Corporations behave badly – and we pay

Posted on July 6, 2012 in Debates

Source: — Authors: – commentary
Published Thursday, Jul. 05 2012.    Margaret Wente

It’s been a dreadful week for corporate reputations. In London, the greatest banking scandal since – well, the last one – has shoved Rupert Murdoch off the front pages. The public is outraged over revelations that some of the world’s leading banks have been rigging interest rates for their own benefit. Bob Diamond, the brash American head of Barclays, has regretfully resigned. But why pick on Barclays? As he pointed out Wednesday, his bank was only doing what everybody else was.

Meantime, GlaxoSmithKline, the world’s second-largest drugmaker, agreed to pay a record $3-billion to settle a giant fraud case launched by the U.S. government over illegal and unethical practices that went on for years. Prosecutors said the company used illegal tactics to push its pills, bullied its critics, and suppressed data that raised questions about the saf ety of a new blockbuster diabetes drug. It even unlawfully paid obliging doctors to push antidepressant use in children. Commentators point out that these practices were common in the industry, and that other companies have also paid enormous fines.

Once upon a time, banks and drug companies enjoyed good reputations and a relatively high degree of trust. Most people regarded them as useful industries that created products and services that benefited society. Sometimes the people who ran these companies even lived down the street. Those times are long gone. Today these industries are movie villains – multibillion-dollar enterprises portrayed as so rapacious they’ll do anything to turn a buck. Judging by current events, this characterization is all too true. Some of the most powerful people in these lines of work will lie, cheat and steal until they get caught, all the while assuring us that they are adding incomparable value to society.

What happened? Both banking and pharmaceuticals went global, and the stakes (and rewards) shot up. Today they count their sales and profits in the billions. Today they’re led by corporate rock stars who make more money than most people can ever dream of. Their compensation is tied to stock prices, which means they have every incentive to do whatever it takes to goose short-term results. This is called “aligning management’s interests with the shareholders,” and for years was thought to be a good thing. Unfortunately, it’s not always such a good thing for the public.

Few of the people who lead these companies are inherently corrupt. The problem is that the penalties for bad behaviour on their watch are relatively puny. Barclays forked over $450-million for its part in the interest-rate rigging scheme. But in 2009, at the height of the scheme, its net profits were $14-billion. And Glaxo’s $3-billion settlement seems pretty small when you learn that sales of its diabetes drug alone amounted to $10.4-billion.

Simple logic dictates that if the risk is small and the reward is great, the temptation to lie, cheat and steal will occasionally prove overwhelming. Those billion-dollar fines are just the cost of doing business.

There’s an even more powerful check on wrongdoing, of course – shame. Sadly, shame doesn’t count for much in our culture. We do not expect those who have presided over dishonourable conduct (such as peddling antidepressants to small children) to fall on their swords. Unless, like Bernie Madoff, you have personally looted widows and orphans of their savings, you will not pay a price when the industry or firm you lead is caught behaving badly.

Bankers are not drummed out of polite society, and pharmaceutical executives aren’t booted from their country clubs. They are in no danger of being shunned by their peers, nor will they suffer any serious financial penalty. (Mr. Diamond has received at least £120-million in compensation since he joined Barclays in 2005.) Their children will continue to attend the finest private schools, and their wives will never have to shop at Target. Glaxo’s former top executives, for example, have gone on to lucrative new jobs, and no one thinks the worse of them. Meantime, the new executives at Glaxo sincerely reassure us that all that noxious behaviour is ancient history, and the industry has learned its lesson, and integrity is at the core of everything they do.

And perhaps that’s even true. Until the next time.

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