Flawed corporate culture has been at the root of the largest corporate debacles in recent years, such as Wells Fargo’s fraudulent accounts, Volkswagen’s emissions cheating, and Boeing’s 737 Max crashes.
In these larger corporate crime cases, the corporations boast a well-funded compliance program, a well-constituted board of directors, and a well-crafted code of ethics. What’s missing is an actual ethical corporate culture that emphasizes high integrity as much as it does high performance. All the observable markers of corporate governance matter little.
Law enforcement officials find it difficult to assess a given corporate culture. As a result, corporations feel free to adopt a check-the-box cosmetic compliance program instead of meaningfully focusing on improving their behavior.
That’s the take of Roy Shapira and Jennifer Hill in a recent law review article titled Accountability for Flawed Corporate Culture.
The article does a deep dive into the role of corporate law in addressing flawed corporate culture.
“In recent years, corporate law’s oversight duty doctrine has been recalibrated,” they write. “That recalibration has made the doctrine adept at holding officers and directors accountable for how they shape the information flows, economic incentives, and in-group norms. To be sure, corporate law alone cannot fix corporate culture, but with the right design it can complement other legal mechanisms and incentivize officers and directors to set the right tone at the top.”
If we can’t measure a culture, how would we ever know if there is a strong culture of integrity?
“That’s exactly the point,” Shapira told Corporate Crime Reporter in an interview last week. “Everybody is now talking about corporate culture, but they cannot measure it. After something bad happens, a company will say – hey, what do you want from us? We did everything we could? We had a strong value statement, strong guidelines, a fantastically worded guidebook, we invested a lot of money in our compliance department. If you score culture based on those factors, you will have to grant us leniency or not prosecute us.”
“In effect, for people coming in from the outside, like a regulator or law enforcement, it’s very difficult for them to understand the unwritten laws of a corporation that shape the culture.”
If you were to institute some legal mechanism to implement a culture of integrity, what would it look like?
“We think it’s important to focus on those who create the informal norms, who shape the informal norms. Usually, those who shape the informal norms are those at the top. They are the ones setting the economic incentive, like sales bonuses, or rewards for whistleblowing, they shape how information flows, what information gets reported upward and what doesn’t. They are setting the example.”
“We figure the only realistic way for the legal system to over time facilitate improvement in corporate culture, to prevent corporate culture from leading to corporate debacle or catastrophe, is for the legal system to open up channels to hold those at the top accountable when the company misbehaves because of a flawed corporate culture.”
“We focused on the private law channel, the corporate law channel rather than through the criminal channel. If you want to criminally prosecute the directors of a giant corporation, like a Wells Fargo, or a Boeing, or a Citigroup, it will be an uphill battle for you as a regulator.”
“In criminal law, you need to prove beyond a reasonable doubt that these directors knew that there was a deeply flawed corporate culture – they knew about it, they let it happen.”
“If you think about a small corporation, the CEO almost by definition micromanages everything that happens in the company. When something bad happens, you will see the CEO’s footprint all over the place.”
“In giant corporations, by definition, the directors will not know 99 percent of the things that are happening in that corporation. Even if something really bad happens, the way the information flows in a corporation, that information will not make it up to the directors.”
“So it will be very difficult to criminally prosecute those at the top. It will be very difficult to hold them accountable via the criminal channel.”
“We suggest proceeding through the corporate law channel. In corporate law, say a company misbehaves, like in the Wells Fargo case or the Boeing case. In those types of cases, not only is there a huge harm to society, it’s a very big hit on the company’s reputation. A conservative estimate is that the 737 MAX debacle cost Boeing something like $20 billion.”
“Allowing the debacle to happen cost Boeing shareholders north of $20 billion. And that’s aside from the human tragedy. In that case, corporate law is saying that Boeing’s shareholders can sue derivatively, on behalf of the corporation – they can sue the directors and officers for not doing enough to prevent this flawed culture from bursting in our faces.”
“In corporate law terms, this would be called the oversight duty function. If I’m a director, I have an oversight duty as part of my fiduciary duty. I have to be proactive about risks. I have to engage in risk oversight. And if I let these risks marinate without doing anything about them, I may be held liable. I may be required to return money to the shareholders for the harm that happened due to this flawed corporate cultures.”
The key legal decision in this area is the famous Caremark decision. It looked at the question of whether the board was responsible for monitoring the law abiding functions of the corporation. In your article, you point to Caremark. And you raise the Boeing case. There was a Delaware Chancery Court case in the Boeing matter. There was a settlement. But the court found that the board’s lack of adequate safety oversight was a breach of fiduciary duty.
