Minding the Law: Jennifer Arlen ’86 and Lewis Kornhauser argue for using psychological insights to deter corporate crime

Minding the Law artwork

As the US legal system grapples with how best to curb corporate crime, prosecutors and scholars have debated the optimal approach to deterrence. Crimes such as corruption, insider trading, and antitrust violations are not victimless, as Norma Z. Paige Professor of Law Jennifer Arlen ’86 and Frank Henry Sommer Professor of Law Lewis Kornhauser remind their audience in “Battle for Our Souls: A Psychological Justification for Corporate and Individual Liability for Organizational Misconduct,” recently published in the University of Illinois Law Review

Jennifer Arlen
Jennifer Arlen '86

Organizational corruption raises consumer costs, negatively affects the quality of goods and services, and erodes the rule of law. The dominant theory of how to reduce corporate crime is classical deterrence theory (CDT), which prescribes criminal liability for both individuals and their companies, compelling organizations to discourage their employees from violating the law.  

But Arlen and Kornhauser point to empirical evidence challenging CDT’s four underlying assumptions. For example, CDT supposes that only narrow self-interest and the threat of legal sanctions motivate people. On the contrary, the co-authors assert, people factor in others’ well-being and their own social standing, and law deters through social condemnation in addition to sanctions. CDT also assumes that people make rationally deliberated choices, and that organizations dissuade employees from wrongdoing merely by appealing to their egoistic motivations. But Arlen and Kornhauser argue that, on a nonconscious and emotional level, self-interest and social standing inform most ethical decisions.

Lewis Kornhauser
Lewis Kornhauser

They articulate instead an evidence-based deterrence theory (EDT) that recognizes the motivational power of social norms and concern for others and incorporates insights from psychology about what factors will lead people to comply with the law when financial self-interest and ethics conflict. They show that organizational misconduct has many features that mute the deterrence role of ethical norms—yet corporations have the ability to tip the scales to increase the power of ethical norms.

 “Companies are the dominant institutions in their employees’ daily lives,” they write, “and have the greatest ability to affect the decision-making environment in which their employees decide whether to engage in organizational misconduct.”

Applying EDT, the co-authors offer a number of prescriptions to prevent corporate crime. People often unconsciously make self-interested choices, justifying their decision through selective weighing of information. Companies can tilt the scales toward ethical behavior, Arlen and Kornhauser write, by crafting compensation, retention, and promotion policies to eliminate incentives to engage in misconduct. Organizations can also promote active deliberation by structuring work so employees are not overburdened and tempted to take ethical shortcuts. 

The EDT version of corporate criminal enforcement does not abandon traditional legal mechanisms: individual violators must face a substantial risk of enforcement and conviction, with significant consequences. The co-authors stress that mutual reinforcement—real legal repercussions coupled with an organization’s clear expression of norms—is crucial: “First, the law adds the weight of the broader society to the company’s message, which may be enhanced further through enforcement. Second, companies inevitably provide employees with multiple normative exhortations: avoid misconduct and pursue profit.”

Arlen and Kornhauser previously co-authored a symposium paper on whether the law can change preferences. The resulting piece was published in Theoretical Inquiries in Law in 2021. Their new article took shape as the authors discussed how corporations influence employees’ behavior and attitudes towards misconduct. 

Both co-authors have published separate seminal works on corporate liability. “We’ve each written on corporate liability and have done experimental work that looks at behavior from a non-rational choice perspective,” says Arlen, “so coming together to do a deep dive into the law and psychology of corporate liability was a natural blending of our joint expertise.”

“Battle for Our Souls” concludes with suggestions for policymakers that combine sticks and carrots: more strongly deterring directors and officers from neglecting compliance oversight, increasing the threat of termination for neglectful managers, and enhancing whistleblower bounties.

“As long as companies are offering the kind of high-powered incentives to produce results at all costs that many provide,” says Arlen, “you’re going to continue to have a lot of corporate crime. I see federal authorities and others paying much more attention to compensation structures and clawbacks and things like that. And I think this [emphasis] is, if done correctly, a very positive development, and could make a significant difference.”

Posted April 13, 2023; updated August 10, 2023