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Dana Radcliffe

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Should Companies Obey the Law If Breaking It Is More Profitable?

Posted: 07/05/2012 5:24 pm

When a large corporation gets caught breaking the law, the costs can be severe -- for the firm if it's sanctioned, for employees blamed for the misconduct and investors if the news hurts the stock price. Just last week, Barclays PLC agreed to pay fines of $453 million after U.S. and U.K. regulators found that the bank had tried to profit from manipulating an interest rate used as a global benchmark for consumer and corporate loans. Barclays has fired the employees involved, its chairman and CEO have been forced to resign, and shares have fallen more than 10 percent since the deal was announced.

This story, like all others about the potential costs of corporate malfeasance, raises an unsettling question: The firm did violate the law, but was its conduct really wrong -- morally wrong -- or did it merely miscalculate the "legal risks"? Did it violate a moral obligation to obey the law -- or can it be criticized only for failing to do an adequate risk-benefit analysis of compliance versus noncompliance?

This is not a purely academic concern, meriting the interest only of management scholars. Rather, whether a firm is morally obligated to obey the law is an issue corporate executives frequently confront, at least tacitly. It isn't uncommon for business decision makers to encounter opportunities to earn hefty profits from illegal behavior where either the likelihood of prosecution is small or the expected penalties are less than the probable gains. In those situations, where it has good reason to believe the financial benefits are worth the legal risks, is it wrong for the company to go ahead and knowingly break the law?

The strongest argument for the view that corporations do not have a moral obligation to follow the law is the argument that, because of the nature of corporations, they cannot have moral obligations, period. Former Labor Secretary Robert Reich forcefully sets out a version of this argument in his 2007 book, Supercapitalism, where he asserts that companies are "neither moral nor immoral," being "logical fictions, nothing more than bundles of contractual agreements." Because they are not "moral entities," as human beings are, they are not proper objects of moral demands or criticism. Thus, when Yahoo collaborated with the Chinese government to suppress the human rights of journalists, it was fulfilling its sole responsibility as a company, namely, "to make money for [its] shareholders and, along the way, satisfy [its] customers."

Reich does hold that firms have an obligation to obey the law and that they should be subject to penalties when they engage in illegal activities, but he doesn't consider whether corporations have a moral as well as a legal obligation to comply with the law. However, it follows from his premise that companies are not moral agents that they cannot have a moral obligation to obey the law. In that case, he would have to acknowledge that decisions about whether and when to comply can rightly be based on a prudent weighing of the risks and benefits.

Formidable as it is, this argument doesn't withstand close scrutiny. A corporation is not simply a "bundle of contracts" but is an organization consisting of assorted individuals occupying contract-governed roles. Though it is only a "legal person" and not a physical one, it does act -- when its managers and other employees act on its behalf. And, as Reich seems to allow, individuals do have moral obligations, including to obey the law and to respect human rights. If, as individuals, executives possess moral obligations, why would their employment by business firms exempt them from those responsibilities?

Furthermore, both individuals and corporations take actions that help or harm other people, and both are benefited by public goods, including national defense, civil order, roads, schools and the like. So, it doesn't seem unreasonable to infer that both function as citizens, with attendant obligations, including to obey the law -- even when it would be more profitable to ignore it.

Finally, if corporate leaders generally believed that it isn't wrong for their companies to violate the law whenever likely payoffs exceed the risks, the costs of preventing noncompliance from undermining the economy would be far greater than they are now. They would entail giving law enforcement and regulatory agencies more responsibilities, power and funding than citizens of a modern democracy would be willing to grant. Hence, it is better for society -- economically and politically -- the more corporate leaders are guided by basic moral values such as respect for the law and human rights.

Indeed, if (in the sagacious words of Spiderman: The Movie) "with great power comes great responsibility," then the unprecedented power of today's large corporations places on them corresponding responsibilities to people affected by their actions. In a world in which great power is so easily abused -- including by major firms in their relentless drive for profits -- no corporate moral obligations are more important than to comply with the law and to honor human rights.

 

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