We came across the article “Scandals suggest standards have slipped in corporate America,” published by The Economist and found on www.economist.com. It provides brief information about some of the powerful companies that have recently faced public scrutiny while delving into the possibilities as to why scandals have been occurring with such frequency in corporate America.We feel that the conclusions discussed in this article are important to share with our clients. What follows is a comprehensive yet digestible synopsis of this article.
It is not hard to notice the large number of corporate scandals that have been uncovered recently. From Facebook’s unauthorized use of personal data to Purdue Pharma’s involvement in the Opioid epidemic, one is left wondering how these corporations managed to get away with their unethical practices for so long. The article explains that it is easy to look at these cases as unrelated, possibly even flukes, but there is evidence showing that the corporations in America are more scandal-prone than those in European countries. The article states, “The total market value of American firms involved in big incidents that have become public since 2016 is $1.54trn. At least 200m consumers have been affected. The figures are only $600bn and under 30m for European firms, including carmakers that faked emissions tests and Nordic banks involved in money laundering.” This eye-opening fact leads us back to our previous question; Why are so many corporations involved in unethical activity?
Before looking at factors that contribute to the problem, it is important to note that capitalism as a whole is not to blame. The article stresses this statement by citing cases in which non-capitalist economies faced scandals. It states, “Volkswagen cheated on emissions tests even though it is part-owned by the German state and has workers on its board.” Instead of blaming capitalism, we must look for common trends between corporations involved in scandals. It is explained that firms involved in scandals are often established and have dominance in their market. The article also proposes that insufficient regulation, litigation, and competition can be to blame for the recent increase in corporate scandals. Let’s take a closer look at these factors as well as compiled data from ten big American firms facing scandals:
The article explains, “The system [of regulation] is a strange blend: there are pockets of laissez-faire attitudes here, thickets of rules there and lobbying everywhere.” Some cited examples of poor regulation include the Federal Drug Administration allowing opioids to be sold to large populations and that the Federal Trade Commission had trouble regulating Facebook’s activities. Finally, it is noted that fines for noncompliance are sometimes too low to serve as a deterrent.
Litigation is also losing effectiveness as a deterrent. The article sums this point up by stating, “Criminal cases leading to jail terms for top executives are as rare as socialists at Goldman Sachs.” Class-action suits are also used less frequently to compensate consumers. This is thought to be because arbitration clauses are used more often than in the past, denying customers and staff the right to pursue class action.
The lack of competition is the third factor to blame for the recent scandals. As an example, the article notes that the only alternative to Boeing is Airbus. It is hard for consumers to switch products in many cases in which a scandal takes place.
When analyzing ten big American firms involved in controversial episodes, only two out of the ten firms had a boss step down. In addition, the same ten firms did not suffer major financial costs. In fact, the article states that, “Although Boeing’s shares have lost 8% since the crash in Ethiopia, they are above their level in January.” What is even more surprising is the fact that the total senior executive pay between the ten companies has risen over the past four years despite major public scandals! There appears to not be enough consequences for the corrupt practices of some organizations.
In summary, there appears to be a shortage of consequences for the corrupt practices of some organizations. Many factors contributing to the increase of scandals in corporate America. These include but are not limited to insufficient regulation, litigation, and competition. That said, many corporations have been eventually caught, resulting in a blow to their reputation. One way to avoid increased regulation within your industry and organization is to effectively fight unethical behavior. The implementation of an anonymous hot line and case management system such as Red Flag Reporting will allow employees at all levels to report unethical behavior before it gets out of hand. It is critical to take the proper measures to avoid unethical practices and to protect the reputation of your organization.