Think Irresponsible

volkswagen-clean-diesel-ad.w529.h352In the competition among industries to see which can act in the most irresponsible manner, we have a new winner. After nearly a decade during which banks and oil giants like BP were the epitome of corporate misconduct, the big automakers are now on top.

The news that Volkswagen inserted devices in millions of its “clean diesel” cars to disguise their pollution levels is the latest in a series of major scandals involving car companies. It comes on the heels of criminal charges against General Motors for failing to report a safety defect linked to more than 100 deaths. The Justice Department, unfortunately, deferred prosecution of those charges in a deal that required GM to pay $900 million. That looks like a bargain compared to the possibility that the EPA could sock Volkswagen, which once employed an ad campaign called Think Small, with penalties of some $18 billion.

Last year, Justice announced a deferred prosecution agreement with Toyota that required the Japanese company to pay $1.2 billion to settle charges that it tried to cover up the causes of a sudden acceleration problem. Later that year, Hyundai and Kia had to pay $100 million to settle DOJ and EPA allegations that they understated greenhouse gas emissions from more than 1 million cars and trucks.

This past July, Fiat Chrysler was hit with by the National Highway Traffic Safety Administration with a fine of $105 million — a record for that agency, which long had a cozy relationship with the industry — for deficiencies in its recall of defective vehicles.

Even Honda, which once had a squeaky clean reputation, was fined $70 million earlier this year by NHTSA for underreporting deaths and injuries relating to defective airbags. Those airbags were produced by the Japanese company Takata, which resisted making changes in its production process despite incidents in which the devices exploded violently, sending shrapnel flying into drivers and passengers.

The ascendance of the auto industry to the top of the corporate wrongdoing charts is actually an encore for what was a long-running performance. During the 1960s, GM inadvertently gave rise to the modern public interest movement in its ham-handed response to the issues raised by a young Ralph Nader about the safety problems of its Corvair compact. The 1970s were the era of the Ford Pinto with its fragile fuel tanks that blew up in even mild rear-end collisions. The 1990s were marked by the scandal over defective tires produced by Bridgestone/Firestone.

Although carmakers were not in the forefront of corporate misbehavior during the past decade, the industry’s record was far from unblemished. In 2005 VW presaged its current problems when it paid $1.1 million to the Justice Department to settle allegations that it failed to notify regulators and correct a defective oxygen sensor in more than 300,000 Golfs, Jettas and New Beetles.

And to make matters worse, through these decades the auto giants kept up a drumbeat of criticism of supposed regulatory excesses and, in the cases of GM and Chrysler, did not hesitate to ask for large bailouts when their markets collapsed.

The American love affair with the automobile has also put us in bed with corporate irresponsibility on a major scale.

What’s Good for GM is Good for GM’s Executives

gm-ignition-switch-accident-victims_0The famous statement from the 1950s to the effect that what was good for General Motors was good for the country needs to be updated.

Based on a settlement just announced by the Justice Department, we should be saying: what is good for GM is good for Mary Barra and bad for the country.

Barra, the chief executive of the automaker, and the company’s other top executives are celebrating the fact that they were able to negotiate a deal with federal prosecutors that contains no charges against individuals in connection with the failure to disclose a safety defect that has been linked to more than 120 deaths.

This came just a week after the adoption of a new policy by Justice that was supposedly going to make sure that individuals, including high-level executives, are targeted in major cases of corporate misconduct. That policy states that companies are not supposed to receive cooperation credit (lighter penalties) unless they hand over evidence relating to actual persons. Yet GM apparently got such credit.

What’s even more shocking about the GM deal is that the company did not have to enter a guilty plea on the criminal charges that had been brought against it. Instead, it was given the opportunity to enter into a deferred prosecution agreement — the widely criticized practice of letting a company buy its way out of legal jeopardy by promising to be good in the future.

The Justice Department was supposedly moving away from what had become virtually automatic use of this device in cases involving large corporations. The GM deal diverges from the guilty pleas that had been extracted in several cases such as those involving major banks such as Citi and JPMorgan Chase.

Finally, the settlement is a disappointment because the amount of the penalty extracted, $900 million, is hardly punitive for a company of GM’s size and is well below the $1.2 billion Toyota had to pay to resolve similar charges last year.

An unwillingness to come down hard on large corporate malefactors is all too common, but what sets the GM case apart is that it is one of those rare instances in which the misconduct has been directly linked to many deaths. The automaker was, in a sense, being accused of murder — actually, of being a serial killer. And real people were involved in the irresponsible decisions that led to those deaths.

Yet GM was offered a deal that is the equivalent of probation and a fine, while its executives did not even get a slap on the wrist. If a street murder case were resolved with such light punishment, the prosecutor would be tarred and feathered. But when it comes to corporate crimes — and crimes involving corporate executives — the rules are very different.

Justice Talks Tough on Prosecuting Crime in the Suites

averyThe Justice Department is trying to get more serious about prosecuting corporate crime. It has just taken what could be a significant step in that direction.

