Corporations as (Unethical) People

Last week, Mary Barra, CEO of General Motors, trekked to Capital Hill to explain just why her company waited so long before disclosing problems with some of its car ignition switches. GM began recalling vehicles equipped with the faulty switches, which have linked to over a dozen fatalities, earlier this year—but the company has been aware of the problem since 2001.

GM is not the only car company currently under scrutiny for failing to disclose important information to the public. The Department of Justice recently fined Toyota over a billion dollars for concealing safety problems in its models. These incidents pose troubling questions about the ability of corporations to govern themselves. It’s natural to ask, for instance, why not a single person at either GM or Toyota spoke up sooner.

But Paul Hirsch, a professor of management and organizations at the Kellogg School, points out that individual employees may well have spoken up. “They may have not been heeded,” he says. This is, after all, what happened in the mortgage banking industry, when lenders knowingly handed out loans to borrowers who couldn’t afford them. “There are examples where someone who was asked to sign off or approve the loans reported to higher ups that [the loans] were not legitimate,” says Hirsch. “But that doesn’t mean that the company changed its activities.”

Sometimes a few bad actors at a company are responsible for fraudulent behavior. Other times, company culture—“what gets rewarded”—pushes otherwise ethical individuals to make bad choices. But in the cases of GM, Toyota, and the subprime lending market, it is probably more accurate to say that the companies themselves behaved unethically. GM “looks exactly like the case we teach about the Ford Pinto,” says Hirsch. “Their lawyers or accountants may have told them it was cheaper to avoid the [safety issues] and pay on individual accidents than to undertake the recall.”

This raises some interesting policy questions, says Hirsch. Right now, companies may have it both ways. They enjoy many of the constitutional protections of being “legal persons,” but may pass along the blame for improper actions to their employees. The big fine levied against the Toyota company, for example, may be more an exception than the rule. “Cars getting into accidents—people can relate to that,” says Hirsch. But explaining derivatives to juries is far more difficult.

Photo credit: Yavno at Wikimedia.