Should companies go to jail?

Could companies go to jail? An odd-seeming question, I know, but I’ve been musing somewhat on the deeper implications of that strange legal fiction of ‘corporate person’…

What started this off was that I went to the local HMV video-store, bought a couple of DVDs for an occasional session of escape-from-thinking-for-a-while, and noticed this chunk of text (with real names that I’ve edited out) printed out on the receipt:

On 15 January 2013, Xx Xxx, Yy Yyy and Zz Zzz of Deloitte LLP were appointed Joint Administrators of HMV Group plc, HMV Music Limited, HMV UK Limited, HMV (IP) Limited and Fopp Entertainments Limited (together the ‘Companies’). The affairs, business and properties of the Companies are being managed by the Joint Administrators. The Joint Administrators act as agents of the Companies only and contract without personal liability.

All fair enough, of course. As I remember, this is roughly the equivalent of what the US folks call ‘Chapter 11’, a kind of not-quite-bankruptcy where the respective company gets a chance to restructure itself to stave off – and, if possible, prevent – a real and final end-of-business.

Yet what struck me there was the repeated point about absence of liability. It’s not just that the Joint Administrators “contract without personal liability”: the company itself largely claims to have the ‘right’ to do so in the first place. And a parent company seems to have a kind of redoubled absence of liability: it’s liable neither for what it does, or for what any of its ‘child’-companies do. Which, when we think about it, is a bit odd.

In corporate law, at least, a company is supposedly a ‘legal person’, with most of the purported ‘rights’ of all legal persons – including, in the US at least, the legal right to provide any amount of funds to a preferred political candidate – yet somehow with far, far fewer responsibilities or liabilities. In fact the whole point of a registered company or corporation is that it has an artificially-reduced liability: that’s why it’s called a ‘limited company’, after all. And yes, within the somewhat-bizarre rules of a possession-based economy, that does make it more possible to do certain types of business that tend to entail certain specific types of risk. Useful, sure.

Yet compare that with the responsibilities faced by real people. If they commit a misdemeanor, they’re likely to get hit with a relatively-hefty fine; if they commit a felony, they’re likely to go to jail. In some countries, they may even face execution for certain more-extreme ‘crimes against the person’ or ‘crimes against the state’. By contrast, the worst that a company is likely to face for any ‘irresponsible act’ is a monetary fine – and often a relatively-paltry fine at that, relative to the potential or actual damage done to other people’s lives. And the fine is paid to the state, not to the people or others hurt in the past, present or future by the crime.

In extreme cases, the company-executives or company-directors might face some personal risk of punishment – but not the company itself, the supposed ‘legal person’ here.

So let’s take that metaphor one step further, and imagine that the company is a legal person in its own right – rather than just an over-convenient legal-fiction about ‘corporate-person’. And let’s play for a while with some of the implications that arise from doing this…

If a company is a ‘legal person’, can it have an owner? If we compare it to the human-rights context, the answer would have to be a very strong ‘No’: one person owning another is slavery, which is definitely against the law. Even if we drop the ‘legal-person’ fiction, the idea of external ‘ownership’ of a company is seriously problematic in terms of the existing common-law on ‘natural-justice’: sure, in a possession-economy it makes sense to have ‘ownership’ of physical-assets, but when – as in many current companies – the main ‘assets’ are the knowledge, skills and experience of the people who work there, external-‘ownership’ of those ‘assets’ likewise looks perilously close to slavery. Oops…

— If a company is a ‘legal person’, should it therefore be able to own another ‘company-as-legal-person’? If we apply the same logic as for a natural-person, it should be obvious that the answer is ‘No’ – because again it would be a kind of slavery, even if in virtual form. Interestingly, the answer used to be ‘No’, in the US at least; but that was changed for some reason somewhen around a century ago, which has brought us to the current thickets of semi-covert ‘ownership’ via shell-companies and the like. If we apply the ‘slavery’ analogy above, that kind of cross-ownership should definitely be illegal: it’s kind of odd that it isn’t…

