With the dizzying expansion of corporate criminal liability, it has never been easier for courts to punish companies for their own or their employees' misdeeds. That makes it critical for employers to protect themselves. "The time for companies to start thinking about this is now," says Washington lawyer Harvey L. Pitt, a former general counsel for the Securities & Exchange Commission.
Corporations should begin with a self-assessment. What are their key operations and what laws govern them? They should pay extra attention to areas prosecutors consider hot, including antitrust and financial fraud.
SAFEGUARDS. The next step is tedious but key. "You have to take each subject and think whether you could possibly violate federal, state, or local law and whether you are doing all you can" to avoid that, says Jon V. Heider, B. F. Goodrich Co.'s general counsel. The idea is to have safeguards before prosecutors knock. Says New Jersey U. S. Attorney Michael Chertoff: "If we saw a corporation had made a reasonable effort to avoid criminal activity, that would be a strong factor" in deciding whether to indict.
Most big corporations already have policy statements or conduct codes to dissuade misconduct--and minimize their liability. A 1990 study by the Ethics Resource Center in Washington found that 85% of 711 corporations surveyed had a policy. But fewer than 10% actively engaged in ethics oversight.
The U. S. Sentencing Commission's corporate sentencing proposals give companies a powerful incentive to step up their policing now. Under them, companies can get reduced fines if they show "a meaningful program to prevent and detect violations of law."
The test is tough. Companies must convince a judge that their compliance programs meet the specified criteria (table). "For a general counsel to ignore these guidelines is professional malpractice," says John C. Coffee, a securities-law professor at Columbia University law school. Ethics training--already mandatory for tarnished federal contractors--could supplement such programs. But, Coffee says, ethics seminars "won't justify sentencing credit" without monitoring, discipline, and effective communication.
Such efforts also must be diligently documented. If the guidelines go through, Goodrich's Heider says the company will "keep a log if necessary" to detail its programs. They include operating a whistle-blowers' hot line and adopting the chemical industry's recommendations for minimizing health and safety risks.
If not carefully crafted, compliance programs could boost a company's liability. A code that restates the law may preclude a company from pleading ignorance or claiming its behavior falls within permissible bounds, Pitt notes. Companies may also lose out if they fail to ensure that their programs really work or fail to gain top management's backing.
Of course, even model compliance programs will never be a guarantee against prosecution or punishment. As Pitt notes in a recent client memo on "new benefits" from compliance codes, judges have held companies criminally responsible for employee misconduct even when the misconduct breaches corporate policy. Given the current climate, though, companies need all the protection they can muster.
AN OUNCE OF PREVENTION...
-- Set mandatory standards and procedures for employee behavior
-- Appoint a high-level manager to ensure compliance
-- Publicize all codes of conduct through brochures, mandatory employee training sessions, and other means
-- Be wary of delegating authority to employees who may abuse it
-- Take all reasonable steps to ferret out criminal conduct by setting up auditing systems and a well-publicized mechanism for workers to reveal suspected crimes without fear of retribution
-- Enforce standards consistently through apt disciplinary measures
-- After a crime, take all reasonable steps to prevent similar offenses