The role of boards in preventing economic crime

Publication Date01 October 2004
AuthorLeo Goldschmidt
SubjectAccounting & finance
Journal of Financial Crime Ð Vol. 11 No. 4
The Role of Boards in Preventing Economic Crime
Leo Goldschmidt
Commercial companies are complex bodies that for
more than 300 years have held a cardinal position in
economic and social life. They marshal resources
towards objectives laid down in their bylaws with a
view to optimising resulting pro®ts for their share-
holders and providing sustainable bene®ts to their sta-
keholders and society Ð or at least not harming them.
Competing companies are at the heart of a web of
laws, rules, contracts and behavioural usage that, as a
supplement to basic ethics, constrain the otherwise
unfettered pursuit of their goals, which must also be
in accordance with society's view of the public good.
For present purposes, `crime' is de®ned as any
serious and detrimental wrongdoing resulting from
the breach of these rules. Indeed, the dysfunction of
any part of these complex relationships will result in
individual or collective hardship and undermine the
trust needed to underpin an ecient economic and
social system.
A multitude of shareholders (and stakeholders)
cannot themselves, as a practical matter, directly
engage in running the company's activities. They
therefore designate agents Ð the board Ð to
achieve the company's objectives on their behalf.
Criminal behaviour of company agents can basi-
cally be exercised in two directions: agents with
fewer morals, not suciently constrained by their
principals, can use their relative freedom to exprop-
riate their principals, the company itself or others
within it Ð `internally oriented crime' as it were. Or
they can take advantage of their corporate status to
commit crimes towards outsiders or with pernicious
eects to society at large Ð `externallyoriented crime'.
The purpose here is to determine whether and how
corporate governance in general Ð that is the systems
and structures through which companies are directed
and run Ð and boards in particular can avert or
reduce the commission of crime. At the root, eco-
nomic theory poses a number of hypotheses that rest
on the darker side of human nature. Greed can lead
agents and managers (or at least at least some of
them) to theft. They will steal from their principals
if they only get the chance, and from other parties
and society at large as well. Laziness Ð or more
elegantly the law of least eort Ð leads economic
actors to negligence. They will count on others to
do what is necessary (such as instructing and monitor-
ing their agents), whenever their personal interest is
low enough not to warrant bothering to do it them-
selves Ð this is called the free rider theory. It will
give agents or some privileged groups the very
chance they were waiting for to abuse others.
Thus the dierent positions and interests of dierent
parties Ð which are inherent in the system and by
the same token unavoidable Ð pose a major risk for
the proper functioning of the system. It is precisely
the object of corporate governance to reduce that
risk substantially even if it cannot eliminate it alto-
gether. Basically, a company and its board are made
up of various interest groups that are summarised in
Figure 1.
Figure 1 Categories of interests making up the
Boards can be one- or two-tiered. In some countries,
notably the Anglo-Saxon and the southern European
countries, `unitary' boards exercise both supervisory
and general directorial functions although actual man-
agement is only carried out by some of the directors
Ð the executives. In others countries, notably the
central and northern European countries, supervisory
and managerial functions are distinctly split: the
executives are spun o to form a board of their own.
An important point is that once elected Ð essen-
tially by shareholders, but in some cases by other con-
stituencies too, such as the company's personnel Ð
board members are no longer supposed to `represent'
the interests of their particular electoral constituency
but to pursue the interests of the company as a
whole. This can have dierent interpretations in dif-
ferent jurisdictions. In any event, the agency function
implies that the board must ensure that the role of the
Page 342
Journalof Financial Crime
Vol.11,No. 4, 2004,pp.342 ±346
#HenryStewart Publications

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