Robert B. Reich: Corporate wrongdoers must be prosecuted as a deterrent
By Robert B. Reich
General Motors has fired 15 employees after an internal investigation into the company’s handling of defective ignition switches that lead to at least 13 fatalities.
But the only way to stop lawbreaking at GM or any other big corporation is to prosecute the people who break the law. And so far, no one at GM has been prosecuted.
“What GM did was break the law. … They failed to meet their public safety obligations,” scolded Secretary of Transportation Anthony Foxx after imposing the largest possible penalty on the giant automaker.
But GM didn’t break the law. Certain GM employees broke the law.
For a decade, certain people at GM had been receiving complaints about the ignition switch but chose to do nothing. David Friedman, acting head of the National Highway Traffic Safety Administration, says those aware of the problem had ranged from engineers “all the way up through executives.”
Who were these people? If they’re the same as the 15 that GM just fired, they should be criminally indicted. If others are responsible — including higher-ups — they’re the ones who should be criminally liable.
The same fallacy of corporate wrongdoing occurred recently when Attorney General Eric Holder announced the guilty plea of giant bank Credit Suisse to criminal charges for aiding rich Americans who avoid paying taxes. “This case shows that no financial institution, no matter its size or global reach, is above the law.”
But financial institutions don’t act above the law. People do.
Credit Suisse employees followed a carefully crafted plan, even sending private bankers to visit their American clients on tourist visas to avoid detection. According to the head of New York State’s Department of Financial Services, Credit Suisse’s crime was “decidedly not the result of the conduct of just a few bad apples.”
Yet no Credit Suisse executive was charged with violating the law. Nobody is going to jail.
Instead, the government is imposing corporate fines. The logic is that since the corporation as whole benefited from these illegal acts, the corporation as a whole should pay.
But the logic is flawed. Fines are often treated by corporations as costs of doing business.
GM was fined $35 million. That’s peanuts to a hundred-billion-dollar corporation.
Credit Suisse was fined considerably more — $2.6 billion. But even this amount was shrugged off by financial markets.
In fact, the bank’s shares rose the day the plea was announced — the only big financial institution to show gains that day. Its CEO even sounded upbeat: “Our discussions with clients have been very reassuring and we haven’t seen very many issues at all.” Credit Suisse wasn’t even required to turn over its list of tax-avoiding clients.
Fines have no deterrent value unless the amount of the penalty multiplied by the risk of being caught is greater than the profits earned by the illegal behavior. In reality, the penalty-risk calculus rarely comes close.
Even when it does, the people hurt aren’t the shareholders who profited years before, when the crimes were committed. Most current shareholders weren’t even around then.
Calling a corporation a criminal is even more absurd. Credit Suisse pleaded guilty to criminal conduct. GM may also face a criminal indictment. But what does this mean? A corporation can’t be put behind bars.
To be sure, corporations can effectively be executed. In 2002, the giant accounting firm Arthur Andersen was found guilty of obstructing justice when certain partners destroyed records of the auditing work they did for Enron. As a result, Andersen’s clients abandoned it and the firm collapsed. (Andersen’s conviction was later overturned on appeal).
But here again, the wrong people are harmed. The vast majority of Andersen’s 28,000 employees had nothing to do with the wrongdoing, yet they lost their jobs, while most of its senior partners slid easily into other accounting or consulting work.
The truth is, corporations aren’t people — despite what the Supreme Court says. Corporations don’t break laws; specific people do. In the cases of GM and Credit Suisse, the evidence points to executives at or near the top.
Conservatives are fond of talking about personal responsibility. But when it comes to white-collar crime, I haven’t heard them demand that individuals be prosecuted.
So here’s a novel idea. If we want to deter giant corporations from harming the public, we have to go after the people who cause the harm.