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Key Finding

Corporate law can play a powerful yet underused role in fixing toxic corporate cultures by holding leaders accountable and complementing criminal and regulatory efforts

Abstract

Flawed corporate culture has been at the root of the largest corporate debacles in recent years, such as Wells Fargo’s fraudulent accounts, Volkswagen’s emissions cheating, and Boeing’s 737 Max crashes. In this type of case the corporation in question boasts a well-funded compliance program, a well-constituted board of directors, and a well-crafted code of ethics. Still, without an ethical corporate culture that emphasizes high integrity as much as it does high performance, all the observable markers of corporate governance matter little. There is a consensus among practitioners and academics that corporate culture matters greatly, both in creating financial value and in mitigating compliance risks. Yet there exists relatively little research on the types of legal mechanisms that can influence corporate culture. The extant legal literature focuses on addressing flawed cultures through criminal law and regulatory mandates. But public enforcers find it hard to assess a given corporate culture. As a result, such regulatory mandates too often result in corporations adopting a check-the-box “cosmetic” compliance program instead of meaningfully focusing on improving their behavior.

This Article spotlights the underexplored role of corporate law in addressing flawed corporate culture. In recent years, corporate law’s oversight duty doctrine has been recalibrated. That recalibration has made the doctrine adept at holding officers and directors accountable for how they shape the information flows, economic incentives, and in-group norms. To be sure, corporate law alone cannot fix corporate culture, but with the right design it can complement other legal mechanisms and incentivize officers and directors to set the right tone at the top. The Article conducts a comparative institutional analysis of different legal fields (criminal versus civil) and different legal systems (the US private litigation model versus Australia’s public enforcement model and the UK market discipline model), to assess the relative strengths and weaknesses of various legal instruments to address flawed corporate culture. In the process, the Article makes the following three contributions.

First, the Article highlights just how pivotal a role corporate culture plays in shaping corporate behavior. Second, the Article delineates the pros and cons of different legal tools to foster accountability for flawed corporate culture. Finally, the Article generates concrete recommendations for practitioners and policymakers. For directors, key lessons include the need to rethink board structures. For judges, key lessons include reassessing prefiling discovery doctrines, and coming up with tools to infer scienter in large organizations.

Published in

Forthcoming in Journal of Corporation Law

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