Pages

Should Shareholders Pay for Corporate Misconduct?

The U.S. SEC’s settlement last week with Citigroup has revived the debate about the efficacy of payments by way of settlements, fines and penalties by companies as a consequence of breaches of law. Under this settlement, Citigroup is required to pay $75 million for making “misleading statements about the extent of its holdings of assets backed by sub-prime mortgages in earnings calls and public filings”, thereby affecting the interests of its shareholders. SEC also settled with two of Citigroup’s officers – Gary Crittenden who has been penalized to the extent of $100,000 and Arthur H. Tildsley, Jr. $ 80,000 – sums which are trifling in the context of the overall settlement.

New York Times’ Andrew Ross Sorkin asks whether it is fair to expect the shareholders to bear the burden of the payment when they themselves have been victims of the lack of proper disclosures. In other words, would shareholders not suffer a double-whammy – once when they were kept in the dark and next when they bear the impact of the fine paid by the company? Others find merit in the approach that involves penalizing the company and not just its directors or officers – using a blend of legal and economic analysis.

Similar issues arise under corporate law and governance in India as well. For example, one of the key deterrents used by SEBI and the stock exchanges against breaches of corporate governance norms is the threat of delisting (which has also been exercised on occasion). Even here, it is the shareholders who suffer due to the loss of liquidity in their shares although they are they are not involved in the breach. Similarly, under principles of corporate criminal liability, it may not serve as adequate deterrent merely for the company to be held liable, but it would be necessary for directors and officers responsible for the misconduct to be made liable too. However, there is some evidence in practice to indicate that responsible individuals tend to go scot free, while the companies bear the burden of fines and penalties. The problem may get compounded if the companies plunge into bankruptcy, as they often do in the aftermath of an epochal crisis afflicting it, which makes any recovery difficult, if not impossible.