Fixing the blame in corporate malfeasance

Public confidence in banks and in pharmaceutical companies has evaporated. The cost of medical negligence claims has spiralled.

The Volkswagen emissions scandal is doubly disturbing because VW was such a widely admired company.

But things go wrong even in the best run organisations. Traders take foolish risks. Doctors make mistakes. Emissions levels are falsified.

When this comes to light what is the nature, and level, of individual and corporate responsibility — and of legal liability, whether civil or criminal.

Anyone observing these areas of law and regulation in recent years will be confused. Banks have paid large fines and penalties. London-based “rogue trader” Kweku Adoboli, who lost UBS $2.3 billion, was sentenced to seven years in jail; Bruno Iksil, the “London whale” whose activities led to $6.2 billion on losses at JPMorgan Chase, will not face charges.

The UK Treasury is watering down the “senior managers regime” designed in the wake of the financial crash to establish personal responsibility in financial services firms. But Sally Yates, US deputy attorney-general, has set out a new policy on corporate wrongdoing that will target individuals rather than the companies themselves.

It is a natural human tendency to ask “who is to blame?” - and for victims of events to want retribution. But if we ask “who is to blame”, rather than “what went wrong”, we encourage concealment and evasion of responsibility.

To cover up malfeasance is in the long run often more damaging than malfeasance itself because it prevents the identification of lessons that will prevent similar events. Increasingly widespread attempts by senior managers to distance themselves from the actions of subordinates, as in the Libor scandal, corrodes honest organisational culture.

The most thoughtful and perhaps successful attempt to deal with this is the aviation industry’s “just culture”. This starts with the recognition that mistakes happen and that organisations advance by learning from them.

Its core principle is that individuals should acknowledge, and will not be penalised for, honest (but not reckless) mistakes consistent with their skill and experience.

Yet the concept does not sit particularly well with the traditions of criminal law, in which retribution for the harm someone’s action has caused plays an unavoidable role. It sits even more uneasily with the traditions of civil law, in which compensation for loss depends on the attribution of blame.

Our culture and our legal system make it hard to say “ I was wrong”, and encourage us to invent retrospective justification.

Bad events in organisations are generally the product of bad systems rather than bad people. So, while it is right to place responsibility for the VW scandal with the chief executive rather than the individuals who falsified emissions tests, we need to go on and ask what it is about modern corporate life that has made such misbehaviour not only possible but appear increasingly common.

The decline of public trust in corporations today threatens the legitimacy of global corporate activity.

— Financial Times