Corporate Fraud Initiative—Bad for Colorado Companies or Good for Colorado Investors? (Part 4)

The proposal to extend criminal liability to officers for corporate violations has been withdrawn.  It arises, however, out of a frustration that corporate officers ought to be more responsible for the actions of the company.  The reality is that civil liability against the company and the responsible individuals ought to provide sufficient incentive to ensure that legal violations did not occur.  Officers and directors would know that their net worth would be impaired if they were found responsible for the company's violation.  But the difficulty in bringing civil suits (Stoneridge and the PSLRA at the federal level, the demand excusal requirement under state law) make this an unfruitful avenue. 

Moreover, state law (particularly fiduciary duties) often do not make clear who should be accountable for violations by the company.  Sarbanes-Oxley tried to address the problem in the securities area by requiring the CEO and CFO to certify the company's financial statements, making them accountable for the contents.  For more on this, see Criticizing the Critics: Sarbanes Oxley and Quack Corporate Governance.

The criminal provision also sidesteps the race to the bottom and the "internal affairs" rule.  Since criminal law is not determined by the state of incorporation, this provision would apply whether or not the corporation is incorporated in another state, including Delaware.  In other words, this type of provision allows states that do not attract large numbers of incorporations to nonetheless get in the corporate governance game.  In other words, this is a provision that arises out of weaknesses in state law.  If state law made fiduciary duties more robust and accountability more clear, this provision would be unnecessary.