Suppose there are two insurance companies. One is following the law, the other one is bribing a mid-level employee of a car company to give them driver info and then using it to set rates and solicit policies. The CEO of the car company doesn't even know it's happening and the CEO of the insurance company does, but isn't telling anyone about it and it just looks like they have above-average margins on their policies.
As long as they don't get caught, the ones breaking the law are not only making money for themselves, they're the ones investors will choose to invest in when all they can see is the bottom line. The honest CEO of the other insurance company gets deposed because investors want someone who can get the same returns as the cheating one, so they cycle through executives until they get one that posts better numbers because they're cheating too.
Some of them will never get caught and come out ahead. The others expect that to happen, which is why they're willing to do it, and if they do get caught then they get replaced by someone else who thinks they won't get caught.
The underlying problem is the structure of the system. The owners want higher profits but are also a diffuse group without the capacity to pay detailed attention to how it happens, so you create evolutionary pressure to cheat. What you actually want is for companies to be operated by their owners because then the owners know what's happening inside the company and can distinguish between a company which is making more money because it's well-managed and one which is making more money because it's cheating and putting their investment at risk. But then we need to stop having megacorps with diffuse passive investors and instead have small and medium businesses which are operated by the owners.
I think this line of argumentation follows and is logically consistent but if this is really how it worked then you're saying in the long run with probability 1 every executive will be a criminal. Nothing about what you're saying about the incentives is unique to white-collar financial crimes. For crimes that have a low chance of being caught the SOP is make the punishment disproportionately severe and weaponize the people likely to observe or carry out the crime. If all goes well you can't cycle through executives because none of them are willing to risk years of prison, fines, and being barred from leadership roles for life.
I don't see how your example resolves as anything other than the mid-level employee is guilty of bribery, and CEO of the insurance company is guilty of 2nd degree $yet-to-be-derermined-crime-name. I don't expect a CEO to somehow know of literally any crime that occurs by any of their employees, just crime by policy.
> I think this line of argumentation follows and is logically consistent but if this is really how it worked then you're saying in the long run with probability 1 every executive will be a criminal.
Certainly not. For example, if a company is run by an above-average executive who can produce good results without cheating, they won't be replaced by someone who cheats. But that's no general solution because it's not possible for every executive to be above-average.
> For crimes that have a low chance of being caught the SOP is make the punishment disproportionately severe and weaponize the people likely to observe or carry out the crime.
Yeah, that's the War on Drugs strategy. It's aggressively broken and encourages the dangerous and socially destructive behaviors associated with organized crime.
> I don't see how your example resolves as anything other than the mid-level employee is guilty of bribery, and CEO of the insurance company is guilty of 2nd degree $yet-to-be-derermined-crime-name. I don't expect a CEO to somehow know of literally any crime that occurs by any of their employees, just crime by policy.
A CEO in a company that isn't the size of a country is going to be directly involved in the company's operations. That companies have grown so large that their owners and executives no longer have a handle on what's happening inside them is the problem.
Which is why we need the law to make crimes not profitable, or at least to attach enough personal risk to dissuade decision makers. It's how we got US corporations to stop dispensing bribes in foreign countries, to which exactly the same logic applies.
So here's the problem. There are some crimes that have a relatively low probability of detection. It doesn't even have to be that low; say it's 40%.
Then there are people with nothing to lose. Some mid-level manager who isn't very good at it, isn't making his numbers. If he plays by the rules, he's about to get canned and lose his house and his wife. If he cheats and gets caught, there's a 40% chance he goes to jail, but a 60% chance he not only makes a lot of money but gets promoted to the head of the company because his numbers are so good. There are going to be too many people willing to take the risk in that case. It's going to happen a lot of the time.
To fix this you need to attach a penalty to someone who both has something to lose and is in a position to detect the crime. But the someone with something to lose are the owners and when they're diffuse passive investors they're not in a position to detect the crime.
> Then there are people with nothing to lose. Some mid-level manager who isn't very good at it, isn't making his numbers. If he plays by the rules, he's about to get canned and lose his house and his wife. If he cheats and gets caught, there's a 40% chance he goes to jail, but a 60% chance he not only makes a lot of money but gets promoted to the head of the company because his numbers are so good. There are going to be too many people willing to take the risk in that case. It's going to happen a lot of the time.
But exactly the same argument applies to paying bribes to foreign officials, and yet the FCPA at least cut that down. I'm not naïve enough to believe that it eliminated it, but surely it's made a difference.
> To fix this you need to attach a penalty to someone who both has something to lose and is in a position to detect the crime. But the someone with something to lose are the owners and when they're diffuse passive investors they're not in a position to detect the crime.
You clarified later you meant the stock owners, but there are also executives of the company. Somewhere up the chain of command will be someone who's reluctant to have their name attached publicly to the behavior, and the possibility of legal hazard will encourage them to regulate their reports appropriately. This is definitely a place not to let the perfect be the enemy of the good.
> To fix this you need to attach a penalty to someone who both has something to lose and is in a position to detect the crime. But the someone with something to lose are the owners and when they're diffuse passive investors they're not in a position to detect the crime.
If they had any accountability they would find ways to put themselves in such a position.
No, they wouldn't. They are you. If you have a 401(k), you probably have shares of some of these companies -- likely hundreds if not thousands of different companies. You don't have time to investigate each of their inner workings and if one of them was convicted of mass murder and fully imploded causing their share price to go to zero, you would typically lose a fraction of a percent of your portfolio and might not even notice.
But that's the problem. Crimes are profitable.
Suppose there are two insurance companies. One is following the law, the other one is bribing a mid-level employee of a car company to give them driver info and then using it to set rates and solicit policies. The CEO of the car company doesn't even know it's happening and the CEO of the insurance company does, but isn't telling anyone about it and it just looks like they have above-average margins on their policies.
As long as they don't get caught, the ones breaking the law are not only making money for themselves, they're the ones investors will choose to invest in when all they can see is the bottom line. The honest CEO of the other insurance company gets deposed because investors want someone who can get the same returns as the cheating one, so they cycle through executives until they get one that posts better numbers because they're cheating too.
Some of them will never get caught and come out ahead. The others expect that to happen, which is why they're willing to do it, and if they do get caught then they get replaced by someone else who thinks they won't get caught.
The underlying problem is the structure of the system. The owners want higher profits but are also a diffuse group without the capacity to pay detailed attention to how it happens, so you create evolutionary pressure to cheat. What you actually want is for companies to be operated by their owners because then the owners know what's happening inside the company and can distinguish between a company which is making more money because it's well-managed and one which is making more money because it's cheating and putting their investment at risk. But then we need to stop having megacorps with diffuse passive investors and instead have small and medium businesses which are operated by the owners.