Understanding Corporate Criminality

Michael B. Blankenship

• Publisher: Routledge
• Year: 2013
• Topic: Business
• eBook ISBN:
  9781135587932
• Subtopic: Sociology
• Index: Business

First Published in 1995. The Exxon Valdez catastrophe, the savings-and-loan bailout, defense-contractor fraud, and insider trading scandals have inspired a growing number of courses devoted to the subject of corporate criminality. This collection of original essays treats various aspects of a wide-ranging problem, including the evolution of the study of corporate crime, the difficulties of understanding corporate illegality, the nature and extent of corporate crime, financial and social costs, measurement issues, the regulation of corporate behavior, public perceptions, and the punishment of corporate crime.

CHAPTER ONE

The Evolution of the Study of Corporate Crime

Gilbert Geis

Few kind words have been used over the centuries to characterize corporations and their executives, at least by those on the outside looking in. The corporate emphasis on making money, in large amounts, traditionally has offended a Christian ethic that in theory, if not in practice, has trouble coming to terms with filthy lucre, particularly when such wealth is not yours and when it can detour that final biblical trip to heaven that is said to be as difficult for a rich man to make as for a camel to pass through the eye of a needle.

Thomas Hobbes, the seventeenth-century English philosopher, stands out in the crowd that has been scornful of corporations. Hobbes’ unsavory comparison was between corporations and ascarides, worms that eat at the entrails of what Hobbes called “natural man” (Hobbes, 1651:174). Centuries later, Robert Heilbroner (1973:223) would further castigate “the corporation with its wealth-seeking, its dehumanizing calculus of plus and minus, its careful inculcation of impulses and goals that should at most be tolerated.”

Corporations and their officers also are often the object of deprecatory humor. As far back as 1635, a satirist had a businessman proclaiming: “I love churches. I mean to turn pirate, rob my countrymen and build one” (Hill, 1964:267). In more recent times, a U.S. senator told the story of a corporation officer who, when asked if he were not ashamed of double-dealing persons who trusted him, was puzzled: “Who else can you cheat?” he wanted to know (Noonan, 1984:660). These putdowns of the business world are part of a common wisdom, reflected in the belief that the expression “legitimate business” is an oxymoron.

Such derogatory jabs at corporations indicate strong public doubts regarding their commitment to honest dealings, a matter confirmed in opinion polls (Walton, 1977). In 1991, hostility to corporations was confirmed in a survey that found that 70 percent of a sample of people who were eligible for jury duty favored an individual plaintiff over a corporate defendant before they knew anything whatever about the dispute (Adler, 1991). A significant number of Americans would undoubtedly agree with the view of Ralph Nader (Heilbroner, 1973:221) that “[c]orporations, yielding when they were forced to, have, in the end, overwhelmed populism, organized labor, the New Deal, the regulatory state, and they will so overwhelm the consumer movement.”

It is arguable whether traditional distrust of corporations arises from an accurate assessment of their unsavory behavior or is rooted in some subconscious Freudian fear of impersonal monsters that might at any moment overwhelm us. Whatever the source of antagonism, Irwin Ross (1980:57) insists that today “crime in the executive suites has come to command media attention of a sort formerly reserved for ax murders.” That statement contains much hyperbole, but it, nonetheless, reflects the growing attention now being paid to the criminal offenses of corporations.

Part of the problem for corporations inheres in the fact that, unlike private individuals, their executives are confronted with strong pressures from those who hold shares in the endeavor and whose overriding interest is their own profit, and the quicker the better. Nadine Gordimer (1973:207) describes the situation in one of her novels, telling of a mining director's assessment of the demands of English stockholders in a South African company: “[O]ur shareholders overseas want big dividends from mines that are in production, not expansion that will create employment but take five or six years before it begins to pay off.”

What often makes the offenses of the corporations more disturbing than those of street offenders, such as robbers and murderers, is that business organizations have at their command extraordinary resources that allow them to inflict widespread and deep harm and also afford them an opportunity to eviscerate penalties for wrongdoing. Corporate lawbreaking also can undermine the faith of citizens in the integrity of all social institutions. When corporate executives are discovered to be crooks, these idols of achievement let us down and, perhaps, shatter our morale and ideals.

On the other hand, much more so than individuals, corporations have been surrounded by thousands of regulations, many carrying criminal penalties. You and I and he or she, for instance, might combine to restrain trade, say, by providing similar allowances to our children, but corporations are barred by antitrust regulations from such price-fixing conspiracies. This, among many other considerations—and most particularly the inanimate nature of the corporate form—renders corporate crime a particularly complicated area of criminological concern.

