Article published in the Philadelphia Business Journal on April 14, 2024.
Is paying fines for violating the law just the cost of doing business, placing profits above corporate responsibility? This is the question raised on a recent NPR podcast.
DuPont
An April 4 episode of the NPR podcast “The Indicator” poses the question, “Can breaking the law be good for business? … Is the company’s duty to the law or its shareholders?” The podcast features the decision of DuPont not to protect the environment over the years from toxic “forever chemical” PFOA in the production of Teflon at the company’s facility in Washington, West Virginia.
Quoting Mary Childs, one of the hosts of the podcast, “There are minutes from a specific meeting of [DuPont] executives in 1984 [during which] they reviewed a detailed cost/benefit analysis of the options they had with PFOA. Do they invest in abatement [to protect the environment], do they stop using this chemical altogether, or do they continue, despite the possible risks to their bottom line? They opted to continue using PFOA.”
Despite any abatement measures the company may have taken, PFOA continued to enter the environment. In 2017, Dupont and spinoff company Chemours settled PFOA claims against the companies for $671 million. In June 2023, Dupont, Chemours and another spinoff company Corteva announced they would pay $1.185 billion into a settlement fund to compensate injured parties for failure to protect the environment from forever chemicals.
Quoting guest law professor Roy Shapira on the NPR podcast, “There are a couple of very influential law professors who said that if [you are] a manager of a company, it’s not only that you may violate the law if you think that it’s profitable. You should violate the law because, as a manager, your duty is to maximize profits for your shareholders.”
What? Would these “influential law professors” advocate fixing prices with competitors in violation of the Sherman [Antitrust] Act, or bribe foreign officials in violation of the Foreign Corrupt Practices Act to maximize profits for shareholders? Both crimes are punishable by jail time.
Let me be perfectly clear. It is not ok to violate the law to maximize profits for your shareholders. Do corporate leaders who violate the law think about the impact on their employees? It destroys trust in that leader. Some employees will think it’s ok for them to violate the law if the senior leadership of the company is doing so.
Volkswagen
A scandal at Volkswagen dubbed “Dieselgate” broke in September 2015. Volkswagen purposely installed software on its diesel cars that would give lower than actual readings in the emissions testing process. Not only did this action permit these cars to pass emission tests, but the results were also used in VW’s strategy to market their “clean diesel” vehicle technology.
In June 2016, the U.S. Department of Justice announced that Volkswagen would pay up to $14.7 billion to settle claims resulting from their fraudulent actions. The company also experienced loss of market share, and a significant blow to its reputation.
Wells Fargo
If you can’t trust your bank, who can you trust?
A September 2016 press release by the Consumer Financial Protection Bureau outlined numerous illegal acts at Wells Fargo. The press release stated, “Spurred by sales targets and compensation incentives, employees boosted sales figures by covertly opening accounts and funding them by transferring funds from consumers’ authorized accounts without their knowledge or consent, often racking up fees or other charges. According to the bank’s own analysis, employees opened more than two million deposit and credit card accounts that may not have been authorized by consumers.”
In February 2020, the U.S. Justice Department announced that Wells Fargo had agreed to pay $3 billion in fines for its criminal sales practices. The costs to Wells Fargo in terms of lost business and reputation significantly exceeded the fines.
I like the ethical standard to which Warren Buffett held the employees of Salomon Brothers when he served as interim chairman:
“After they first obey all rules, I then want employees to ask themselves, whether they are willing to have a contemplated act appear the next day on the front page of their local [news]paper, then be read by their spouses, children and friends … If they follow this test, they need not fear my other message to them. Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.”
This is the ethical standard all corporate leaders should be held to. This is the ethical standard that should be taught to all university students, regardless of their field of study. Violating the law is not the way to drive shareholder value.
Stan Silverman is founder of Silverman Leadership and author of “Be Different! The Key to Business and Career Success.” He is also a speaker, advisor and widely read columnist on leadership. He can be reached at stan@silvermanleadership.com.
