Abstract: Legal knowledge is a core aspect in compliance. For law to shape behaviour, people whose conduct the law tries to influence should know the law. This chapter reviews the body of existing empirical research about legal knowledge. It assesses the extent to which laypersons and professionals know and understand legal rules across various domains including employment, family affairs, criminal justice, education and health care. This body of work shows that ignorance and misunderstanding of the law are common across these domains. There is variation and for some laws, amongst some people and in some jurisdictions, there is more or less legal knowledge. Also, the review shows that there is evidence that people tend to equate their own norms with the rules of the law. The chapter concludes by discussing what these findings mean for compliance and the way our laws try to steer human and organisational conduct. Here it questions compliance approaches that view it as a linear process from rule to behaviour.

Abstract: The global pharmaceutical market is projected to approach $1170 billion by the year 2021; the US market alone currently accounts for 45 percent of the market, at nearly $500 billion. International legal frameworks share fundamental characteristics governing the development, evaluation, and approval of drugs and biological products, including clinical trials demonstrating safety and efficacy; good laboratory, clinical, and manufacturing practices; appropriate labeling; and robust reporting and post-market surveillance. This chapter explores regulatory compliance in the pharmaceutical industry drawing from recent scholarship, federal agency reports and materials, and publicly available corporate resources. Coverage will focus specifically on the US market, with general discussion of international trends as well.

Abstract: An essential component of ethics and compliance programs is the training of organizational members. Training helps ensure that all employees understand their legal and regulatory obligations, and company policies. There are significant legal incentives for organizations to adopt training, but understanding when training is effective is challenging. After discussing the legal incentives, this chapter explores how effectiveness can be measured, and reviews those factors that the academic literature has identified as potentially having a positive impact on training effectiveness.

Abstract: In this chapter, we assess the use of laboratory experiments in tax compliance research. We first discuss the reasons for using laboratory experiments, and we then describe the basic design of most experiments, including their main limitations. We also summarize some of the main results of these studies, and we discuss how the insights obtained from experimental research can help shape better tax policies. We conclude with some suggestions on new areas of research on tax compliance in which laboratory experiments may be usefully applied in the future.

Abstract: The traditional economic approach to enforcing tax compliance rests on the assumption that taxpayers are reluctant to pay their share, are inclined to maximize their egoistic goals by rationally considering audit probability and fines in case of detected evasion, and comply only if forced to. Behavioral economic and psychological insights draw a more complex picture of determinants of compliance and point to differences between taxpayers and their inclination to be compliant, which calls for differential strategies to ensure compliance rather than a one-size-fits-all strategy. This chapter describes actors in the tax arena and interaction dynamics. Interaction is shaped by the power of the authorities and their trustworthiness, which, combined, are the underlying dimensions of the tax climate. As conceptualized in the slippery slope framework and its extension, it is argued that a distinction between coercive and legitimate power, and between reason-based trust and implicit trust, is necessary to understand the interaction dynamics. Subsequently, emotions elicited by the power of the authorities and their trustworthiness are described, followed by speculations about the impact on compliance of anger, fear or feelings of protection and security. Finally, strategies to shift from control to cooperation are summarized.

Abstract: This chapter reviews the key findings of the optimal deterrence theory and discusses the remaining challenges. Some of these challenges reflect current modeling choices and limitations. These include the treatment of the offender’s gains in the social welfare function; the design of the damages multiplier in a realistic, multi-period framework; the effects of different types of uncertainty on behavior; and the study of optional, imperfectly enforced, threshold-based regimes – that is, regimes that reflect the most common real-world regulatory setting. Other challenges arise because several key regulatory features and enforcement outcomes are inconsistent with the deterrence theory’s predictions and prescriptions. These inconsistencies include the “abnormally” high levels of compliance, the pervasiveness of gain-based (rather than harm-based) sanctions, the widespread use of offense history in sanctions design, the variation of sanctions based on legal aggressiveness, and the significance of the offender’s mental state in the determinations of both liability and sanctions. The chapter discusses how the recent optimal deterrence scholarship has addressed – but has not fully resolved – all these challenges.

Abstract: Notable business leaders and institutional investors have begun to support the idea that companies should be run for the benefit of all stakeholders – customers, employees, suppliers, communities, and shareholders. After decades of focus on maximizing shareholder value, corporate social responsibility (“CSR”) and initiatives relating to environmental, social, and governance matters (“ESG”) are gaining ground in the debate about corporate purpose. Despite their rising prominence, CSR and ESG are still highly contested and no consensus exists about their precise meaning. Diverging views about what constitutes socially responsible activity and the rationale for its pursuit have driven wide-ranging approaches to researching and implementing CSR and ESG practices. This chapter examines the shifting debate and landscape of CSR, ESG, and their connection to compliance. Although CSR and ESG are often connected conceptually to legal compliance, or taking actions that exceed such an aim, usage of the terms vary. Further, although many studies find a positive relationship between CSR or ESG and financial performance, the empirical evidence is mixed and does not conclusively establish whether CSR or ESG activity mitigates compliance, regulatory, litigation, or other business risks. Finally, the chapter observes that social responsibility initiatives are on the rise in the form of internal governance mechanisms, private principles, and third-party ratings and rankings, but the dizzying array of approaches and frameworks impedes a clear understanding of what it means for a company to “comply” with aims for CSR or ESG. The lack of a singular, universal system enables customization, but evolving norms and laws on corporate practices and disclosures could lead to new insights.

