The views expressed in any article published in this blog are the author's own and do not necessarily reflect the views of Joseph Foster or Bob Lupoli.

Monday, April 4, 2011

Jeffrey Pfeffer: Business Executives Should Do Hard Time!

Joe: should executives commit crimes serve jail time? Of course, imagine stealing from a 7-11, jail time. The difficulty here is what constitutes a crime? Willful Negligence, looking the other way, following corporate safety rules, but really not providing safety. Tough to prosecute but do-able. I share his sentiment. –Bob

Here’s one big difference between you and me and a large bank: if we break into someone’s home and take their possessions and then have the misfortune to be caught, we’re going to face criminal prosecution and maybe even jail time. But as Mimi Ash discovered, when the Bank of America broke into her home, changed the locks, and took all of the possessions in the house, including her late husband’s ashes, even though the foreclosure behind these actions was a mistake, no one at the bank faced criminal charges. And the difference between us and a government entity: if we promise to make payments and then renege on that commitment, we will be in trouble, and may even face fraud charges if we made the promise knowing that we did not have the means to fulfill our obligations. But when the town of Prichard, Alabama, stopped making pension payments to its retired employees, something that was both predicted and violated state law, the city officials who made promises they didn’t keep faced few consequences.

The difference between what happens to individuals and organizations may help explain why there is so much persistent organizational malfeasance. After all, deterrence is a central concept in our criminal justice system. The idea is simple: if people think they can get away with misbehavior, they will misbehave. Thus, to stop murders, robbery, and assaults, it is incumbent on law enforcement to ensure that perpetrators of crime will face a high probability of being caught and enough punishment for their crimes to deter the undesired behaviors.

Companies face a very different landscape. When and if caught, companies may get sued–witness all of the foreclosure cases for damages winding their way through the courts. But who pays? A company’s fine comes out of its general funds, not from the pockets of those who actually did or oversaw the harmful behavior. As the recent news from Bank of America, JP Morgan Chase, and other large banks that have set aside billions of dollars in reserves against anticipated future costs from the foreclosure fiasco illustrate, the shareholders are the ones who are ultimately on the hook. Corporate directors and officers are invariably covered by indemnity agreements. There is almost never individual prosecution for actions that, in a different context, would generate harsh prison sentences.

This even includes murder. Companies have sold tainted food (peanut butter, ground beef, spinach) that resulted in deaths, operated unsafe workplaces that wound up killing people (remember the Texas City refinery of BP), and dumped toxic pollutants into the air and the water. But no individuals went to jail.

This state of affairs is not just a problem for society and the past and future individuals who are harmed by corporate criminal activity. As Sarbanes-Oxley nicely demonstrates, all companies and managers incur the costs that arise from the misbehavior of a relative few. And when there was tainted spinach, bad ground beef, and other food scares, sales of the product category as a whole suffer, not just the companies responsible. That’s why it is actually in everyone’s interests, including businesses, to ensure that there is effective deterrence of corporate criminal behavior.

What’s appropriate for common criminals should be appropriate for people working inside corporations as well–as the saying goes, people who do the crime should serve the time. If the findings of the research on deterrence hold true here, and executives inside companies started facing criminal prosecution for criminal actions, there would be less criminal behaviors. That means fewer business consequences for companies, and less damaged reputations.

Punishment is obviously not the only way to modify behavior, but it works. Executives have unfortunately learned that they face virtually no consequences for approving break-ins and the theft of people’s property or food and workplace safety practices that result in death. No wonder all of these criminal actions continue unabated.

No comments:

Post a Comment