Recognizing the “Bad Barrel” in Public Business Firms: Social and Organizational Factors in Misconduct by Senior Decision-Makers

JAMES A. FANTO, Brooklyn Law School

Abstract

The Article argues that laws dealing with business associations do not adequately address the group and organizational factors in misconduct by senior decision-makers of public firms. The law essentially adopts a “bad apple,” rather than a “bad barrel,” perspective: it considers senior-level misconduct to be essentially an individual matter, and group or organizational causes or factors to be insignificant in it. The Article contends that this approach contradicts the learning of those who study groups and organizations, social psychologists and organizational theorists. Since senior-level misconduct is often attributable to group and organizational factors, a response that focuses only upon punishing the individuals involved leaves problematic organizational attitudes and practices unaffected and makes misconduct likely to recur.

The Article first reviews representative social psychological and organizational literature to set forth an understanding of its basic teachings about group and organizational factors in and causes of misconduct by senior decision-makers of public firms and draws four lessons from this review. It then conducts a targeted review of several legal areas in order to see how well they take into account the group or organizational causes of or factors in senior level misconduct. It considers corporate law and the enforcement of the federal securities laws by the Securities and Exchange Commission (“SEC”) and federal prosecutors. The analysis of civil and criminal enforcement of the federal securities laws particularly focuses on organizational liability, in conjunction or in contrast with individual liability, since holding a public firm liable for the acts of its directors, officers, and employees squarely raises the issue of group and organizational causes of their misconduct. This review of relevant laws and of their enforcement and prosecution reveals that, by and large, group and organizational causes or factors are given little attention in corporate law jurisprudence and by the SEC and federal prosecutors in securities law enforcement. Again in organizational parlance, the legal emphasis is on “bad apples” rather than “bad barrels.”

The Article argues that the current state of affairs in corporate and securities law should be reformed to reflect the group and organizational causes of senior decision-maker misconduct.. The basic argument is that, unless the law recognizes the group and organizational factors in senior-level misconduct, organizational reform will be superficial and will not address the culture and practices that contributed to the misconduct, which will likely resurface in the organization, despite any imposed changes to it. It considers the possibilities of reform within the legal areas already examined and the impediments to it, particularly the obstacle of the self-interest ideology. It contends that organizational civil and criminal liability must be maintained because it is a societal acknowledgement that social and organizational factors contribute to misconduct and because it is one of the few tools that allow society, through prosecutors and regulators, to address group malfunctioning and pathological organizational culture. It concludes by arguing that the current policy of preferring deferred or non prosecution agreements to organizational prosecution and conviction should be continued, but that federal prosecutors should work together with the SEC in designing these agreements to focus more on organizational reform and should enlist social psychologists and organizational theorists in the effort.