Cosmetic Compliance and the Failure of Negotiated Governance

Across a range of legal regimes—including environmental, tort, employment discrimination, corporate, securities, and health care law— United States law reduces or eliminates enterprise liability for those organizations that can demonstrate the existence of “effective” internal compliance structures. Presumably, this legal standard rests on an assumption that internal compliance structures reduce the incidence of prohibited conduct within organizations. This Article demonstrates, however, that little evidence exists to support that assumption. In fact, a growing body of evidence indicates that internal compliance structures do not deter prohibited conduct within firms and may largely serve a window-dressing function that provides both market legitimacy and reduced legal liability. This leads to two potential problems: (1) an under-deterrence of corporate misconduct, and (2) a proliferation of costly—but arguably ineffective—internal compliance structures. The United States legal regime’s enthusiastic embrace of internal compliance structures as a liability determinant is consistent with the increasing influence of what are referred to in this Article as “negotiated governance” models that seek to improve government regulation and/or the litigation process through more cooperative governance methods that provide a governance role to the regulated group and other interested parties. Drawing on the incomplete contracts literature, this Article argues that, although the negotiated governance model provides valuable descriptive insights into the mechanisms by which legal rules develop, the model’s proponents minimize the dangers of opportunistic behavior during the renegotiation phases of governance (that is, the implementation and enforcement phases) by those with the greatest stake in the meaning of 487 * Bruce W. Nichols Visiting Professor, Harvard Law School; Professor of Law, University of North Carolina. [email protected]. I am grateful to participants at a University of North Carolina School of Law faculty workshop and the F. Hodge O’Neal Corporate and Securities Law Symposium at Washington University for valuable input on this paper. I would also like to thank Scott Baker, Bill Bratton, Devon Carbado, Steve Choi, John Conley, Marion Crain, Jill Fisch, Mitu Gulati, Jerry Kang, Don Langevoort, Bill Marshall, Jim Rossi, and Ed Rubin for helpful comments on earlier drafts of this Article. Finally, I am indebted to Neil Bagchi and Huiyeon Kim for outstanding research assistance. Washington University Open Scholarship p487 Krawiec book pages.doc10/27/03 11:42 AM 488 WASHINGTON UNIVERSITY LAW QUARTERLY [VOL. 81:487 incomplete law—in this case, business organizations and legal compliance professionals, including lawyers.