According to an internal memo written by Deputy Attorney General Sally Q. Yates and leaked to the New York Times, the department will now be pressing companies under investigation to identify the individuals involved in the misconduct, no matter how high they are in the firm’s organizational chart, and hand over evidence that may aid in the prosecution of those individuals.

Rejecting the all-too-frequent practice of treating business misconduct as an abstraction, Yates told The Times: “Corporations can only commit crimes through flesh-and-blood people.”

While it is likely, as The Times points out, that the memo is to some extent “an exercise in public messaging,” Yates does lay out some rigorous guidelines. For example, the provision of information on individuals is made a prerequisite for any company seeking “cooperation credit,” a kind of plea bargaining in which the firm gets lighter penalties for voluntarily disclosing relevant facts to prosecutors.

A company cannot, the memo says, pick and choose what facts to disclose, and those facts must relate to all individuals “involved in or responsible for the misconduct at issue, regardless of their position, status or seniority” (emphasis added). Depending on how strictly that phrase is interpreted, it could open the door to more charges against top-level executives.

Yates also orders criminal and civil attorneys at Justice to “focus on individuals from the inception of the investigation.” She rightly acknowledges the connection between the investigation of the company and the investigation of its executives. Focusing on individuals from the start, she writes, “will maximize the chances that the final resolution of an investigation uncovering the misconduct will include civil or criminal charges against not just the corporation but against culpable individuals as well.”

To prevent corporations from shielding their executives, the memo states that Department attorneys should preserve the ability to pursue individuals in those instances when it first reaches a resolution of charges against the company. Prosecutors may agree to immunity for executives in “extraordinary circumstances,” but these cases have to be approved by the relevant Assistant Attorney General or United States Attorney. It remains to be seen whether this provision gets abused.

It’s interesting that the Yates memo came to light right after United Airlines CEO Jeff Smisek was forced to resign amid a federal investigation of the Port Authority of New York and New Jersey that turned up evidence suggesting that United had maintained a money-losing flight from Newark Airport to Columbia, South Carolina to curry favor with then-Port Authority Chairman David Samson, who had a vacation home in the Palmetto State.

The circumstances in that case, which stemmed from Chris Christie’s George Washington Bridge scandal, may be unusual, but it was a pleasing change of pace to see the guy at the top being held responsible. Let’s hope that the Yates memo leads to more of the same amid heightened prosecution of both rogue corporations and the executives who run them.

Bringing Regulatory Fines Into the 21st Century

texascityIn spite of perennial business complaints about regulatory overreach, for decades large corporations were able to break the law knowing that the potential financial penalties would inflict little pain. Typical fines were the commercial equivalent of parking tickets.

In recent years, the Justice Department has forced Corporate America to pay a higher price for its sins. Major banks, in particular, now have to consent to ten or eleven-figure settlements, such as Bank of America’s $16.7 billion payout last year.

DOJ, however, handles a limited number of cases. The question is whether the federal regulatory agencies are following suit in bringing penalty levels into the 21st Century.

I’ve been looking at the enforcement data for those agencies as part of the preparation for the Violation Tracker my colleagues and I will introduce this fall. The numbers are a mixed bag.

One agency that has apparently recognized the importance of substantial penalties is the National Highway Traffic Safety Administration. In July it imposed a civil penalty of $105 million on Fiat Chrysler for failing to carry out a recall of 11 million defective vehicles in a complete and timely manner. The penalty, the highest in the agency’s history, followed a $70 million penalty against Honda earlier in the year. In 2000 Chrysler (then owned by Daimler) was fined only $400,000 for a deficient recall.

By contrast, the Nuclear Regulatory Commission is still applying laughably low penalty amounts. The list of “significant enforcement actions” on its website shows only about three dozen cases in which any penalty at all was imposed in the period since 2009, and only five of those involved amounts above $50,000.

The NRC list appears not to have been updated recently, but a look at recent press releases by the agency show that penalty amounts continue to be modest. In April of this year, the agency fined a subsidiary of Dominion Resources all of $17,500 for security violations at a facility in Wisconsin.

Despite a series of significant accidents, the Pipeline and Hazardous Materials Safety Administration is still lagging in its penalty amounts. Since 2010 it has collected fines of $1 million or more in only three cases, and it still imposes penalties below $10,000 in some instances.

The Occupational Safety and Health Administration, which has a much larger jurisdiction than these other agencies, seems to have one foot in the past and a couple of toes in the present when it comes to penalty levels. As the AFL-CIO’s Death on the Job report points out, the average penalty per inspection is only about $10,000.

In a limited number of high-profile cases, OSHA brings out the big guns. When BP failed to live up to the terms of a settlement stemming from a massive explosion in 2005 at its Texas City refinery (photo) that killed 15 workers, the agency proposed penalties of $87 million (though it settled for $50 million after the company appealed).

Financial penalties by themselves are not a panacea for ending the corporate crime wave, but they are certainly part of the solution. And the bigger the better.

Addendum: Upon re-reading this post I realized I should have mentioned that agencies vary in the amount of discretion they have in setting penalties. In some cases maximum fines are determined by law. My point is that regulators should make full use of the power they have to set penalties as high as possible in cases of egregious offenses.