— If a company is a ‘legal person’, can it hold contracts on the lives of other people? Once more, if we compare it to the human-rights context, the answer would again have to be a strong ‘No’: that’s called ‘bonded servitude’, which is supposedly not even legal in prisons, let alone anywhere else. Look again at that common phrase about “our people are our greatest asset!”: sure, it’s usually well-meant, but it’s actually tantamount to an assertion in law that the company believes that it has a ‘right’ to possess the lives of those people. The blunt fact is that it doesn’t work: the relationship is the asset – not the person. And without that relationship, there’s no access to the knowledge, skills and experience of those people. Not a good idea…

— If a company is a ‘legal person’ that commits what would, for a ‘natural person’, be a major crime, could it go to jail? As above, if we compare it to the equivalents for a ‘natural person’, the answer would have to be ‘Yes’: in terms of natural-justice, it would be unjust (or technically, ‘unconscionable privilege’) if the two types of persons did not face the same risks of punishment. Yet if we compare actual punishments  for natural-persons versus corporate-persons, the latter not only face vastly lower punishment for an equivalent offence, but the company itself remains unpunished: a few selected scapegoats might suffer – perhaps even at executive level – but the company itself will continue on, often entirely unscathed. Likewise the ‘external-‘owners’, who bear no personal liability for offences carried out in their name and for their personal profit – yet they certainly should be liable, if core themes of international law such as the Nuremberg Principles were to apply. Again, very odd – or at the very least, oddly inconsistent…

— If a company were to face jail, what would ‘jail’ for a company look like? Following legal logic, it would look much the same as for as for a ‘natural person’: a graded scale from supervised ‘community service’ for relatively-minor crimes, to open-prison where liberty is constrained but can still maintain contact with the outer world, to full incarceration, and even execution for capital-crimes.

[Don’t panic! 🙂 – remember, this is the company itself I’m talking about, not the executives, directors or ‘owners’ of the company – though some of us might be happier if the same more-honest scales of punishment would apply to them too…]

‘Community-service’ could, for example, be a court-mandated action to serve some appropriate community-need: helping to rebuild a public-hospital, perhaps, or repair a road or some other public-infrastructure.

‘Open-prison’ would be where the company continues to trade, but only under tight supervision, and not for its own profit. In practice it might look much like ordinary ‘under administration’ or ‘receivership’, as in the HMV example with which I started this, but imposed by a criminal-court rather than by a bankruptcy-court.

‘Incarceration’ would be where the company is not allowed to trade at all, for the duration of the sentence. As for incarceration of ‘natural persons’, some public protection should be available to minimise risk or harm to the company’s dependents – such as its employees and immediate communities. That protection could be paid for by fines – perhaps including fees levied against the company’s ‘owners’ , since they profited personally at first from the company’s misdemeanours.

‘Execution’ in this case would literally mean an execution: termination of the company itself.

‘Remand’ applies an interesting twist on this, because a remand-prisoner is a person who has been charged with a major crime but who has not yet been committed to trial. Probably the nearest equivalent would be suspension of trading of stock: since the ‘owners’ would in effect also be legally liable in part for the company’s actions, the logic suggests that it would be in itself a personal criminal offence to attempt to sell stock of a company that is ‘on remand’ or whilst serving any kind of sentence after conviction for a misdemeanour, felony or crime.

The same logic suggests court-mandated seizure of company-assets in the case of major crime – equivalent, for example, to seizure of personal-assets for drug-related offences or organised-crime.

— Should a parent-company be legally-liable for the actions of a ‘child’-company? Following the same legal logic as for ‘natural-persons’, the answer again would seem to be ‘Yes’. Different countries have different expectations for the relative responsibilities of adults and their children, but the general principle that adults have more responsibilities than children, and at least some responsibility and liability for the actions of their children, is almost universal everywhere. It would seem that the same therefore ought to apply to ‘parent/child’-relationships between companies: that it usually doesn’t – in fact that that kind of relationship is often used to reduce the liabilities of the parent is definitely somewhat odd…