Abstract: This chapter explores the conceptual, measurement, and incidence issues surrounding the costs and benefits of compliance. At the conceptual level, foundational questions are not fully resolved. For example, when speaking of compliance, do we mean compliance with the law or something else (e.g., an ethical code or industry standard)? What a firm is complying with will influence the costs and benefits being considered. Further, are the costs and benefits to be assessed from the perspective of the firm or from the perspective of society? Which one is chosen will impact what are viewed as costs and benefits. At the measurement level, assessing the effects of various compliance initiatives is a fraught exercise as attested to by a voluminous literature. It will typically require the use of multidisciplinary approaches with challenging questions about the unit(s) of measurement, the presence of counterfactuals, difficult to measure items, and difficult to operationalize trade-offs along with many potentially questionable assumptions. Further, embedded within measurement issues will be legal policy choices and structures that influence how, and by whom, the measurement is conducted. Finally, questions of incidence are important but are not often addressed in the literature. For example, if the costs of compliance fall disproportionately on smaller businesses, then what impact does that have on the political sustainability of the compliance initiative, the equity of it, and the competitive structure of the sector subject to these initiatives? Bringing together these considerations allows for a richer and more nuanced understanding of the costs and benefits of compliance and also encourages us to develop more careful theoretical models with which to analyze, and more reliable evidence-based research with which to assess, compliance initiatives.

Abstract: In criminology, compliance is a central focus of the deterrence and rational choice perspectives on crime. In turn, these perspectives have been guided by traditional microeconomics. Behavioral economics, a recent branch of economics which pivots from and amplifies economic theories, has increasingly informed decision-making on a range of matters, including public health and finance. Criminologists have begun to marshal behavioral economic insights to better understand decisions surrounding crime and transgression. Prominent in behavioral economics are heuristics and biases in judgments under uncertainty. These involve shortcuts, rules of thumb, and other deviations from traditional economic norms, in how people navigate uncertainty. This chapter discusses how various biases and heuristics from behavioral economics research affect one of the most prominent decision-making constructs in criminology and compliance – perceptions about the likelihood of punishment for a contemplated transgression.

Abstract: Naming and shaming offenders is often considered an effective strategy to improve compliance. Shaming exposes an offender to condemnation by a community of stakeholders. The threat of negative publicity, reputational damage and social disapproval is perceived as a sanction, and can in theory be more powerful than a formal legal sanction. This chapter asks to what extent naming and shaming can improve compliance. It takes stock of extant empirical evidence on the effect of shaming policies on regulatory compliance and identifies conditions for shaming to affect compliance. The complex relationship between ‘naming and shaming’ and compliance makes it difficult to predict and control the various effects of shaming sanctions. The chapter concludes that the unpredictability of effects makes ‘naming and shaming’ a risky tool for regulators. A theory about naming and shaming should differentiate among types of offender, shaming agent and social context.

Abstract: Compliance has become important in our contemporary markets, societies, and modes of governance across very different public and private domains, stimulating a rich body of empirical work and practical expertise. Yet, so far, we do not have a comprehensive understanding of what compliance is and what mechanisms and interventions play a role in shaping it, or how compliance shapes various fields. Thus far, the academic knowledge of compliance has remained siloed in different disciplinary domains, and along different regulatory and legal spheres and different mechanisms and interventions. This chapter, which is the introduction to The Cambridge Handbook of Compliance, offers a comprehensive view of what compliance is. It takes a broad approach in seeing compliance as the interaction between rules and behavior. It discusses what different mechanisms and interventions are at play in shaping such compliance. And it reflects on the different methods for studying compliance and their inherent limitations.

Abstract: Responsible supply chain is about ensuring that members of the supply chain act responsibly for the well-being of all people and Mother Earth. It involves both the environmental responsibility side and the social responsibility side. On top of this, responsibility also entails ensuring that products sold to consumers are authentic without having been adulterated, and that the processes throughout the supply chain are run in an ethical manner. Although interests in and concerns over responsibility by the general public, governments, and companies have continued to increase, the problems of controlling violations and noncompliance with responsibility standards remain daunting. This chapter uses a “sense” and “respond” lens to look at how such problems can be addressed. We describe some of the innovative ways that some leading companies have used to make progress.

