Corporate Compliance: A View Through the Political Looking-Glass

One of the benefits of a symposium celebrating a major statute’s anniversary is that it forces us to take stock of what has occurred since the statute was first enacted. Consider the Sarbanes-Oxley Act (SOX) of 2002. Much has changed in the past two decades—remote work has become ubiquitous, artificial intelligence (AI) seems poised to overtake the marketplace, and the United States (along with much of the rest of the world) has become more noticeably polarized than it once was.

Amidst this change, we have witnessed the growth of a major new industry, corporate compliance. As I observe at the opening of my new article, Corporate Compliance’s Achilles Heel, ‘To an outer-space visitor who first touched down on Earth in 2002 and returned two decades later, the story of corporate compliance’s evolution in the intervening two decades is largely one of success.’ (article, 791.) But success can metamorphose into failure if we ignore important red flags. To that end, we should take heed of broader socio-political developments that threaten compliance’s future success and expose us to the types of wrongdoing that produced Sarbanes-Oxley in the first place.

Compliance Today

The activities we collectively refer to as ‘compliance,’ have become part of an ‘essential, prominent function of any publicly held company.’ (article.) Although compliance owes its genesis to laws and practices that precede Sarbanes-Oxley, it has also benefitted greatly from SOX’s elements.

Congress’s strong emphasis on internal monitoring, certifications by top executives, and increased statutory maximum punishments for crimes such as mail and wire fraud, removed any doubt that internal corporate policing was a corporate necessity. Compliance leapt to the top of everyone’s mind (federal prosecutors included); lawyers, accountants, and former enforcement officials populated a burgeoning industry, which attracted professional training and scholarly debate.

During this same time period, however, a very different change was occurring.  

Polarization on the Rise

Numerous surveys establish that the United States has become, in just a few decades, highly polarized along multiple dimensions, including age, class, ethnicity, and education (article, 805). Ideological polarization, which reflects differences of opinion on specific political issues and party agendas, has given way to ‘affective polarization,’ which is defined as ‘the phenomenon by which partisans move beyond disagreement on specific policies and instead associate political affiliation with social identity.’ (article.) An affectively polarized world is one in which facts and opinions are filtered through one’s group affiliation. Out-group members are met with hostility; in-group members repeatedly receive the benefit of the doubt.  

Opposing and hostile social identities threaten corporate compliance. Compliance, after all, is relational in nature; it requires employees and supervisors to trust each other and share information as they deliberate. Polarization undermines these activities while distorting facts on the ground. In a world such as this, the issue is no longer the structural silo (where responsibility is delegated to too many groups), but instead the psychological one, where individuals purposely keep information to themselves.

Polarization’s Practical Implications

The foregoing narrative helps us understand several workplace and enforcement-related trends.

For example, artificial intelligence (AI) is on the minds of many, in part because it has become ‘a major feature of the private sector.’ (article, 814.) AI and automation (admittedly not the same thing) offer a complex bundle of benefits and drawbacks. Machines make our lives easier in many respects, boosting our knowledge and productivity. But machines are also a threat. They replace jobs; erode accountability for corporate wrongs; and dampen empathy for all those who work for and come into contact with the firm. In an ordinary, depolarized world, we would identify an equilibrium between these costs and benefits. Polarization, however, decisively shifts that equilibrium in the direction of machines. Machines do not fight about politics or social issues. Thus, firms will choose machines even if an excessive reliance on machines hurts the company or (ironically) fuels greater polarization.

Remote work creates a similar dilemma. It enables the firm to employ workers outside of a given location and reduce their commuting costs. But it also threatens losses to productivity, firm loyalty, and team morale. In an apolitical world, firms would weigh these costs and benefits and judiciously select from a menu of working arrangements. In the polarized world, the pendulum swings more strongly in the direction of remote work. That very remoteness, in turn, deprives compliance personnel of the fortuitous encounters that enable the prompt identification of illicit schemes.

The third trend of interest is the least developed, but it exists nevertheless: the decentralization and defederalization of corporate compliance enforcement. When Sarbanes-Oxley was enacted in 2002, it was reasonable to conceptualize ‘compliance’ primarily as a federal obligation. Today, we would expect our corporate compliance officer to cast a far wider net and to be ready to negotiate with state, local, and foreign enforcement authorities. To some degree, this is a positive story. State attorneys general and state corporation law can arguably fill gaps left by federal prosecutors. But it is far from clear how well a decentralized enforcement framework can fill these gaps. As I conclude in Achilles Heel,

The very scope and complexity of corporate wrongdoing has long served as our reason for relying on a strong, federally coordinated enforcement response. If the federal government’s enforcement apparatus has become so ‘politicized’ that it loses its legitimacy and ability to influence corporate behavior, it is far from clear that either state or local institutions will develop the necessary bandwidth to pick up the federal government’s slack. (article, 818.)

This article is the first of a multi-part project examining polarization’s impact on corporate crime and its enforcement. The aim of this first installment is to demonstrate the shortcomings of a purely structural approach to compliance. However, when we respond to corporate wrongdoing, we should do so with the knowledge that the social and political factors that shape our relationships and institutions also shape compliance. How we utilize this information can be taken up in future scholarship.

This Essay is an adaptation of Corporate Compliance’s Achilles Heel, written for the UCLA-hosted Symposium: Sarbanes-Oxley at 20. Papers written for this symposium can be found at 78 Bus Law 629, et seq (2023).

Miriam H. Baer is the Vice Dean and Centennial Professor of Law at Brooklyn Law School.