— Should there be varying liabilities at different maturity-stages in the corporate life-cycle? Again following the same logic as for ‘natural persons’, the answer in this case should probably be ‘Yes’. A start-up is kind of like an infant or, at times, a tantrum-laden toddler in the midst of the ‘terrible-twos’; somewhat later in the lifecycle, a company might well be more like an adolescent struggling with growing-pains and a distracting overdose of hormones and general pre-adult confusion. At some point, for real children, there’s a separation, moving out on one’s own: the same should be true of ‘child’-companies too, setting out to make their way in the world, yet with the full legal responsibilities of an adult. We don’t allow children to drink alcohol, drive cars, operate heavy machinery, take on loans or credit-cards: and the reason we don’t is because we know they have a reduced ‘response-ability’, the ability to choose appropriate responses to sometimes-difficult challenges. That we somehow assume that companies will be ‘instant adults’ in every sense is perhaps a little strange…

This suggests, too, a subtle yet important difference between a start-up versus a ‘spin-off’ from an existing company. In the latter case, the parent-company should literally take on the role of the parent – including the equivalents of the natural-parent’s legal responsibilities and liabilities. A start-up is perhaps more like a parentless orphan – in which case there’s a definite role there for a public legal-guardian ‘in loco parentis‘. It also suggests that the role of an investor to a start-up should involve quite a lot more responsibilities – and more active responsibilities – than just putting in a small amount of money and then sitting back and waiting to cash in (or cash-out, rather) on the IPO…

Anyway, maybe best to leave it at that for now. We could amuse ourselves further by pondering about the point at which a company might achieve its legal ‘age of majority’; or key social ‘rites of passage’, its metaphoric bar-mitzvah or christening or prom-night; or what scale of punishments might apply to this strange pseudo-person for different types of misdemeanour or offence. But perhaps the main point is to get clear that the legal-fiction of ‘corporate person’ cannot be allowed to have it both ways: it doesn’t make any kind of sense, either in terms of other law or of natural-justice, to allow an artificial construct to have far greater ‘rights’ yet far lower liabilities than those assigned to natural-persons – especially as that skewed set of responsibilities is then made available to be leveraged solely by and solely for the personal short-term benefit of a relatively-small self-selected subset of humankind. Oops indeed…

So yeah, definitely odd, definitely not-okay… And I fear that we can expect some serious troubles to start happening soon in the political arena – and, in turn, in the contexts within which all companies and corporations currently operate – if this socially-absurd and socially-insane disparity is not addressed and resolved Real Soon Now. Definitely a ‘really-big-picture’ theme for enterprise-architects, business-architects and the like, that we need to watch with care: the phrase ‘You Have Been Warned’ might well apply?

4 Comments on “Should companies go to jail?

  1. I agree that the fiction-based institution of treating collectives as persons in order to shield flesh-and–blood persons from the consequences of their actions and decisions behind a cowardly veil of non-responsibility constitutes a legalistic abomination. That is what you are saying, yes? According to my worldview, any such abdication of personal responsibility can be seen as a form of “just following orders” regime, which constitutes a moral hazard singing a siren song.

    Anything we can do about this?

    • @Doug: “That is what you are saying, yes?”

      Uh… not quite. What I’m aiming to do – very, very carefully! – is assess all of this mess is as much of a ‘pejorative-free’ and ‘politics-free’ way as I can. Yes, it is a mess, and yes, it’s very clear that some (much? most?) of it is paediarchy-run-rampant, but yelling loudly about it doesn’t make it any easier to resolve – in fact risks placing ourselves back in the same dysfunctional power-over/power-under battles.

      There’s a very, very fine line to walk here. What I’m actually aiming to do here is gently highlight a huge foundational problem that lies directly underneath how everyone does business, and that – if we don’t start looking at it properly, and urgently work on it to fix it – is very likely to bring the whole structure of business crashing down. The catch is that most people really don’t want to know about, because it’s hellishly scary: to clean up the mess, we’ve got to dig right down into the cellars, and it’s pretty unpleasant what we’ll find there. If I don’t push hard enough, people will continue to ignore it until it’s too late; if I push too hard, I’ll get written off as a ‘loonie leftie’, an ‘anti-business nutcase’. (Which I’m not: I’m just a plain ordinary enterprise-architect, thinking perhaps a bit too deeply about the way that enterprises actually work.) It’s a very, very delicate balance: “legalistic abomination” may well be an accurate description, but it’d push people’s interpretations over the edge! 🙁 🙂

      So what I’d suggest is to re-read this from an enterprise-architecture perspective – nothing else. It’s a risk-assessment, plus an assessment of pointers towards mitigation of risk – nothing more than that. It’s essential to keep the emotion out of it as much as possible: hence no morals, no politics (though those can come later, if anyone wants).

