Can Corporations Be Held Morally Responsible?

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Wharton’s Eric Orts and Amy Sepinwall discuss ‘The Moral Responsibility of Firms.’

People are responsible for their individual actions. But what about the company as an entity? In a new book titled The Moral Responsibility of Firms, authors Eric Orts and Craig Smith and contributor Amy Sepinwall argue that companies are indeed morally culpable.

Orts is a professor of legal studies and business ethics at Wharton and director of the school’s Initiative for Global Environmental Leadership; Smith is a professor of ethics and social responsibility at INSEAD, and Sepinwall is a professor of legal studies and business ethics at Wharton. Orts and Sepinwall recently discussed the book on the Knowledge@Wharton show, which airs on SiriusXM channel 111.

The Moral Responsibility of Firms by Eric W. Orts, N. Craig Smith

An edited transcript of the conversation follows.

Knowledge@Wharton: Why was it important to put together a book looking at moral responsibility for firms?

Eric Orts: There’s a very long-standing philosophical debate about whether organizations like business firms have a moral responsibility as firms themselves, or whether it’s only the individuals in the firm or organization who have moral responsibility. This has been a long-standing problem and a number of people have contributed to it, but it’s not really been resolved for decades. We decided it was time to revisit this question. In partnership with INSEAD and with a generous grant from the Wharton and INSEAD Alliance, we decided to pull together the leading thinkers on this issue, have a conference on it and then write the book based on that conference.

Knowledge@Wharton: Is there a for and against in this book?

Orts: You have some scholars — among them are Philip Pettit who is a philosopher at Princeton; Michael Bratman at Stanford, although he hedges somewhat in the book, but he’s included in the chapter in favor of finding more responsibility for firms; Peter French, who has written a very influential statement that moral responsibility can be attributed to firms. They’re examples in the first part of the book. In the second part of the book, Amy is included in that as well as some other people, including John Hasnas at Georgetown, Ian Maitland and some others arguing the other side of it. The basic argument there is that you have an individualist point of view and the idea of moral responsibility really doesn’t make sense to attribute to firms.

Just as some background, I raised this with a friend last night and said, “I’ll be on the radio talking about this.” She said, “What do you mean? It seems like it’s common sense that you would think there would be moral responsibility of firms.” But once you look into this a little more deeply, you realize it’s not really necessarily true.

Just take the Volkswagen example [and its emissions cheating scandal]. If I bought a Volkswagen, it was not correct that it was represented as an environmentally friendly vehicle. There was environmental fraud conducted. But then is it true that Volkswagen as a whole is responsible for that, or is it only the individuals within Volkswagen who may have known about it who were involved in the deception?

It probably doesn’t make sense for me to say, “Well, whoever sold me that car did a moral wrong” because they’re going to say, “I didn’t know that the other people were doing this. I was completely innocent.” The local dealer who sold me the car is probably not morally responsible. Yet many people would assume VW is responsible, so then anyone associated with VW must be responsible. That’s kind of the question that we’re trying to get to the bottom of.

“In an organization, it’s often easy to hide when you’re doing something you might know is wrong.”–Eric Orts

Amy Sepinwall: The book in many instances pursues, at a fairly high level of abstraction, thinking theoretically about corporate moral responsibility. But it’s motivated by these instances of corporate wrongdoing where it looks like maybe we can identify some individual perpetrators of corporate wrong. But even were we to hold each of them responsible, it’s not clear that we would fully have expunged the indignation that the corporate wrongdoing has elicited.

If you think about the BP oil spill, for example, which is the worst environmental disaster that the United States has seen, it turns out that what caused the oil spill was a number of relatively small errors for which there are individuals who are guilty. But they’re guilty just for their small contribution. If we were to hold each of them responsible, punish each of them in accordance with their contribution, we really would not end up with the kind of response that matches up with the amount of harm that BP created.

There is this felt sense, as some of the authors in the book put it, of a responsibility deficit. This idea that holding only individuals responsible fails to fully account for all of the harm that occurred, and we need to do something else if we want to respond appropriately. It often takes the form of punishing the corporation or blaming the corporation or holding the corporation responsible.

