Do Nothing, Go to Jail
from September/October 2008
by John R. Engen
Colorado voters appear poised to approve a first-of-its-kind corporate-fraud initiative that would mandate fines or jail time—and open the door to civil lawsuits—for executives and board members who know their company is breaking the law but do nothing about it.
A recent poll found that 84% of Coloradans support the proposed legislation; opponents, including much of the business community, view it as a potential disaster. Outsiders are watching with interest. Jess Knox, executive director of Protect Colorado’s Future, an organization made up of labor and other groups sponsoring the initiative, says he’s received inquiries “from every corner of the country” seeking details on the proposal.
As in other states, directors of companies doing business in Colorado already bear responsibility if their outfit “affirmatively” commits criminal acts. This new initiative would take things a step further with the threat of criminal liability if a board member is aware of illegal behavior on the company’s part, such as dumping banned effluents into public waterways, and doesn’t report the violation to state authorities. Right now such liability lies with the business entity but not the individual.
While seemingly a small distinction, the proposed change threatens to create “an incomputable number of new crimes that executive officials could be charged with,” says Douglas Friednash, an attorney with Fairfield& Woods in Denver and counsel to Coloradans for Responsible Reform, which opposes the initiative. For directors specifically, he says, it amounts to “criminalizing breaches of fiduciary responsibility,” misdeeds that are typically subject to civil but not criminal sanctions.
Opponents say the proposed law, which could come up for a vote in November, would result in a wave of lawsuits against directors. Friednash offers the example of a New York City restaurant chain whose board members might face criminal charges if one of its Colorado branches violated a health-code standard. But “if you do business in Colorado, you’re subject to our laws,” says attorney Mark Grueskin, who drafted the initiative for Protect Colorado’s Future. “Just residing someplace else doesn’t give you immunity.”
Even the mere threat of those lawsuits could hike directors’ and officers’ insurance rates and scare off businesses and qualified executives and directors from the state, Friednash says. “You’re going to have a harder time recruiting officers and directors, because they won’t want to be subject to this law.”
In practice, the law could have a stifling effect on boardroom dynamics. Dean Krehmeyer, head of the Business Roundtable Institute for Corporate Ethics at the University of Virginia, worries that it could make board members reluctant to ask tough questions for fear the answers might get them into trouble. “You’re creating a situation where lack of knowledge is bliss,” he says. “This is uncharted water in terms of the consequences corporate leaders could face.”
Jess Knox counters that company leaders need to be forced out from behind the corporate shield and to bear personal responsibility for their own bad moves. Fraudulent behavior is contagious, he says, and purported concerns about Colorado’s competitiveness are a red herring: “The least appealing economic development strategy is to promote your state as a place where fraudulent acts are welcome.” Colorado voters have been bombarded with stories of corporate malfeasance, including allegations of insider trading against former Qwest Communications chairman and CEO Joseph Nacchio, and are eager for greater accountability, says Knox. Nacchio faces a new trial after his conviction was overturned on appeal in March.
It’s possible that not much will change if the law passes. Grueskin notes that similar laws placing liability on corporations have been in place since 1985, with only a handful of prosecutions. “So why would there suddenly be a flood of lawsuits now?” he asks.
Both sides anticipate a spirited battle in the months ahead. With outside money flooding in, Friednash predicts that a total of as much as $40 million could be spent on advertising by the opposing groups. Denver will host the Democratic National Convention in late August, adding fuel to the fire. “Colorado has become a modern-day gunfight at the OK Corral,” says Friednash.