      Personally, I do agree with your point about ‘moral hazard’ – and much more, too. Wearing my enterprise-architecture hat, though, I need to keep the emotion out of it as much as practicable, and to keep the politics at bay. Hence for this purpose, it’s more useful to frame it not as ‘moral hazard’ but as ‘business-hazard’. And it most definitely is a business-hazard: for example, the groundswell of social anger – against the banks and the ongoing costs of tidying up the banks’ mess (e.g. Cyprus, at present) whilst the banks themselves continue onward without any change at all; against the newspapers (in Britain) over unethical practices “on an industrial scale”; against politicians in general, who seem spineless in facing any of these issues adequately or at all; and against “the 1%” and the slow realisation in the broader society that the slopes of the pyramid-game have suddenly turned ridiculously steep (just exactly how is the work of a CEO ‘worth’ three thousand times more than that of the average employee of the company?) – all of that is dangerously close to breaking-point. And if it does break, almost all business will break with it – which might satisfy some in the short-term, but is not likely to be a good outcome in the longer-term for anyone.

      To answer your “Anything we can do about this?”, what I’m doing here is a really-straightforward assessment of risk and opportunities for mitigation – nothing more than that for now. Right now that’s more than enough to be getting on with, from a business perspective. We need to get a solid grasp of that before moving too far forward toward anything else – otherwise we’ll just replicate the same mistakes all over again.

  2. I’d leave any discussion on Companies. Companies are employers and often have share holders and the share market has your superannuation or pension fund. Over the last 30 years most of us have been employed by companies that have restructured, altered the mode of operation or even gone out of business. Until our legislatures are restructured to actually represent majority of people Companies and the the cycle of shareholders, companies, employees and consumer vs pension funds will go NO WHERE…

    • Point taken, Peter, though this isn’t actually about companies as such – it’s about the legal groundwork on which they stand.

      The blunt reality is that, within a social context, any structural unfairness – a ‘rigged game’ – creates social stress. The more ‘rigged’ the game, the more social stress is created, until eventually it reaches a point where there’s a high risk of catastrophic-failure. To again be blunt, a lot of the global- and national-scale indicators suggest we’re perilously close to that point in many parts of the globe: for example, look at what’s happening in Cyprus right now. All that I’ve done above is show that the current structure of corporate-law is a major contributing-factor to that stress, and therefore represents not just a broader yet somewhat amorphous social risk, but also a direct risk to businesses.

      For example, if that social stress does erupt against businesses in general – as in the London riots of a couple of years ago – then it can put individual companies out of business. Straight away, we therefore need to include consideration of these themes within our enterprise-architectures.

      Likewise, many business-models are only viable at present because they’re able to ‘export’ many of their real costs to the wider community and environment: if those externalities are blocked – which increasingly will become the case, as transparency is forced more back onto businesses – those organisations risk going out of business unless they undergo fundamental change. Hence, again, this is a direct concern for enterprise-architecture: not politics, but business.

      There’s one warning that I’d add, though, about this:

      @Peter: “Until our legislatures are restructured to actually represent majority of people Companies and the the cycle of shareholders, companies, employees and consumer vs pension funds will go NO WHERE…”

      Yes, fully agreed about “Until our legislatures are restructured” – which is very unlikely to happen in the normal way. A rigged-game tends to stay rigged as long as those players are in control of the game – which at present, yes, includes an, uh, questionable alliance between certain politicians, certain business-folk, certain propagandists (do I hear the words “Murdoch” or “Fox News” or “Gina Reinhardt as wannabe”?), certain members of the judiciary, etc. Yet we should never forget that a game only ever exists within a broader context, and that the game can therefore always be changed from outside of the game itself: and there’s a lot of tension right now towards people “taking the law into their own hands” – which tends to be very messy indeed if/when that happens. From a business-perspective, it’s increasingly clear that the rigged-game is becoming a very real risk to business itself: and to me at least, it seems wise to at least explore that risk in a bit more detail, using appropriate techniques from enterprise-architecture and elsewhere.

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