You argue that this type of litigation enforcement is better than criminal law enforcement. You go a step further and say that the Australian model is better because instead of putting the enforcement in the hands of private litigants, it creates a public law enforcement civil prosecutor to bring these kinds of cases.
Let’s start with this – why do you think this kind of civil litigation will be more effective than criminal prosecution?
“I would not say that it’s categorically more effective, but it may hold relative advantages. In criminal prosecution, the bar is set high. In the corporate law channel, we are dealing with motion to dismiss cases at the pleading stage. It’s not the trial itself. The question is – is it worthwhile to take this case to trial?”
“You have private attorneys who are entrepreneurial, seeking cases they believe will be successful, that will result in hefty settlements. The only way to survive this motion to dismiss and have a chance of getting one of these large settlements is for you to locate that initial evidence connecting the directors to the corporate trauma, showing what the directors knew and what they did or didn’t do to stop the problem.”
“In that sense, the legal system is providing a supercharged economic incentive for private attorneys to extract information on the role of those at the top.”
“So you already have a system in place that is geared to provide incentives for private, sophisticated enforcement to extract information. And that information is itself a kind of channel for accountability.”
“Now one advantage of the criminal law channel is that the sanction is much tougher – you can put people in jail. In the corporate law arena, usually the directors don’t even pay out of pocket – the directors and officers insurance will cover the expenses. But in this civil law channel, there is a much bigger chance you will get information about what the directors knew and when they knew it.”
“The advantage is the information production. And that information production can generate accountability.”
Are you saying that civil discovery reaches deeper into a corporation than criminal discovery?
“No. There are different incentives. If you are a public enforcement agent – a regulator or a prosecutor – you are incentivized to maximize the number of enforcement actions and the amount of fines you are collected. That’s what your political overseers judge you on. And the way to boost your numbers is to just settle with the company very quickly. The company will pick up the tab and write it off as a cost of doing business. As a regulator, you will get to boost your numbers.”
“The public enforcement agent doesn’t have the resources to go after those at the top of the corporation. You will not be able to prove beyond a reasonable doubt that they knew. It’s a giant organization and the information often doesn’t reach the top. And the corporation will out lawyer you. You will take one case and the corporation will drain your scarce resources. And you will probably lose over the course of five or six years.”
“So the regulators go after the entity and settle the cases very quickly. In corporate law, the only way I can get the bounty is by surviving the motion to dismiss. The only way that I can survive the motion to dismiss is to extract information from inside the company showing what the directors knew and when they knew it.”
“And so the incentives are very different.”
In your article, you lean toward the Australian model, which in the United States would take the power out of the hands of these private lawyers and put it into the hands of a dedicated public regulator.
You write: “It seems that the only viable alternative to private oversight duty litigation is public enforcement of the oversight duties via a dedicated regulator.”
“In the United States, we don’t currently have public enforcement of oversight duties,” Shapira said. “We’re writing that sentence against the backdrop of recent changes to Delaware law, narrowing shareholder inspection rights, making it more difficult to bring these cases. But in the United States, it is still the most viable channel for accountability for a flawed corporate culture.”
Back to your proposal, would it be a federal or a state regulator?
“It could be both. You need a proactive dedicated regulator taking these cases. Of course, public regulators are susceptible to other problems, such as regulatory capture. When the political administration changes, the new administration might put in a regulator who doesn’t want to pursue these cases aggressively.”
“It’s easier to capture one regulator than it is to capture the entire plaintiffs’ bar. Right now in the United States, we have a private bounty hunter model. The Australia system has this dedicated regulator who systematically goes after corporate misconduct emanating from flawed corporate culture.”
“If you can show me that in the United States there will be a dedicated regulator who will do it day in and day out and will not be captured, I might say – great, let’s do it.”
Almost fifty years ago now, Ralph Nader, Mark Green and Joel Seligman released a report calling for federal chartering of corporations. What you are calling for seems to be a step in that direction.
“I think we are saying something different. We are saying that from 2020 to 2024, for five years, the oversight duty doctrine in Delaware worked pretty well in generating accountability for flawed culture. But then we got swift changes, where large corporate interests go to the Delaware legislature and narrow the scope of shareholder inspection rights and make it harder on shareholders to hold insiders accountable, then the case for the proposal you are talking about is stronger.”
“For corporate America, it’s probably better to have a stronger private litigation system in Delaware. If Delaware isn’t functioning, if Delaware is giving in to corporate interests, then over time there is bound to be federal intervention.
[For the complete q/a format Interview with Roy Shapira, see 39 Corporate Crime Reporter 34(12), September 8, 2025, print edition only.]