CORPORATE ETHICS




 

By Eric Orts and Craig Smith

There’s a very long-standing philosophical debate about whether organizations like business firms have a moral responsibility as firms themselves, or whether it’s only the individuals in the firm or organization who have moral responsibility. This has been a long-standing problem and a number of people have contributed to it, but it’s not really been resolved for decades. 

If you think about the BP oil spill, which is the worst environmental disaster that the United States has seen, it turns out that what caused the oil spill was a number of relatively small errors for which there are individuals who are guilty. But they’re guilty just for their small contribution. If we were to hold each of them responsible, punish each of them in accordance with their contribution, we really would not end up with the kind of response that matches up with the amount of harm that BP created.

There is this felt sense of a responsibility deficit. This idea that holding only individuals responsible fails to fully account for all of the harm that occurred, and we need to do something else if we want to respond appropriately. It often takes the form of punishing the corporation or blaming the corporation or holding the corporation responsible.

The legal proceedings you have with VW and with these other cases shows you — practically — why this philosophical issue matters. Is it enough to just have a big judgment against VW as a company and make them pay a huge penalty? Individualists and ethical theorists would say, “No, that’s completely not OK because you are essentially letting all these people who really did the bad acts off the hook and sort of pretending that by punishing a big auto company we’re getting that.”

Another good example of this, and this is mentioned by Craig Smith in his introduction, is the financial crisis and what happened after that. Very few, if any, actual human beings, were convicted of crimes or punished for various allegations of financial fraud. But you had very big penalties paid by banks and other financial institutions that admitted to crimes and admitted to wrongs and paid huge amounts of damages. The question is, does that really help anything? Does that really help to deter moral bad behavior if you’re just putting the onus on the shareholders of the banks and you’re letting the bank as an entity take the hit and not actually going [after] individuals?

There has been an actual policy change on that. Former acting Attorney General Sally Yates, who has become famous for other things since then, has an influential memo that changed policy within the Department of Justice and that said we are not as a matter of policy going to do that anymore. We’re not going to pursue or settle cases just with the corporation. We must have individuals on the hook. For our purposes, that’s one of these reasons this practical question of moral responsibility matters, because it goes back to the moral foundation of the problem to decide how the law should treat this issue.

There are lots of good, legal reasons why there are limitations on being able to seek out the individual people who did the act. In an organization, it’s often easy to hide when you’re doing something you might know is wrong. You make sure there’s no paper record or you’re telling an underling to do the act, knowing that underling will take the fall if anything goes wrong or if it’s discovered. There are lots of problems in holding individuals responsible. But you’re absolutely right, there’s one other thing.

There’s a sense that everybody wants to find someone to blame. You have a name called Wells Fargo and everybody goes on that, and then somehow if you succeed in getting them to pay a bunch of money and admit to some wrongdoing then maybe that is enough. It might be enough for the public sentiment, but if you look at the moral consequences, you might be letting a lot of people off the hook and making it easier to deal with the problem when you’re not really providing the right incentives and deterrents going forward.

A lot of people want to place blame, but blaming the corporation may not always be the right situation. Blame is, in part, seeking to induce the experience of guilt. Corporations don’t have a capacity for emotion, which means they can’t experience guilt. What sense is there in blaming this entity that can’t experience guilt?

Blaming the corporation is very similar to the reaction to Wells Fargo — that Wells Fargo is a stand in, it’s a placeholder. We know that there are individuals within the corporation who deserve blame, we just don’t know who they are. So, we express our blame as if it’s directed toward Wells Fargo, but what we really mean is there are some real people here and they deserve blame.

Understanding the practice of corporate criminal liability in that way makes a lot more sense and makes the practice compelling to those of us who have this conception of the corporation as just a nexus of contracts. If it’s the kind of entity that can act on its own behalf, it doesn’t rise to the level of being the kind of entity that is an appropriate target of what are called the moral reactive attitudes.

Everyone believes that ethics matters. There are some who might say financial responsibility is the only thing a firm should care about and forget about moral responsibility. It’s a common view within the field of business ethics that you don’t check your morals at the office door when you go in. And so one way or another morals matter. 

Companies every day do huge amounts of good in the world in terms of productivity supply and basic economic financial functions. But there are lots of positive duties and responsibilities that firms might take or have as well. One of them might be what’s called a duty to rescue.

If you are a firm in the health care industry and particularly able to deal with some rare disease, like the Merck case with respect to river blindness, then there is a moral argument that the firm should take the extra step to handle that issue even if there would not be an immediate financial return. 

It’s certainly true that we know that deregulation in the 1990s and early 2000s allowed for a lot of the activity that then precipitated the financial crisis. A lot of what happened, as damaging as it was, wasn’t contrary to the letter of the law. It’s a general problem that it’s really hard for the law to restrain actors in a lot of contexts, and maybe especially actors in the financial context because those actors tend to be very smart and have so many incentives to try to skirt the law where they can. You can almost think about them as these rapidly mutating bacteria who become immune to the latest antibiotics very quickly. The law seems to be very frequently one step behind.

But we should also not neglect the idea that the law is just one way of responding. In many ways it is the most powerful, but public outrage is another way of responding. We can be outraged even at acts that are not illegal because we recognize that they’re immoral.

There were a number of bad actions and illegal actions that were taken by very large financial institutions, and they pled guilty or took responsibility. One of the criticisms of those agreements was that even though the banks were agreeing that they had violated the law, and this included deceptive practices with respect to mortgage securitizations and originations, there was a lot of pressure at the mortgage origination stage — they weren’t really checking the information that should have been checked.

The criticism from academics and others about what happened there is that individual people were not held responsible. One of the reasons is that it’s really hard to pin these kinds of complicated financial misdeeds on individual people, especially when you have very large and well-financed legal defenses that are going for them. There is a tendency for prosecutors to say, “Let’s just settle for a multimillion-dollar or higher settlement. We get credit. We can say we solved the problem. We meet the public outrage in part.” But you actually didn’t get to the problem, so the unintended signal is that this is OK as long as you don’t get caught or get into a situation where you can’t hire a very good legal defense to get you off the hook.

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