Skilling - Criminalizing Agency Costs
One great skill academics have, and ex-academics can appreciate, is the ability to condense a important debate into a single word or phrase. Professor Larry E. Ribstein has coined the phrase "criminalizing agency costs", which first appeared on his blog here, to describe white collar criminal cases. The Wall Street Journal Law Blog found the phrase, as it applied to the Skilling's defense in the Enron trial, "just a fancy way of saying that the government has misused criminal laws in this case to punish questionable business transactions and bad business decisions."
Whether you accept Mr. Skilling's characterization of his activities at Enron as risky, but legal business decisions aimed at, spectacularly unsuccessfully, improving shareholder wealth, or not, Professor Ribstein has characterized, in an important way, when criminal sanctions should be applied to corporate bodies. Agency costs, as economists understand them, relate to the problem that any public corporation has: management makes decisions which may turn out to benefit management more than the shareholders, who can only hold the former accountable through the actions of the board of governors - which can in turn be "captured" by senior management.
Mr. Andrew Fastow inflicted agency costs on Enron by profiting at Enron's expense via his participation at minimal risk and cost in the off-balance sheet partnerships. I found this a fairly convincing case of theft - at the high end of an agency cost which was intentionally fraudulent. Mr. Skilling also inflicted agency costs on Enron, in part by only spending "8 or 10" minutes reviewing Mr. Fastow's involvement with the off-balance sheet partnerships. Was this oversight intentional and was it fraudulent? Did Skilling dupe himself, or did he recklessly blind himself to the truth about Enron's financing? That is what his criminal trial is about.
There are going to be a number of both statutory and regulatory failures associated with some agency costs. Some of these will give rise to strict liability, with a due diligence defence, others will be absolute liability - but, criminal activities require an additional element: a required state of mind. Trying to assess and balance this enquiry with the relevant agency costs is what a criminal prosecution is all about.
Technorati Tags: business decisions, enron, academics, blog, wall street journal, questionable business, criminal sanctions, legal business, business transactions, shareholder wealth, larry e ribstein, corporate bodies, economists, punish, appreciate, white collar criminal, criminal laws, agency costs, white collar criminal cases
Technorati Tags: business decisions, enron, academics, blog, wall street journal, questionable business, criminal sanctions, legal business, business transactions, shareholder wealth, larry e ribstein, corporate bodies, economists, punish, appreciate, white collar criminal, criminal laws, agency costs, white collar criminal cases
