Companies on Trial: Are They ‘Too Big to Jail’?

Lawrence Summers:

Companies on trial: are they ‘too big to jail’?: Disillusionment with government and large institutions is a salient feature of contemporary American life. An important cause is the widespread sense that big companies and those who run them are not held accountable for their crimes – that they are ... Too Big To Jail. The fact that no one has been imprisoned for the misdeeds that led to the financial crisis is seen as outrageous by many on Main Street. At the same time, the multibillion-dollar fines and enforcement actions against financial institutions that now seem to be a monthly event are a new phenomenon...

The current trend towards large fines ... seems to promote a somewhat unattractive combination of individual incentives. Managers do not find it personally costly to part with even billions of dollars of their shareholders’ money, especially when fines represent only a small fraction of total market value. Paying with shareholders’ money as the price of protecting themselves is a very attractive trade-off. Enforcement authorities like to either collect large fines or be seen as delivering compensation for those who have been victimized by corporate wrongdoing. So they are all too happy to go along.

In the process, punishment of individuals who do wrong or who fail in their managerial duty to monitor the behavior of their subordinates is short-changed. And deterrence is undermined. There is a broader cultural phenomenon here as well. Relative to other countries such as the UK or Japan, the principle that leaders should resign to take responsibility for failure on their watch even when they did not directly do wrong is less established in the US. This is probably an area where we have something to learn. ...