A quiet summer holiday in a mountain village – time to ponder last month’s note from an always-thoughtful reader, on the news that Msgr. William Lynn, then secretary for clergy in the Catholic archdiocese of Philadelphia, had been convicted of child endangerment for allowing priests accused of child molestation to be moved from parish to parish. He asked:
“How is it that the Catholic Church and its senior hierarchy have not also been indicted?”
The question resonated for two reasons. The first was poignant, because the questioner is a retired partner of the Arthur Andersen accounting firm – perhaps the single global institution in the last decade to have paid with its own life for individual wrongdoing at its senior levels.
The second is the still-unfolding question of sanctions for the global banks, starting with the multi-year conspiracy to rig the London interbank offered rate, which so far has include the defenestration of Barclay’s chairman Marcus Agius, CEO Robert Diamond and COO Jerry del Missier.
The three departed took hidings from the British Parliament’s Treasury Select Committee on July 4th, 10th and 16th, after the bank in late June had agreed to pay fines totaling some $450 million to the British Financial Services Authority and the US CFTC.
By settling, the bank avoided criminal charges – eliciting speculation as to whether the Libor-fixing scandal will lead to actual indictments of other banks, and querulous criticism from James Stewart of the New York Times – who is also upset about the serial mis-behavior of UBS (here).
Unlikely. With the singular exception of Andersen, the prosecutorial pattern is to allow the institutions to settle:
- Goldman Sachs threw its trader Fabrice Tourre under the government bus in 2010, over its design of a tradable hedging product designed with the input of a favored customer, escaping itself with the fine of an inconsequential $ 550 million (here).
- The fine of $ 456 million paid by KPMG in 2005, to settle criminal charges by the IRS over its long-running tax-shelter activities, was said by those knowledgeable to have approached the firm’s survival tolerance – but an outside monitor’s supervision and a deferred prosecution agreement allowed the firm to survive and carry on.
- The revelation of Jerry Sandusky’s decades-long abuse of young boys, under the knowingly tolerant eyes of the authorities at Penn State, cost the jobs of the president and athletic director, plus that of the theretofore sanctifiable coach Joe Paterno – as detailed in the damning report of ex-FBI director Louis Freeh – and now removal of JoePa’s on-campus statue and agreement to accept NCAA sanctions including a fine equal to a year’s football revenue, four years of post-season suspension and the bizarre “vacating” of its football victories since 1998. Thus briefly hobbled by a national sports administration arguably more influential than official law enforcement, the Penn State football program survives, and there is not a whisper of existential threat to the school itself.
So what does it say about the societal enforcement of the responsibilities of large institutions, that they are normally spared from the ultimate penalty?
Whatever one’s belief about the proper scope of government, my reader presents a profound challenge: how can and should agencies of government act for the public good, with appropriate recognition of the limitations on their competence?
Societies decide on their behavioral norms, their tolerable limits for deviation, and their enforcement expectations from agencies of regulation and governance.
The Andersen experience may prove a rule, that the powers of law enforcement are fundamentally reluctant to threaten the life of an enterprise or institution, no matter how egregious the behavior of its principals.
The weight of anecdotal evidence would appear so. And society has and uses other tools:
- As one effective sanction, the rules of the private marketplace are inexorable. Fallen leaders have taken down entire institutions, from Bear Stearns and Lehman Brothers to Merrill Lynch and MF Global. But the history is uneven: doubtful actors also survive, sometimes with government assistance but also due to the vagaries of bankruptcy and reorganization – recent examples being GM, AIG and Fannie Mae.
- Further, the lottery of civil litigation – with all its flaws, costs and uneven application – provides some reimbursement to some of the wronged – although with the slow grinding of the wheels of the courts, these will impose mainly not on the wrong-doers but on current and generations – Barclay’s current shareholders, and future Penn State students seeing larger tuitions and smaller course selections.
- Thirdly, the fragility of reputation takes its toll: Penn State will fail to attract some future students, and the Church will lose some members. Companies will change auditors, and bank clients will shift their loyalties.
The conflicts and ambiguities in the punishment of institutions mean that “justice” is not easy to define in practice and even harder to locate and apply case-by-case.
With that, I can only hope to hear whether this meditation nourishes the reader whose note, with my appreciation, set it in motion.
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 Where, by way of reminder/disclosure of a chapter long closed but not forgotten, I also spent a considerable time, although ended before the firm’s death spiral that was Enron.
 Not least, because Andersen’s fatal indictment and disintegration can be explained, with the simplicity of Occam’s Razor, as owing to its leadership’s arrogant refusal to face its record as an unrepentant recidivist.