Why Don’t General Counsels Stop Corporate Crime?

Abstract

Corporate fraud is costly, involving hundreds of billions of dollars in lost reputational and out of pocket costs for stakeholders and hundreds of thousands of job losses for employees, suppliers and customers as well as loss of lives. To prevent fraud, general counsels (GCs) are charged as the gatekeepers for the corporation. They understand the law and they are expected to use their legal expertise to advise, intervene and report whenever they are suspicious of fraud. In spite of their legally-mandated central role, however, corporate counsels typically do not appear to discover any corporate wrongdoing. In this paper, we analyze the potential reasons why corporate counsels keep silent in the face of potential wrongdoing in their own firms and propose policy recommendations to better protect shareholders’ interests against self-dealing by top management.