How do you punish a crooked public company?

by Luke Balleny | | Thomson Reuters Foundation
Thursday, 12 September 2013 16:36 GMT

Hundreds of Bulgarian protesters at the parliament building demand the resignation of the Socialist-led government which they accuse of corruption and murky links with influential business circles. September 4, 2013 REUTERS/Stoyan Nenov

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How should corporate wrongdoing be punished - are fines unfair on shareholders, or should they, as owners of the firm, share responsibility for corporate governance?

“Corporations cannot commit treason, nor be outlawed, nor excommunicated, for they have no souls,” the famed English Elizabethan jurist Sir Edward Coke once said.

And yet while many people would agree that companies are soulless places, they still think that if a company does wrong, be it paying a bribe or polluting a river, it should be punished.

But does that belief change when the company is publicly listed?

At Monday’s “Corruption and Anti-Corruption: Challenges and Future Perspectives”, a conference organised by the University of Sussex’s Centre for the Study of Corruption, Bruce Bean, a law professor at Michigan State University, said that it did.

Bean said that when a public company is hit by a large fine, it is the shareholders who end up out of pocket, and he questioned whether that was right. After all, they cannot control whether a company employee pays a bribe or not, so why should they suffer?

This argument was strongly rebutted by Robert Barrington, the head of the UK chapter of anti-graft watchdog Transparency International. Barrington said that, as a former director of governance and sustainable investment at institutional investor F&C Asset Management, he was quite sure that shareholders, as part-owners of the company, bear some responsibility for the actions of a company in which they have invested.

Bean countered that your average retail investor had no power over the inner workings of a company in which he or she had invested – but he admitted that if fines were not used to punish a public company, he did not know how else it should be punished.

The argument about fines as punishment centres on the relative profitability of ethical and unethical companies. Ethical, sustainable and socially responsible investing makes up a tiny percentage of all investments made, but it is a fast-growing sector.

Ethical investors believe not only that investing in ethical companies is the morally correct thing to do, but also that in the long term, ethical companies outperform unethical ones. Therefore a company that refuses to pay a bribe may miss out on a big contract in the short term but, given that companies that are known to pay bribes are likely to be asked for them repeatedly (which gets costly), and also run the risk of getting caught (very costly), ethical investors believe that their strategy is the optimum one.

Some investors, particularly those interested in short-term gains, may be willing to take the risk of investing in an unethical company. And it is this stance, ethical investors argue, that means that if an unethical company misbehaves and is caught, it is quite right that the investor should share in the pain of the fine.

Of course, the argument falls apart if you don’t believe that the unethical company will be caught and punished. What percentage of bribe-paying companies are caught?

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