While corporations do have a significant impact on us, by the same token we can have an impact on them through the justice system - by convicting them and sentencing them when they break the law.

The New South Wales Law Reform Commission, as part of its review of sentencing laws in New South Wales, has recently given specific consideration to the sentencing of corporate offenders. The Commission’s final report is yet to be released by the Attorney General. This paper discusses some of the issues the Commission has considered in the course of its review, but cannot reveal our final recommendations on the issues raised.

Inadequacy of the current regime

When corporations are convicted, there are few options for dealing with them under the current general sentencing regime. This is because the general sentencing regime assumes that it is dealing with individuals and, as already noted, a corporation is a legal abstraction without a physical presence. Hence, unlike its officers or employees, a corporation cannot be imprisoned. This means that other forms of incarceration less then full-time imprisonment are also not applicable. Other options under the general sentencing regime, like community service orders and bonds are also, at present, not readily amenable to corporate offenders.

Inadequacy of fines

The fine is, therefore, at present, the major sentence imposed on corporations in New South Wales. Yet, the fine may be inadequate for achieving the traditional objectives of punishment (namely, retribution, deterrence, rehabilitation, incapacitation, denunciation and recognition of harm to victims). These traditional objectives of punishment are as applicable to corporations as they are to individual offenders.

Before moving on to a consideration of options that may better achieve some of these objectives, let me elaborate some of the ways in which fines are inadequate for achieving some of the objectives of sentencing:

Deterrence

First, fines may be ineffective in achieving deterrence. This proposition may apply both to large and small corporations.

Large corporations may treat fines, especially relatively low fines, as mere business losses that can be outweighed by the commercial gains from their illegal operations. Let’s take an actual case as an example: A worker was killed in a workplace accident. The company, a large multinational corporation, and its subsidiary were found to have committed breaches of the Occupational Health and Safety Act. The total fine imposed on the two companies was $270,000. That year, the combined gross revenue of these companies was close to $1 billion. It may be argued in this, and similar cases, that the fine could be seen as a mere cost of doing business and not something that would necessarily influence their future conduct for the better.

For smaller corporations or subsidiaries of larger corporations, the effectiveness of a fine is limited by a wealth boundary. This is referred to in the literature as the “deterrence trap”. This arises when a corporate offender does not have the resources to pay a fine in an amount required for effective deterrence. For example a fine of $5m will have no greater deterrent effect than one of $500,000 for a company whose assets are less than $500,000.

Rehabilitation

Secondly, fines, especially if treated as business expenses, may not be sufficient to compel a corporation to correct the systemic or procedural faults that gave rise to the offending behaviour. This is particularly so if the corporation takes the view that the cost of corrective measures outweighs the cost of incurring further fines. Other strategies, therefore, need to be developed to encourage rehabilitation of corporate offenders.

Denunciation

Fines may also trivialise the gravity of some corporate offences and may even lead the public to believe that corporations can simply buy their way out of trouble - take the example I’ve already mentioned of the worker killed in an industrial accident. Fines may also leave the impression that the harm caused by corporate crime, in particular social and environmental harms, are purely economic in nature.

Effect on third parties

Finally, consideration should be given to the impact of fines on third parties. Third parties are almost always affected when courts hand down sentences. In the cases of individual offenders this is most obvious when the court gaols a family’s breadwinner.

In the context of corporate offenders, one of the main criticisms of fines has been that they may unnecessarily punish people who have not been involved in the offence. This includes shareholders, employees, creditors, customers and trading partners. For example, a reduction in dividends for shareholders, increased prices for consumers and wage cuts and layoffs for employees. The effect on third parties is referred to as the “spillover” effect.

There has been much debate about the extent, if any, to which these the victims of “spillover” can be termed “innocent”. For example, it can be said that the company’s illegal activities have provided many of these “victims” with economic benefits, in the form of greater dividends, lower prices or higher wages. However, given the potentially greater flow-on effects on the economy, the issue of spillover ought to be considered and may be dealt with more effectively by sentencing options other than the fine.

Fines as the primary sanction against corporations

Notwithstanding the inadequacy of fines in some cases, the fine should probably continue to be the primary sanction against many corporate offenders. The fine still embodies the legislative view, based on community standards, of the seriousness of criminal conduct. The fine is also, arguably, the appropriate sanction in certain cases, for example, those involving less serious “regulatory” offences. They are also cheap and easy to administer (and generate revenue for the government). However, there are circumstances where other sentencing options, either alone, or in combination with fines, may be more appropriate.

A comprehensive sentencing regime for corporations

The Commission has, therefore, been considering a more comprehensive sentencing regime for corporations. The objectives of sentencing may be furthered if a broad range of penalties is available to a court to deter and punish corporate offenders. For example, deterrence, denunciation and rehabilitation may be more effectively promoted where a corporation is ordered to reform its management structure or its internal procedures or policies, than they would be if the corporation was simply ordered to pay a fine.

One approach would be to give the courts the general power to impose additional or alternative sanctions on corporations. At present, such powers are only available in the context of specific statutes, principally concerned with environmental protection, occupational health and safety, and fair-trading. The Commission has been drawing on these provisions and also on a voluminous literature on the subject of sentencing corporations that dates back to the 1970s.

