Called More Equitable Than Fining Companies : Plan Would Punish Directors for Crime

Jail terms, fines and probation may not be suitable ways to punish corporations that commit crimes, but a federal commission that debated the issue in Pasadena last week has agreed to study another method: punishing company directors.

The suggestion, proposed to the U.S. Sentencing Commission last Friday during its final hearing at the U.S. Court of Appeals in Pasadena, is likely to add fuel to a debate in government and academic circles about how to improve a penal system more attuned to punishing individual lawbreakers.

The commission, an independent federal agency, was already considering a proposal that would levy economic penalties under a complex formula that considers the loss caused by the criminal act and the likelihood of getting away with the offense. The commission has also discussed methods of imposing probation on convicted corporations without destroying their businesses.

But Robert A. G. Monks, president of Institutional Shareholder Services, a Washington-based consulting firm whose work includes making recommendations to stockholders on proxy voting, has another idea. He suggested at the commission’s Pasadena hearing that the government enlist shareholders to hold directors accountable for corporate crimes, much as politicians are held accountable at the ballot box by voters, whether the politicians actively participated in a crime or not.

Monks, a 55-year-old lawyer, did not detail how his plan would work. But he said that since a handful of institutional shareholders hold most of the outstanding shares of the biggest U.S. corporations, they could be employed, perhaps by requiring them to enact new corporate bylaws, to ensure that directors are removed from office if their company is found guilty of certain criminal offenses. He added that removal from office would be a sufficient deterrent.

Won Strong Support

“Now that you have a fairly small group of institutions with enormous stock holdings, I think you have the (framework) for something that is a great deal more effective than we have had in the past,” Monks said.

The proposal drew almost unanimous support from the six-member panel, which said the plan is more simple and equitable than a new system of fines or probation.

“It’s a novel idea,” William W. Wilkins Jr., chairman of the commission, said. “I think it has several attractive aspects. But we would have to see . . . specifics.”

However, the plan appears to conflict with the traditional legal view of directors as company policy-makers rather than hands-on managers who might know of any criminal activity. And some observers said it probably would make it more difficult for companies to find qualified people to serve on their boards.

“It makes sense to the extent you can establish a nexus between the directors and the criminal activity,” said Eric M. Zolt, a tax professor at the UCLA School of Law who also testified at the Pasadena hearing. “But my personal preference is to focus on monetary sanctions.”

Less than 1% of those facing sentencing in federal court are organizations, according to the commission. Those that have paid fines for their crimes, generally have not had to reach deep into their pockets. From Jan. 1, 1984, through Dec. 31, 1987, nearly half of all defendant organizations paid fines of less than $5,000 and nearly 80% paid less than $25,000.

Lack of Deterrent

Yet a company cannot be jailed, and judges say that fines can be hard to calculate and that probation is cumbersome to enforce.

Some experts argue that the new system of fines being considered by the commission would not provide an effective deterrent because it is tantamount to a tariff system that allows businesses to engage in criminal behavior as long as they are prepared to pay the penalty. Probation, too, is criticized because it interferes with a company’s ability to continue doing business.

The commission, which earlier held similar hearings in New York and Chicago, plans to submit its final plan to Congress next spring. The proposal will become law unless Congress acts to block it.