Why is it difficult to hold individual employees to account for wrongdoing?

Business misbehaviour usually attracts a corporate fine from authorities seeking to punish those responsible and deter future infringements of a similar nature. The corporate fine will punish the firm as a whole and may be most acutely felt by shareholders. Yet corporations (especially large ones) are by their nature rule-following bodies and the decision to commit wrongdoing is typically made by a group of employees (in some cases just one) acting outside the institutional framework of the firm. In the case of cartel infringements of competition law, this involves meeting and communicating in a clandestine manner so as to hide the activity from customers, the authorities and from others within the firm.

The challenge for businesses is how to best respond to the threat of corporate fines and, in particular, how to ensure employees are deterred from engaging in wrongdoing. Good corporate compliance can go a long way in meeting this challenge. It ensures employees understand the law, the firm’s commitment to adhere to it and procedures for the internal reporting of suspected breaches. It is important not to underestimate the level of ignorance about the law. Recent surveys show that around half of British businesses and members of the UK public do not know that price fixing is illegal, for example.¹ Tackling ignorance is made difficult by the expansive range of compliance training employees must now undertake, and the difficulty of ensuring all such training is engaging and successful. Businesses may also wish to set out disciplinary procedures for individuals engaged in wrongdoing. This could include dismissal or a penalty affecting salary or the value of an individual’s pension.

We know empirically that the risk of wrongdoing varies between trading conditions. For example, individuals are far more likely to break the law where they fear losing their jobs because the market is experiencing a downturn, or where there is a danger of the business becoming insolvent. Firms should be particularly careful not to set unrealistic performance targets for employees as a condition of their continued employment, as this will have the same effect. Risk analysis, undertaken as part of a compliance programme, will help determine whether a business operates in a market that is susceptible to particular forms of wrongdoing. In the case of cartels, this might include markets where a homogenous product is being sold and where there is frequent communication between competitors through a trade association.

While the efforts identified above will reduce the risk of liability, there is always a danger of determined employees deliberately choosing to break the rules despite being aware of the law and its consequences. This is not helped by way firms are vicariously liable for their actions, or the fact that any corporate fine may come years after the conduct is perpetrated, by which time the individuals may have left the firm or retired. The arsenal of sanctions aimed at individuals is growing, with disqualification, debarment and other such penalties available in some industries and for some types of misconduct.  For serious wrongdoing many believe that only a criminal offence with a credible threat of custodial sentences can have any deterrent effect. This is partly because anything short of a custodial sentence can be viewed in monetary terms and so may be overcome if the individual views the ‘reward’ of engaging in wrongdoing as significant enough. The US experience would certainly suggest incarceration has some significant deterrent effect. In the UK and throughout Europe the number of white-collar criminal cases against individuals is comparably low and the numbers of successful convictions lower still. This is likely to embolden those thinking of engaging in white-collar crime as it suggests the prospect of getting caught and successfully punished is quite remote.

The increasing use of leniency, settlement and deferred prosecution agreements may actually be compounding the problem of how to deal with employees determined to break the law. The most extreme example of these is in competition law. Firms in violation of Chapter I of the Competition Act 1998 or Article 101 of the Treaty on the Functioning of the European Union receive immunity if they are first through the door and discounts in fines of up to 50% if they are not first but are still willing to cooperate. On top of these leniency discounts, firms can be awarded an additional discount if they opt for a shorter, streamlined enforcement process (essentially settlement). These procedures are becoming more common in business law and are intended to ensure cases are dealt with in a timely manner so that enforcement resources can be freed up and used elsewhere. A cynic might suggest they essentially punish firms for exercising the right to defend themselves and that they may have an incentive to cooperate and settle out of corporate pragmatism (for example to reduce uncertainty in capital markets), even though they have doubts about the extent of their alleged liability.

These mechanisms require the complete and continued cooperation of the firm in return for a reduced or deferred penalty. The problem is that the information needed to ensure the firm benefits from this cooperation is usually held by the individual decision makers who were responsible for the wrongdoing in the first place (remember these actions do not generally occur within the institutional framework of the firm and so minutes from meetings, records of communications etc. are not kept).  So where the firm would ideally like to discipline or dismiss those individuals, they might actually find themselves having to provide incentives for those individuals to help the firm reduce any corporate fine. They may even have to reward the individuals and pay for any legal costs associated with prosecutions and other action taken against them.

This problem suggests the law’s focus on vicarious corporate liability needs to be more in balance with individual responsibility. In particular, more criminal prosecutions are needed where wrongdoing was caused by an identifiable group of employees who acted against the stated policies and procedures of their employer. There is also a need for leniency and settlement type procedures to show some flexibility to firms wishing to discipline the individual employees responsible, where they hold the bulk of the relevant information, instead of rewarding them for their cooperation. In the meantime, firms should continue investing in compliance programmes as these help build a culture of compliance among employees and attach a greater stigma to deliberate wrongdoing. This is important because individuals are greatly influenced by the attitudes and views of their peer groups. Continued investment in compliance also makes it more likely a business will detect wrongdoing at an early stage and benefit more from any subsequent cooperation with the regulator.

Andreas Stephan
Professor of Competition Law
Law School and Centre for Competition Policy, University of East Anglia
a.stephan@uea.ac.uk