Knowledge@Wharton: The German government is pursuing potential charges against the leaders at VW who may have known about what was going on. There should be a personal responsibility, but should there be a moral responsibility as well?

Orts: Well, that’s exactly it. The legal proceedings you have with VW and with these other cases shows you — practically — why this philosophical issue matters. Is it enough to just have a big judgment against VW as a company and make them pay a huge penalty? What I call in the book individualists, ethical theorists would say, “No, that’s completely not OK because you are essentially letting all these people who really did the bad acts off the hook and sort of pretending that by punishing a big auto company we’re getting that.”

Another good example of this, and this is mentioned by Craig Smith in his introduction, is the financial crisis and what happened after that. Very few, if any, actual human beings, were convicted of crimes or punished for various allegations of financial fraud. But you had very big penalties paid by banks and other financial institutions that admitted to crimes and admitted to wrongs and paid huge amounts of damages. The question is, does that really help anything? Does that really help to deter moral bad behavior if you’re just putting [the onus] on the shareholders of the banks and you’re letting the bank as an entity take the hit and not actually going [after] individuals?

One footnote: There has been an actual policy change on that. [Former acting Attorney General] Sally Yates, who has become famous for other things since then, has an influential memo that changed policy within the Department of Justice and that said we are not as a matter of policy going to do that anymore. We’re not going to pursue or settle cases just with the corporation. We must have individuals on the hook. For our purposes, that’s one of these reasons this practical question of moral responsibility matters, because it goes back to the moral foundation of the problem to decide how the law should treat this issue.

Knowledge@Wharton: Another example is the scandal at Wells Fargo. The bank paid a huge penalty for the creation of fraudulent accounts, yet there wasn’t a whole lot of punishment for the people who were involved.

“Corporations don’t have a capacity for emotion, which means they can’t experience guilt.”–Amy Sepinwall

Orts: There are lots of good, legal reasons why there are limitations on being able to seek out the individual people who did the act. In an organization, it’s often easy to hide when you’re doing something you might know is wrong. You make sure there’s no paper record or you’re telling an underling to do the act, knowing that underling will take the fall if anything goes wrong or if it’s discovered. There are lots of problems in holding individuals responsible. But you’re absolutely right, there’s one other thing.

There’s a sense that everybody wants to find someone to blame. You have a name called Wells Fargo and everybody goes on that, and then somehow if you succeed in getting them to pay a bunch of money and admit to some wrongdoing then maybe that is enough. It might be enough for the public sentiment, but if you look at the moral consequences, you might be letting a lot of people off the hook and making it easier to deal with the problem when you’re not really providing the right incentives and deterrents going forward.

Knowledge@Wharton: A lot of people want to place blame, but blaming the corporation may not always be the right situation.

Sepinwall: That’s exactly right. My worry is … blame is, in part, seeking to induce the experience of guilt. In the theory that I advance in the chapter, corporations don’t have a capacity for emotion, which means they can’t experience guilt. What sense is there in blaming this entity that can’t experience guilt?

I’ve argued that I think what we’re doing when we blame the corporation is very similar to what Eric just described in terms of our reaction to Wells Fargo — that Wells Fargo is a stand in, it’s a placeholder. We know that there are individuals within the corporation who deserve blame, we just don’t know who they are. So, we express our blame as if it’s directed toward Wells Fargo, but what we really mean is there are some real people here and they deserve blame.

I think understanding the practice of corporate criminal liability in that way makes a lot more sense and makes the practice compelling to those of us who have this conception of the corporation as just a nexus of contracts. If it’s the kind of entity that can act on its own behalf, it doesn’t rise to the level of being the kind of entity that is an appropriate target of what are called the moral reactive attitudes.

