholar

71. See NORMAN BOWIE, BUSINESS ETHICS 140–43 (1982); Sissela, Bok, Whistleblowing and Professional Responsibilities, 11 Q., N.Y.U. Educ. 2, 3 (1980).Google Scholar

72. Fox's lack of knowledge that he was acting illegally does not relieve him of liability. With only a few exceptions, see Cheek v. United States, 498 U.S. 192 (1991), knowledge of the law is not a required element of a criminal offense.

73. U.S.S.G. § 8C2.5 cmt.12 (2005); McNulty Memorandum supra note 49 § VI(B).

74. How much more would this be the case if the employee had innocently or inadvertently committed a public welfare offense or was charged as a responsible corporate officer?

75. See Tom, R. Tyler, Promoting Employee Policy Adherence and Rule Following in Work Settings, 70 Brook., L. Rev. 1287 (2005).Google ScholarSee also Andrew, A. King & Michael, J. Lenox, Industry Self-Regulation Without Sanctions: The Chemical Industry's Responsible Care Program, 43 Acad., Mgmt. J. 698 (2000);Google ScholarClifford, Rechtschaffen, Deterrence vs. Cooperation and the Evolving Theory of Environmental Enforcement, 71 S., Cal. L. Rev. 1181 (1998);Google ScholarMarius, Aalders & Ton, Wilthagen, Moving Beyond Command and Control: Reflexivity in the Regulation of Occupational Safety and Health and the Environment, 19 L. & Pol'y 415 (1997);Google ScholarDarren, Sinclair, Self-Regulation Versus Command and Control? Beyond False Dichotomies, 19 L. & Pol'y 529 (1997);Google ScholarMark, Suchman, Managing Legitimacy: Strategic and Institutional Approaches, 20 Acad., Mgmt. Rev. 571 (1995).Google Scholar

76. See Tom, R. Tyler, Promoting Employee Policy Adherence and Rule Following in Work Settings, 70 Brook., L. Rev. 1287, 1290–93 (2005).Google Scholar

77. Tom, R. Tyler & Stephen, L. Blader, Can Business Effectively Regulate Employee Conduct?: The Antecedents of Rule Following in Work Settings, 48 Acad., Mgmt. J. 1143, 1154 (2005).Google Scholar

78. To be regarded as cooperating, a corporation must demonstrate “affirmative acceptance of responsibility for its criminal conduct,” U.S.S.G. § 8C2.5(g) (1) (2005). Because a corporation that “puts the government to its burden of proof at trial by denying the essential factual elements of its guilt” is regarded as not having accepted responsibility for its conduct, id. § 8C2.5 cmt. 13, cooperation requires a corporation to be willing to plead guilty. But a corporation is guilty of an offense only when its employees are. Therefore, cooperation requires a corporation to presume its employees are guilty. Hence, no corporation that accords its employees a presumption of innocence can satisfy the legal requirements for cooperation.

79. Laura, B. Pincus & Clayton, Trotter, The Disparity between Public and Private Sector Employee Privacy Protections: A Call for Legitimate Privacy Rights for Private Sector Workers, 33 Am., Bus. L.J. 51, 88 (2001).Google Scholar

80. See George, Brenkert, Privacy, Polygraphs, and Work, in Business Ethics: Readings and Cases In Corporate Morality 294, 295 (Michael Hoffman, W. & Jennifer, Mills Moore eds., 2d ed. 1990);Google ScholarJoseph, R. Des Jardins & Ronald, Duska, Drug Testing in Employment, in Business Ethics: Readings And Cases In Corporate Morality 301, 302 (Michael Hoffman, W. & Jennifer, Mills Moore eds., 2d ed. 1990).Google Scholar

81. Id.

82. See supra, text accompanying notes 34–36.

83. U.S.S.G. § 8B2.1(b)(5)(A) (2005).

84. For example, Deloitte & Touche now offers to create psychological profiles of employees designed to help employers identify those likely to engage in illegal conduct as one of its services. See Karen, Richardson, Find the Bad Employee: A Tool Can Do It, Privacy Issues Aside, Wall, St. J., Feb. 1, 2006, at C3.Google Scholar

85. See James, A. Waters, Catch 20.5: Corporate Morality as an Organizational Phenomenon, in Contemporary Moral Controversies In Business 160 (Pablo Iannone, A. ed., 1989);Google ScholarRobert, Jackall, Moral Mazes: Bureaucracy and Managerial Work, Harv., Bus. Rev. Sept.-Oct. 1983, at 118–30.Google Scholar

86. Courts do not recognize the doctrine of selective waiver. Waiving the privilege for one purpose, e.g., cooperation with a criminal investigation, waives it for all purposes. See United States v. Massachusetts Institute of Technology, 129 F.3d 681, 685 (1st Cir. 1997).

87. David, A. Nadler, Don't Ask, Don't Tell, Wall, St. J., Nov. 25, 2003, at B2.Google Scholar

88. This was in conformity with the provision in Thompson Memorandum (the McNulty Memorandum's predecessor) that permitted prosecutors to consider the payment of such fees as a lack of cooperation. As noted above, this provision was removed from the McNulty Memorandum. See supra, note 50.

89. In conformity with this agreement, KPMG has agreed to settle a class action lawsuit brought by purchasers of its tax shelters for $225 million and is in the process of settling other outstanding suits. Nathan, Koppel, Law Firm Offers an Unusual Fee in KPMG case, Wall, St. J., Jan. 27, 2006, at C1.Google Scholar

90. The facts of this account of the KPMG case are taken from Laurie, P. Cohen, Prosecutor's Tough New Tactics Turn Firms Against Employees, Wall, St. J., June 4, 2004;Google ScholarLeonard, Post, Deferred Prosecution Deal Raises Objections, Nat'l., L. J. Jan. 30, 2006, at 4;Google ScholarKPMG in Wonderland, WALL ST. J., Oct. 6, 2005, at A14; Deferred Prosecution Agreement (Re: KPMG) from David N. Kelley, US Attorney for the Southern District of New York (Aug. 26, 2005), available at http://www.usdoj.gov/usao/nys/Press%20Releases/August%2005/KPMG%20dp%20AGMT.pdf; Press Release, Internal Revenue Service, KPMG to Pay $456 Million for Criminal Violations (Aug. 29, 2005), available at http://www.irs.gov/newsroom/article/0,,id=146999,00.html.

91. As previously noted, this requires the corporation to be willing to plead guilty, which in turn requires it to regard its employees as guilty. See supra note 78. Hence, the corporation must make no public statements inconsistent with this assumption.