Abstract
Although the virtues of corporate compliance are widely acknowledged, co-regulation and compliance management schemes constantly meet with failure, as emerges from the empirical records. This chapter is about the structural limits of corporate compliance and the factors that make it inevitable that in some cases the programs to prevent corporate wrongdoings will fail. The failure of existing compliance models should therefore not come as a surprise, since these models suffer from three structural limits. The understanding of these limits is crucial to identify what corporate compliance can realistically achieve and to isolate those deviant behaviors that require different and more effective measures. First, compliance is an imperfect science when it comes to rulemaking, resulting in the fact that no compliance program can perfectly avert failures of all sorts. Second, from a criminological point of view, compliance presents a second structural weakness in its inability to prevent the individuals in control of a company from acting illegally. Finally, the third limit stems from the economic framework in which compliance models are applied and the fact that these models, designed for large public companies, are frequently unfit for small- and medium-sized entities (SMEs).
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Notes
- 1.
In other words, “despite spending a great deal of time, effort, and money to enact structural reforms and improvements within organizations’ compliance programs, every year brings a new, more stunning example of how organizations’ attempts to reign in misconduct often fail to prevent even the most extensive compliance failures within industries and firms” (Root Martinez 2020, p. 251).
- 2.
- 3.
More generally, on “root cause of compliance failures,” see Root Martinez (2019).
- 4.
The structural framework for compliance “includes also (1) a commitment from senior leadership to the task, setting a right ‘tone at the top’; (2) delegation of authority to officials with distinct compliance responsibilities and the resources to do their task; (3) firm-wide education and training about both the substance and process of compliance; (4) informational mechanisms to alert as to suspicious activity (e.g., whistleblowing procedures); (5) audit and surveillance tactics to detect compliance failures or risks; and (6) internal investigation, response, discipline and remediation so as to learn and adjust when failures occur” (Langevoort 2017, p. 939).
- 5.
Posner notes that “When the legislature enacts a rule, it specifies in advance of some action whether that action will be penalized. When the legislature enacts a standard, it delegates to a court the authority to determine after the action whether that action will be penalized” (Posner 1997, p. 101).
- 6.
Landau also notes that “a carefully worked out policy may […] be taken as equivalent to a theory. Just as a scientific theory serves to reduce the ‘surprise’ value of an empirical domain, so a policy is designed to order a task environment” (Landau 1973, p. 539).
- 7.
Hambrick et al. (2015) argue that boards fail as an effective monitor when the board members lack independence, expertise, bandwidth, and motivation.
- 8.
The author notes that “[w]ithout the right information at the right time, boards cannot effectively monitor managers. Despite the critical importance of the flow of information in the work of a board, information has been surprisingly underemphasized in the scholarly and policy debates on board reform.”
- 9.
The authors underline that “[w]hen more top executives are appointed during a CEO’s tenure, the CEO’s social influence increases because CEOs are heavily involved in recruiting, nominating, and appointing top executives. Those executives are more likely to share similar beliefs and visions with, and may be more beholden to, the CEO who hired or promoted them to their current position than executives appointed during a previous CEO’s tenure. CEOs also tend to be involved in appointing board members either directly or indirectly through consultation with the nominating committee. Consequently, directors recruited during a CEO’s tenure may be similarly beholden to the CEO” (Khanna et al. 2015, p. 1203).
- 10.
According to Khurana, corporations have increasingly sought CEOs who are above all charismatic and whose fame and strength of personality could impress analysts and corporate media.
- 11.
On the persistence of the phenomena Milgram studied, see Haslam and Reicher (2017).
- 12.
Dunn then explains that insiders “control management by keeping the key managerial positions to themselves. In this way they regulate the flow of information needed to make decisions. They also control the Board through their ownership interest. By having a large voting block relative to others on the Board the insiders can ensure that their will prevails. In this case, this can lead to aberrant decision-making, to knowingly releasing false financial information.”
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Centonze, F. (2022). The Imperfect Science: Structural Limits of Corporate Compliance and Co-regulation. In: Manacorda, S., Centonze, F. (eds) Corporate Compliance on a Global Scale. Springer, Cham. https://doi.org/10.1007/978-3-030-81655-1_3
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