The Commission has, therefore, considered whether the following penalties should be generally available for sentencing corporations in addition to, or in place of, a fine:

• Incapacitation orders;
• Correction orders;
• Community service orders;
• Publicity orders; and
• Equity fines.

Incapacitation orders

Incapacitation orders are about preventing companies from conducting some or all of their usual activities. They can take the form of dissolution or disqualification. Dissolution involves winding up a corporation and disqualification involves preventing a corporation from carrying out certain commercial, trading or investment activities or from participating in, for example, government contracts.

Incapacitation orders achieve the objectives of incapacitation, rehabilitation and deterrence in varying degrees. However, they provide little scope for rehabilitation and may present formidable problems of spillover. They are generally considered to be harsh options and have been compared with imprisonment in the case of disqualification and even the death penalty in the case of dissolution. It is generally considered that these orders should only be used on rare occasions and in extreme circumstances. For example, the US Sentencing Commission’s Guidelines make special provision where a corporation has been “operated primarily for a criminal purpose or primarily by criminal means”.

In Australia dissolution is already available as a civil remedy under the Corporations Law and there are instances of the courts ordering winding up on a number of grounds including breaches of the law.

To be an effective preventive measure, dissolution may also require provisions to prevent shareholders and directors of a dissolved corporation from reincorporating to continue with the corporation’s illegal activities.

Correction orders

A correction order is basically an order that requires a corporation to do, or refrain from doing, a specified activity or thing. The aim is to reform or control a corporation’s behaviour in some way. Correction orders can encompass a broad range of possible orders that have been given a variety of names in the literature and relevant legislation. There are two broad categories - probation orders and punitive injunctions.

Probation orders involve making a corporation carry out certain requirements with the aim of rehabilitation. One example of such an order is an internal discipline order which involves making a corporation investigate its own activities, take disciplinary action against individuals and return detailed compliance reports. Another example is an organisational reform order which involves a limited period of judicial monitoring of the activities, policies and procedures of corporations. Forms of corporate probation may currently be imposed under the Trade Practices Act 1974 (Cth) and in New South Wales under the Protection of the Environment Operations Act 1997 (NSW).

Punitive injunctions essentially involve the court imposing specific internal controls at the risk of further punishment if the corporation fails to implement them. Such orders may set out in detail the conduct a corporation must not engage in, or require the corporation to do particular things. Examples in current New South Wales legislation include orders for restoration and prevention under the Protection of the Environment Operations Act 1997 (NSW) and orders to remedy certain matters or to carry out specified projects under the Occupational Health and Safety Act 2000 (NSW). Like probation orders, punitive injunctions can achieve, in varying degrees, the objectives of prevention, rehabilitation and deterrence. However, greater emphasis is placed on enforcing or preventing certain actions and their stricter terms can give clearer expression to the unacceptable nature of the offence that has been committed.

Community service orders

Community service orders involve the court ordering a corporation to undertake or contribute to work or projects that benefit the community in some way. Apart from the general benefit to the community, community service orders can provide an avenue for reparation for the harm caused by an offence. They may also enhance rehabilitation and deterrence, especially when officers and employees of the corporation are involved in the community service project. In New South Wales the courts can currently order corporations, under relevant legislation, to carry out specific projects aimed at restoring or enhancing the environment or for the improvement of occupational health, safety and welfare.

Publicity orders

Publicity orders involve the publication of details of a corporation’s conviction to a specific group of people or the general community. The material published can include information about the offender, the offence and its consequences, and any other penalty imposed. Publicity orders are particularly suited to achieving the sentencing objective of denunciation. They may also have the effect of punishing and deterring corporations because the adverse publicity generated may threaten a corporation’s good reputation, affect consumer confidence and compromise the corporation’s autonomy. In New South Wales, legislation in the areas of environmental protection, occupational health and safety and fair trading, currently allow courts to order that an offender publicise the offence and its consequences. The Commonwealth’s Trade Practices Act 1974 also includes publicity orders amongst its sanctions.

Equity fines

The equity fine has been proposed in the literature for more than twenty years. An equity fine would require a corporation to issue shares rather than pay a cash fine. Most proposals envisage a sentence that requires the company to place the newly issued shares in a fund to compensate victims of crime. This would have the effect of watering down the corporation’s market value thereby punishing the corporation while avoiding a liquidity crisis. An equity fine is therefore not limited by a “wealth ceiling”. It also achieves the ancillary sentencing goal of compensating victims of crimes.

It has further been suggested that the threat of a change in the ownership structure of a company will have a deterrent effect on the company’s management.

However, there are a number of criticisms of the equity fine. One is that in punishing all shareholders it fails to distinguish between larger shareholders and smaller powerless ones who will usually be unable to influence managerial conduct. Equity fines do not provide for rehabilitation any more than cash fines do. Finally there are practical difficulties. There is a lot involved in managing a public share portfolio and there are also difficulties in dealing with securities given the volatile nature of the stock market.

Conclusion