When the corporation first was accorded legal standing, derelictions tended to elicit responses from moralists, often based on theological imperatives. Then legislative forums and courts began to attend to such wrongdoing. Later, concern with corporate wrongdoing was placed into the theoretical and research agenda of the academic community, most notably that of sociological criminologists. Enunciation of the concept of white-collar crime by Edwin H. Sutherland in 1939 provided the first formal structure to embrace this academic study of corporate crimes and of offenses committed by high-status persons in the course of their business, professional, and political activities. Later, such work grew more ecumenical, embracing not only sociology and criminology, but also jurisprudence and political science (especially that branch concerned with regulatory actions), as well as, though to a much lesser extent, organizational and management studies, economics, and psychology.

This chapter examines some of the strengths and weaknesses of the various methods that, over time, have been brought to bear upon the scrutiny of corporate crime. Attention will be paid initially to the eighteenth-century South Sea Bubble case, England's first major corporate offense. The wild shenanigans that marked this case came under legislative scrutiny, with Parliament acting in both an investigative and judicial capacity. The muckraking years in the nineteenth century, the second topic to be addressed, were marked most notably by the involvement of what today would be known as investigative reporters, journalists who dug out scandalous facts about corporations and emblazoned them in the pages of high-circulation magazines. Academic concern with corporate wrongdoing, the next area to be discussed, began with the appearance of sociology as a university research discipline in the late nineteenth century, and became more focused with Sutherland's 1939 presidential address on white-collar crime (Sutherland, 1940). The path that this academic interest has taken, combined with the continuing concern of legislatures, regulatory bodies, public interest groups, journalists, and citizens in general, will be examined in the final chapter segment.

The South Sea Bubble Case

The South Sea Company was chartered in London in 1711 to accomplish two goals: first, the company promised to ease the backbreaking burden of a £10 million national debt by absorbing as stockholders those owed money by the government; second, it proposed to reward its shareholders with anticipated heady profits from the importation of slaves (Donnan, 1930) and, more importantly, profits from trade in what was called the “South Seas,” by which was meant South America from the Orinoco River to the south of Terra del Fuego. The Scheme (as it was called) was magnificently improbable from the outset. “It was wholly impossible it should have issued in anything but disaster,” Lecky (1907:1,372) points out. The company prospered at first, primarily because huge bribes, totaling more than £1.25 million, were slipped to members of Parliament to support it. It also flourished because English citizens with means enough to invest had virtually no previous experience regarding the brokering of stock from which to draw warnings. The Bank of England and the East India Company were the major stock companies of the time (Boyden, 1948). As late as 1693, the latter had only 499 shareholders, with eighty-eight men owning three-quarters of the total stock. One of three East India shareholders in that year had held his stock for the past sixteen years or more. A brisk market in shares only really began, though it increased with remarkable speed, after the incorporation of the South Sea Company (Carswell, 1960:10).

The South Sea Company scandal also arose because stockholders were misled throughout the life of the Scheme about the company's true financial condition. The price of South Sea stock surged wildly because of a snowball effect created by clever manipulation of the atmosphere surrounding the company and because of the great greed of a public scenting huge profits. The managers of the stock made it easy to invest, allowing purchases for amounts as low as 10 percent of the total value, contingent upon supplementary and higher charges over the later years. On the basis of what had been happening, purchasers presumed that they would be able to raise the money due later merely by selling at a magnificent profit just a small portion of the stock they were then purchasing.

A fierce “speculative mania” (Heckscher, 1930–1931:321) sent the price of South Sea stock on a ride that lasted almost a decade. At the beginning, when the stock first came onto the market in October 1711, it was quoted between 73 and 76 (Scott, 1912:111,297). Near the end, on July 16,1720, South Sea stock, selling at nearly 2,000, reached its highest level (Mottran, 1929:133); by August 17,1720, however, it had dropped to 900, and forty days later had plummeted to 190 (Cowles, 1960:141).

Ironically, part of the company's difficulty was created by passage of the Bubble Act (6 George I, c. 18), which was sponsored by South Sea directors. The success being enjoyed by South Sea investors had prompted the incorporation of myriad other enterprises, some of them wildly improbable, such as one that solicited funds to construct a perpetual motion wheel (Erleigh, 1933:95). In addition, some companies set up for one purpose had begun to seek and use funds for quite different kinds of enterprises. The money the other corporations were attracting reduced significantly the funds available for investment in the South Sea enterprise; its directors therefore sought to dry up such diversionary founts by severely controlling the formation and activities of other enterprises competing for investment monies. The unexpected upshot was that when the other corporations went downhill because of the new limitations placed upon them, they had to call for further money from those who had speculated on margin, leading to withdrawals by investors from their South Sea holdings, and thereby endangering that company's financial position.

