Scholarship@WashULaw

Document Type

Article

Publication Date

2019

Publication Title

Journal of Corporation Law

Abstract

Harnessing strategies both ancient and modern — hostages, surety, gatekeepers, and blame — this Article proposes a new tool for achieving more efficient corporate compliance. It begins with the premise that a handful of well-known factors, including agency costs, misaligned time-horizons, cognitive biases, and insufficiently deterrent legal regimes sometimes cause companies to ignore important public safety obligations even when those obligations are cost-effective and welfare-maximizing. The result is systemic undercompliance with certain regulatory obligations. Despite the seriousness of this problem, currently available options for motivating compliance mostly fail to make public-safety regulations sufficiently salient to the individuals who perform the regulated tasks.

This new tool is called stewardship. To use it, regulators would require companies engaged in high-risk activities to appoint an internal gatekeeper, called a steward, who would agree to be personally liable should specific preventative measures fail to occur, or worse, specific harms occur. This executive would become the steward of the community’s social welfare with respect to that particular, pre-identified risk. Unlike other forms of responsible officer liability, the steward would consent ex ante to being personally liable — civilly, and perhaps even criminally — should they fail to guide the corporation away from harmful conduct. Recognizing that companies will not always follow their steward’s guidance, stewards can avoid liability by reporting out and cooperating with regulators if they suspect their employer is failing to meet its compliance obligations. In this way, stewardship is a mandatory reporting regime. These interlocking incentives make stewardship an unusually effective strategy for deterring harm ex ante, and a more efficient option for imposing liability ex post. And while the idea of imposing individual liability for collective harms may seem radical at first, our legal system already exhibits nascent forms of this regulatory approach — most notably in the Sarbanes-Oxley Act, the Internal Revenue Code, anti-money laundering and state labor laws. But unlike these broad regulatory regimes, stewardship works on both an industry-wide and project-by-project basis. Therefore, it is a tool for even the most local regulators.

Beyond improving compliance, stewardship is potentially transformative in two ways. First, if and when a corporation causes significant harm, regulators would have a clear target for enforcement actions. Easier enforcement would in turn mitigate the perception of lawlessness that arises when there is no significant enforcement response to obvious wrongs. Second, stewardship facilitates efficient regulation by allowing regulators to focus on their end-goals instead of process and documentation requirements. The resulting system would thus more effectively prevent serious harms while at the same time impose less onerous requirements on businesses.

Keywords

Compliance, Corporations, Stewardship, Liability

Publication Citation

Danielle D'Onfro, Corporate Stewardship, 44 Journal of Corporation Law 439 (2019)

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