Buckyballs, Facebook and the dangers of virtue-signaling

In 2014, the Obama administration decided to ban Buckyballs, a desktop magnet set that was a hit with business executives. In response to reports that children had swallowed the magnetic balls, the Consumer Product Safety Commission ordered a nationwide recall. The government also went after the company’s founder personally, a move known as “piercing the corporate veil,” though he later was released from personal liability.

In the end, the maker of Buckyballs was forced to dissolve the company. Yet, the Obama administration’s rule underlying the case was rejected by the courts. And even members of the Consumer Products Safety Commission, which instigated the case, called into question whether the CPSC complied with its own rules when it tried to hold company’s leaders personally liable. No one side could claim victory in the battle of the Buckyballs — you can still buy them today. But 160 people lost their jobs as a result of government overreach.

A similar effort is happening at the Federal Trade Commission in a case dealing with Facebook. The FTC is investigating Facebook for violations of a 2011 consent order regarding its privacy policies. Now, it is considering fining Facebook’s CEO Mark Zuckerberg for the corporate breach.

Privacy protections are a serious matter and the government has a responsibility to hold businesses accountable when they take actions inconsistent with their legal obligations. In all but the most egregious cases dealing with public health and safety, corporate fines and restitution are the appropriate remedy. And indeed, Facebook has set aside $5 billion to make amends for its conduct.

But for some, that isn’t enough. Democratic senators are pressuring the FTC to hold Zuckerberg personally liable as well. Yet Zuckerberg is not accused of any specific conduct leading to the privacy violations. While going after corporate officers and directors may feel cathartic to some, it raises serious policy implications.

For more than 130 years, corporations have been considered “legal persons,” separate and apart from their officers, directors and shareholders. Indeed, one of the primary purposes of the corporate entity is to protect managers from liability for the actions of others working for the corporation.

But under the so-called “responsible corporate officer” (RCO) theory of liability being pursued by the left, virtually any manager can be targeted. All that is required is that he/she be in the chain of command and have some degree of authority over the business units where activities have taken place that violate federal law or policy. The zealots want to hold managers personally liable even when their employees have concealed the illegal conduct.  

Conservatives oppose the RCO approach for three significant reasons: fairness, competitiveness and public safety.

We often hear the mantra “the government needs to send a message” when holding individuals liable for corporate wrongdoings. And that may be true when the person targeted had a substantive role in the decisions leading to illegality. But going after someone merely because they hold substantial stock or a senior position in the business undermines a fundamental concept of justice: you don’t hold people responsible for the bad actions of others.

Equally troubling is the long-term impact of the RCO theory on American competitiveness and innovation. What corporate manager would encourage legitimate risk-taking to create shareholder value if he/she could be held personally liable? With the ever-expanding regulatory state, the safer path is to enter the safe harbor of the status quo and let others lead, even at the expense of innovation and growth.

Finally, the RCO theory discourages self-reporting and cooperation with regulators, since doing so may lead to personal liability for those in leadership positions. That is just human nature.

Every few years, we read about corporate officials being tried and executed in China for a variety of offenses. Make no mistake, China doesn’t hold individual corporate leaders accountable to foster compliance and strengthen the rule of law. Rather, these incidents are merely virtue-signaling on a grand scale. The Chinese Communist Party really likes “sending messages.”

We must not follow this extreme Chinese model, or the approach tested by the Obama administration, when corporations are held to account. Penalizing company officers, directors or employees personally, when they played no part in the wrongdoing, creates all the wrong incentives if we want a successful, innovative marketplace.  

Dan Schneider is the executive director of the American Conservative Union. He served in the George W. Bush administration, and was chief of staff to former Rep. Jim Ryun (R-Kansas).

David Safavian is the general counsel of the American Conservative Union. He also served in the Bush administration, and was chief of staff to former Rep. Chris Cannon (R-Utah).