Over the long run, the Bubble Act, until its repeal in 1825 (4 George IV, c.94), inhibited the development of corporate forms in England and, concomitantly, the emergence of a sophisticated body of law to dictate the boundaries within which such organizations could operate. Until 1825, for instance, an unauthorized joint stock company was regarded in law as a common nuisance, and its promoters were subject to the penalties of praemunire—a fine with no ceiling and perpetual imprisonment (Carswell, 1960:157).

The falling apart of the South Sea Company, as Viscount Erleigh (1933:10) has noted, was “not merely one of a long process of financial crises, but the first great crisis in the modern manner.” King George I sounded a particularly loud blast against the company when things began going sour, referring to its “unwarrantable practices” and berating the speculative fever that he insisted was diverting people from more practical pursuits. The stock swindle, the King declared, had involved “ensnaring and defrauding unwary persons to their utter impoverishment and ruin” and “taking off the minds of many of our subjects from attending [to] their lawful employments and by introducing a general neglect of trade and commerce” (Cowles, 1960:138).

Ultimately, the near moribund condition of the South Sea Company led to a searching inquiry by parliamentary committees, whose members served both as investigators and judges. Many of those who had lost money sought revenge—122 members of the House of Lords and 462 members of the House of Commons had invested in the Scheme. Those who had been bribed, on the other hand, were looking for secrecy and/or mercy. The first surprise was that there was no statute allowing criminal proceedings to be launched against the malefactors. Robert Molesworth, who had lost £2,000 of borrowed money on South Sea stock (Sedgwick, 1970:11,262) plunged into this gap by insisting that the company directors should be declared guilty of parricide by parliamentary fiat—they had, he argued, slaughtered their country—and subjected to the ancient Roman punishment for that crime by being sewn up in sacks with a monkey and a snake and cast headlong into the river (Carswell, 1960:210; Erleigh, 1933:128). Though that proposal withered, the House of Commons held what accurately had been labeled “a drum-head court martial” of those implicated in the scandal. Edward Gibbon, that most perspicacious of English historians, whose grandfather was sanctioned as one of the directors of the South Sea Company, accurately noted that “the equity of modern times must condemn the violent and arbitrary proceedings which ... disgraced the cause of justice” (Gibbon, 1966:151).

The parliamentary hearings ran for three weeks from nine in the morning until eleven at night (Carswell, 1960:223–237), but charges and rumors proved difficult to substantiate because the official who had recorded the bribes to members of Parliament—as well as to two of the king's mistresses—had absconded with his books across the Channel to Brabant territory: “Self-preservation has compelled me to withdraw myself,” he sensibly explained in the note he left behind (Cowles, 1960:160). The culprit had avoided extradition back to England, probably with the connivance of culpable members of the king's court, by invoking an obscure medieval treaty.

In the end the parliamentary committee was able to account for only about one-eleventh of the stock that had been employed to pay the bribes (Scott, 1912:111,343). There were demands for capital punishment and imprisonment, but in the end those deemed to be guilty, despite the absence of specific prohibitions against what they had done, were required to submit statements indicating their net worth. Then, after wrangling and maneuvering, they were allowed to keep a portion of their estate, based upon what they were alleged to have done and what support they could muster in Parliament. For some, the penalty was confiscatory: Francis Haws received the smallest allowance, on the ground that he had encouraged speculation with public funds by some clerks in the Navy Office. Of his estate of £400,031, he was permitted to retain only the £31. Edward Gibbon was permitted to keep only £10,000 of a total of £106,543, though in due time, his grandson tells us (Gibbon, 1966:16), he replenished his fortune. For others, the assessment was much lighter. In terms of the immediate consequences of the failure of the South Sea Company, Cowles (1960:175) undoubtedly is correct: “The blow to the national credit had been largely psychological. Many people had lost, but an equal number had gained. The money was still there, but in strange pockets.” In a larger sense, though, as has been noted earlier, the South Sea Company fiasco handicapped for years the movement toward incorporation and, most particularly, the development of satisfactory mechanisms to control corporate enterprise.

The kind of legislative oversight and inquiry that constituted the response in the case of the South Sea Company scandals continues today as a major tac...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Foreword
• Introduction Understanding Corporate Criminality: Challenges and Issues
• Chapter One The Evolution of the Study of Corporate Crime
• Chapter Two Defining Corporate Crime: A Critique of Traditional Parameters
• Chapter Three Assessing Victimization from Corporate Harms
• Chapter Four Public Perceptions of Corporate Crime
• Chapter Five Measuring Corporate Crime
• Chapter Six Theoretical Explanations of Corporate Crime
• Chapter Seven Regulating Corporate Behavior
• Chapter Eight Corporate Criminal Liability
• Chapter Nine Sanctioning Corporate Criminals
• About the Authors