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Organizational Incentives to Care About the Law Deborah A. DeMott 60 Law & Contemporary Problems 39 (1997) |
ABSTRACT:
The legal personality of a corporation creates a perplexing question in relation to its "moral" personality: how are the duties and rights created outside the sphere of organizational law applied to a "person" that is wholly created by compliance with a legal form? For example, how is a corporation to be treated in the context of crimes that require a mental state as an element, that presuppose the presence of a sentient actor? In this insightful and interesting article, Professor DeMott discusses the incentive structures that a corporation creates for its agents and employees and how that structure ought to impact the vicarious liability of the corporation for the individual actors in the corporation. She discusses the responsibility of monitoring by the governing body, specifically in the context of In re Caremark Int'l, Inc. and, more importantly, the role of the incentive structures in creating rewards for actions that might violate the law that directly contradict instructions from the governing body to follow the law. Professor DeMott characterizes the agency relationship as a private structure of norms created by the directors in a corporate setting. The argument of the article is that corporations should be held vicariously liable to encourage the governing body to create incentive structures with appropriate rewards that do not encourage violations and to strive for greater clarity in instructions to agents and employees while also promoting efforts at monitoring. The argument is qualified, however, by the realization that this type of liability is only an effective deterrent where the principal of the organization retains enough control to define wrongful conducts and send clear messages. Professor DeMott also suggests a modification of the business judgment rule to give shareholders a better chance of succeeding with bringing derivative litigation where senior management is involved in the defense of the case.
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