The United States has long had a uniquely broad rule of criminal liability that essentially parallels respondeat superior. This has offended doctrinal purists, but there is little likelihood of legislative change. Nonetheless, a newer empirical critique has begun to gain favor among legal scholars: corporate criminal liability is not working—principally, because it has lost touch with the defining features of the criminal law. Today, when a large corporation becomes caught in a messy scandal, the typical outcome is a deferred prosecution agreement (or ‘DPA’), negotiated much like an elaborate contract, between defense counsel and the prosecution, without the court becoming involved. A DPA may involve a substantial fine, but it spares the corporation from a public trial and most of the ‘blaming and shaming’ that is at the core of the criminal law. Put simply, both shame and judicial discretion have been drained from the process.

Still, there is an even stranger aspect to corporate prosecutions. What happens when the corporation is sentenced? Even when record multi-billion dollar penalties are imposed, the corporation’s stock price typically goes up (and almost never down). Because it is unlikely that the market could not have predicted and discounted record penalties in advance, the most likely implication here is that even staggering high fines can be absorbed by large corporate defendants as a cost of doing business.

So is the policy answer even higher fines? The problem is that the corporate defendant might respond by declaring bankruptcy, closing plants, or laying off workers en masse. Few judges would be willing to risk such outcomes. In a recent article, I argue that (i) we need to rethink the rationale for corporate criminal liability, (ii) find a means of subjecting those senior managers who cannot be identified with sufficient certainty to indict to some penalty that will deter, and (iii) reduce the ‘overspill’ of corporate penalties on employees, creditors, and other innocent stakeholders in order to enable the use of more potent penalties. Each of these topics is briefly considered below.

A) What Should be the Rationale for Corporate Criminal Liability?

Although many would prefer to focus penalties on individuals and ignore the corporate entity, the reality is that senior managers in the modern decentralized firm are remote, distant, and able to hide their often tacit involvement. Equally important, if we focused only on individuals, the corporate entity could threaten its employees, pressuring them to violate the law. Indeed, the corporation might be more effective in pressuring for legal non-compliance than the state is at inducing law compliance.

Why? After all, only the state can send the employee to jail. Still, we need to distinguish the severity of the penalty from its likelihood of imposition. Going to prison is far worse than being fired, but being fired is far more likely. Hence, employees may accept the remote risk of prison to avoid the near certainty of dismissal. This means they will comply with tacit hints to cut legal corners that come from above in the corporate hierarchy. Only severe penalties placed on the corporation can discourage the firm’s willingness to use employees as pawns in this fashion.

Of course, civil penalties could also discourage the corporation from inducing it its agents and employees to commit crimes on its behalf. But the unique advantage of a criminal penalty is that it carries a far greater reputational stigma, and public corporations are reputationally sensitive. Hence, we get a bigger bang for the buck from a criminal penalty.

B) Where Does Deterrence Fall Short?: Targeting Senior Management.

Senior executives today generally escape any serious legal threat for corporate misconduct. So long as they do not order or direct an underling to commit a crime, tacit signals and coded language can seldom prove them guilty beyond a reasonable doubt.

If so, what can be done to fill this gap? The answer that I favor is to use corporation probation to design a penalty that will fall heavily on senior management at firms that are not law compliant. Suppose the sentencing court finds that the convicted corporation lacks a law compliant culture. In addition to imposing a fine, the court could, as a probation condition, restrict the use of incentive compensation for executives for the period of probation. The rationale would be that incentive compensation is criminogenic because it encourages risk-taking. The effect of such a probation restriction would fall precisely on the senior management that is today largely immune from the threat of a serious sanction. The court would need to find a failure of law compliance (and could spare divisions or offices that had behaved commendably), but it would deliberately impose a group penalty. This is intended to incentivize management to restrain, rather than tolerate, their more reckless colleagues, in order to protect their own compensation.

C) How to Deter the Corporation Without Overspill?: The Equity Fine.

From an economic perspective, deterrence requires that the expected penalty exceed the expected gain. But the expected penalty must be discounted by the limited prospect of apprehension. The likelihood of apprehension for many white collar crimes is low, probably under 25%. On such an assumption, the penalty would have to be four times the gain. This quickly produces penalties that would bankrupt corporations, and particularly financial institutions.

But there is an answer. When extraordinary penalties are necessary (as they would appear to be in some cases—for example, in the case of companies producing or marketing opioids that killed hundreds of thousands), the penalty should be levied not in cash, but in shares of the company’s stock. A company with a market capitalization of, say, $50 billion could be ordered to pay a fine of 15% of its market capitalization in stock to a crime victim’s compensation fund. The issuance of this stock will not harm employees, creditors or other stakeholders because it does not reduce corporate cash flow, but it will dilute shareholders. This ‘equity fine’ may seem harsh to shareholders, but deterrence requires that someone feel the penalty (and today cash fines seem to produce mainly stock price increases). Equally important, in light of the recent concentration of share ownership among institutional shareholders, shareholders are no longer dispersed or powerless. They can take action, and the threat of high penalties should make them much more proactive.

None of these proposals will be quietly accepted by the corporate community. They will continue to pretend that corporate compliance plans work (when there is little evidence to this effect). Thus, organizational misbehavior will persist. But at least we can understand what meaningful reform would require.

John C. Coffee, Jr. is the Adolf A. Berle Professor of Law at Columbia University Law School and Director of its Center on Corporate Governance.