“It’s a common view within the field of business ethics that you don’t check your morals at the office door.”–Eric Orts

Orts: Even though Amy and I are co-authors, we occasionally disagree. I think she strikes a very strong argument for the individual side, and I agree with a lot of it. I think I’m persuaded that both the collectivist view, which says that there can be some moral responsibility correctly attributed to firms, and the individualist view can be correct. We might disagree about whether that’s true. But I’d like to highlight one other theme that we haven’t talked about yet, and that’s this debate about where you put the emphasis on moral responsibility at the firm level or individual level.

Everyone contributing to this topic believes that ethics matters. There are some who might say financial responsibility is the only thing a firm should care about and forget about moral responsibility. None of the authors, despite the differences in the book, took that view. I think it’s a common view within the field of business ethics that you don’t check your morals at the office door when you go in. And so one way or another morals matter. Kendy Hess was one philosopher who has a chapter in the book who talks about that.

One other thing to highlight was raised in another chapter by Nien-he Hsieh, who’s at Harvard Business School, who said it’s not just the bad moral actions that we have to attribute, it’s also positive actions. Companies every day do huge amounts of good in the world in terms of productivity supply and basic economic financial functions. But Hsieh also indicates that there are lots of positive duties and responsibilities that firms might take or have as well. One of them might be what’s called a duty to rescue.

If you are a firm in the health care industry and particularly able to deal with some rare disease — and there are examples taught in business ethics courses, like the Merck case with respect to river blindness — then there is a moral argument that the firm should take the extra step to handle that issue even if there would not be an immediate financial return. There are some other larger themes that are addressed in this book, too, which I think haven’t been addressed in other treatments of this topic.

Knowledge@Wharton: The bankruptcy examiner for Lehman Bros. pointed that there was nothing illegal that any of these banks or bankers did.

Sepinwall: It’s certainly true that we know that deregulation in the 1990s and early 2000s allowed for a lot of the activity that then precipitated the financial crisis. A lot of what happened, as damaging as it was, wasn’t contrary to the letter of the law. I think it’s a general problem that it’s really hard for the law to restrain actors in a lot of contexts, and maybe especially actors in the financial context because those actors tend to be very smart and have so many incentives to try to skirt the law where they can. You can almost think about them as these rapidly mutating bacteria who become immune to the latest antibiotics very quickly. The law seems to be very frequently one step behind.

“We know that there are individuals within the corporation who deserve blame, we just don’t know who they are.”–Amy Sepinwall

But we should also not neglect the idea that the law is just one way of responding. In many ways it is the most powerful, but public outrage is another way of responding. We can be outraged even at acts that are not illegal because we recognize that they’re immoral.

Orts: I agree with all that. I’d like to add that it’s also true that there were a number of bad actions and illegal actions that were taken by very large financial institutions, and they pled guilty or [took responsibility]. One of the criticisms of those agreements was that even though the banks were agreeing that they had violated the law, and this included deceptive practices with respect to mortgage securitizations and originations, there was a lot of pressure [at the mortgage origination stage — they] weren’t really checking the information that should have been checked.

The criticism from academics and others about what happened there is that individual people were not held responsible. One of the reasons is that it’s really hard to pin these kinds of complicated financial misdeeds on individual people, especially when you have very large and well-financed legal defenses that are going for them. There is a tendency for prosecutors to say, “Let’s just settle for a multimillion-dollar or higher settlement. We get credit. We can say we solved the problem. We meet the public outrage in part.” But you actually didn’t get to the problem, so the unintended signal is that this is OK as long as you don’t get caught or get into a situation where you can’t hire a very good legal defense to get you off the hook.

Knowledge@Wharton: I want to bring up a letter that you and other professors wrote to Congress about supporting the rule of law. Tell us about that.

Orts: There is an open letter to legislators and others that Amy, I and a few of our colleagues helped to organize. We have about three dozen Wharton faculty, and I should emphasize that it’s only [from us as] individuals.

In keeping to the theme of the moral responsibility of firms, this is just a few professors who have come together to make this statement. But we felt we had an obligation to speak out with respect to the rule of law given that there have been a number of violations.… When you see something wrong happening, sometimes there’s a duty to speak up and say so.

Article by Knowledge@Wharton

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