Abstract: “A significant purpose of the Exchange Act was to eliminate the idea that use of inside information for personal advantage was a normal emolument of corporate office.” In pursuit of that goal, federal law creates significant incentives for corporations to adopt policies designed to prevent illegal trading by insiders. Such policies protect the insiders by providing guidance as to when trading is least likely to result in liability. Given the severe penalties for inside trading, and the inevitable temptation to profit from access to inside information, such policies are necessary to, in a sense, protect insiders from themselves. Even more important, however, such policies also protect the issuer itself from potential controlling person liability. Not surprisingly, perhaps, most public corporations have adopted such policies. This chapter provides an overview of corporate insider trading compliance programs. It sets out the basic legal framework of the federal insider trading prohibition. It then reviews the reasons why corporations adopt compliance programs. The chapter next reviews the basic elements of an insider trading compliance program. Finally, the chapter examines the special case of Rule 10b5-1 compliance programs.

Abstract: This chapter revisits the significance of responsive regulation for theories of compliance. It shows how responsive regulation’s theory of compliance recognises both multiple motivations for compliance and plural actors who help negotiate and construct compliance. It argues that responsive regulation theory implies responsive compliance and that this can help build possibilities for deliberative democratic responsibility and accountability of both businesses and regulators. This is the idea that I previously labelled the meta-regulation of the ‘open corporation’. This chapter concludes that since business activity and indeed human development now face the existential challenge of socio-ecological disruption and collapse in which profit-oriented commercial activity is a significant driver, theories of compliance need to expand to concern themselves with how whole markets and industries can be made responsive to both social and ecological embeddedness. Regulatory compliance scholars need to pay attention to how networks of interacting business, government and civil society and social movement actors can influence business activity profoundly enough to shift the very nature of ‘business as usual’. The chapter therefore proposes the need for ‘ecological compliance’ as a development of Ayres and Braithwaite’s analysis of compliance.

Abstract: This chapter assesses whether tort liability can have a deterrent effect and reduce risky and harmful behaviour. It discusses insights from key reviews of empirical work across regulatory domains. These reviews show that this body of empirical work, in all but one of the domains (corporate director liability towards shareholders) studied, does not find conclusive evidence that tort deters or that it does not deter. Studies do find some indication of negative side effects of tort regimes, such as lowering necessary services, enhancing unnecessary legal defensive practices and raising costs. The chapter concludes that common assumptions about the role that tort can play in compliance require a more solid empirical basis. The chapter presents directions for future tort and deterrence research with a focus on better understanding the causal processes through which liability rules may shape human and organizational conduct.

Abstract: Qualitative research is valuable because it allows us to gain a deeper appreciation for the everyday lived experiences of individuals and groups across a wide spectrum of compliance settings. The insights gained from qualitative research may also provide an opportunity to challenge traditional assumptions held in the literature by revealing what we miss when we fail to account for the social context of compliance. In this chapter, qualitative researchers are encouraged to draw on their compliance imaginations in order to develop innovative and creative research projects that explore everyday practices of (non-)compliance.

Abstract: Corporate leniency programs promise putative offenders reduced punishment and fewer regulatory interventions in exchange for the corporation’s credible and authentic commitment to remedy wrongdoing and promptly report future violations of law to the requisite authorities. Because these programs have been devised with multiple goals in mind – that is, deterring wrongdoing and punishing corporate executives, improving corporate cultural norms and extending the government’s regulatory reach – it is all but impossible to gauge their success objectively. We know that corporations invest significant resources in compliance-related activity and that they do so in order to take advantage of the various benefits promised by leniency regimes. We cannot definitively say, however, how valuable this activity has been in reducing either the incidence or the severity of harms associated with corporate misconduct.

Notwithstanding these blind spots, recent developments in the US Department of Justice’s stance toward corporate offenders provide valuable insight into the structural design of a leniency program. Message framing, precision of benefit, and the scope and centralization of the entity that administers a leniency program play important roles in how well the program is received by its intended targets and how long it survives. If the program’s popularity and longevity say something about its success, then these design factors merit closer attention.

Using the Department of Justice’s Yates Memo and FCPA Pilot Program as demonstrative examples, this chapter excavates the framing and design factors that influence a leniency program’s performance. Carrots seemingly work better than sticks; and centralization of authority appears to better facilitate relationships between government enforcers and corporate representatives.

But that is not the end of the story. To the outside world, flexible leniency programs can appear clubby, weak and under-effective. The very design elements that generate trust between corporate targets and government enforcers may simultaneously sow credibility problems with the greater public. This conundrum will remain a core issue for policymakers as they continue to implement, shape and tinker with corporate leniency programs.