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Could These Corporate Failures Have Been Prevented?

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In recent months, failures at BP's Deepwater Horizon Gulf of Mexico facility injured and likely killed 11 oil rig workers and spawned an unprecedented environmental catastrophe; an explosion at Massey Energy's Upper Big Branch mine in West Virginia killed 29 miners; and a recall of millions of Toyota vehicles occurred after an acceleration defect was linked to injuries and deaths. These events have a few things in common, not the least of which is that they all illustrate a governmental failure to effectively regulate business activity and protect the public.

In each instance, businesses with poor safety records have continued to operate in a system of voluntary regulation. Federal agencies, battered by lengthy procedural hurdles, slashed budgets, and anti-government sentiments, rely on business to police themselves. After each "accident," Congress and the media begin a crusade: how can such things happen and why didn't somebody see this coming? But after all the hand-wringing and finger-pointing, rarely is anything done to prevent future catastrophes. Instead, we continue to be stuck with "government by reaction."

Unfortunately, BP, Massey Energy, and Toyota are only the tip of the iceberg. Nearly every day, there is a story about contaminated lettuce or meat, financial misfeasance, drug recalls, or dangerous children's products. Either because of a lack of news coverage or because these crises appear isolated, the public has not been able to connect the dots. But a pattern of government inaction, coupled with a cozy relationship with regulated interests, is beginning to take its toll.

These and other incidents result from a failure of politicians to provide regulatory agencies with the resources and authority to set and enforce standards. The public may understand and support the government's role in providing public protections, but until the public begins to hold elected officials accountable for government's failure to prevent or mitigate these disasters, we can't begin to rebuild government's capacity to develop and enforce effective regulations.

Massey Energy

The Mine Safety and Health Administration (MSHA) could not place Massey Energy on the agency's list of companies with patterns of violations because Massey was able to appeal citations, delaying agency action. The pattern of violation program identifies the worst mining companies and invokes enhanced MSHA enforcement efforts. Companies can escape this status, however, by contesting citations to the independent Federal Mine Safety and Health Review Commission (FMSHRC), which has a backlog of approximately 16,000 cases.

Filing challenges has been a normal business practice in recent years because the backlog at FMSHRC means companies will not pay fines for contested citations, or MSHA will choose to settle the proposed penalties. With the cost of violating the law put off or reduced by the agency, violations become just another cost of doing business.

Toyota

Incidents of sudden acceleration that led to the recall of millions of Toyota vehicles have sparked a debate over whether the National Highway Traffic Safety Administration (NHTSA), the federal agency in charge of auto safety, needs enhanced powers and resources. In congressional hearings in March, witnesses noted that NHTSA should be able to levy greater fines on delinquent automakers, those that don't issue voluntary recalls quickly enough. The current statutory limit on civil penalties is $16.4 million. "This amount might be considered by a large, multi-billion dollar manufacturer as just the 'cost of doing business,'" Amy Gadhia of Consumers Union, publisher of Consumer Reports, told the House Energy and Commerce Committee's Subcommittee on Commerce, Trade, and Consumer Protection. "We recommend removing this cap on civil penalties to act as a deterrent for future violations of the law."

BP

At BP, it's the same story. The Washington Post reported that during the first 20 days of the Deepwater Horizon oil spill, BP spent $350 million, or $17.5 million per day. Under federal law, the company is liable for no more than $75 million in damages. For a company that nets $93 million per day, according to the Post, this is just the cost of doing business.

Problems at the Agencies

Agencies aren't without fault. When foxes are appointed to guard the henhouse, as happened most egregiously during the Bush administration , agencies may actively guard their "clients" from regulations. At the Minerals Management Service (MMS), the Department of Interior agency overseeing oil and gas operations in the Gulf of Mexico, Alaska, and elsewhere, the staff was more than cozy with companies they were supposed to be regulating. MMS is responsible for collecting oil and gas revenue royalties from companies. Relations became so friendly between agency staff and oil company employees that they socialized together and MMS staff received gifts from the companies. Small wonder the staff had a hard time telling the hand that feeds the agency what safety procedures might be needed in oil drilling operations. The result is quite perverse: in the case of BP, the company got a waiver from conducting an environmental impact analysis, no inspections were conducted of the blowout preventer, and other special favors flowed in.

Speaking of the hand that feeds an agency, MMS and other federal agencies literally receive money from regulated industries in the form of royalties and fees. If a chunk of your revenue is coming from the industry you regulate, you think twice about enforcement.

President Obama has countered the foxes in the henhouse by appointing qualified, public-service oriented leadership to most agencies. Overcoming the lack of resources and legal authority, changing the revolving door nature of Washington, and delinking royalties and fees from those writing and enforcing rules are much larger tasks. Although many agencies have received budget increases to help rebuild parts of their regulatory and enforcement offices, Obama has called for a freeze in discretionary spending to confront the short-term budget deficits facing the country. Cutting spending for agencies that have to confront these disasters is irresponsible.

Shaking Things Up

So what is to be done? Here are three steps to shake things up:
  1. Agencies need resources to study, develop, and enforce public protections. As the fallout from Hurricane Katrina and the BP oil spill shows, it is penny-wise but pound-foolish not to put additional resources into our regulatory agencies.
  2. Let's get the president and Congress to put teeth into enforcement penalties. When repeat violations occur, fines need to be elevated to a level that hurts, say a percentage of a company's revenue. When there are accidents, corporations and their executives need to be held accountable, with criminal prosecution if necessary. Put a few executives behind bars or revoke corporate charters and these "accidents" will stop.
  3. Regulatory agencies need to be inoculated from special interest influence. Fees cannot go to the units that are writing or enforcing the rules. While I have no problem with making the regulated industry pay fees, it must be done in a manner that does not corrupt the process. Additionally, the content of all "visits" and other forms of communications by regulated interests or their surrogates with regulatory agencies need to be logged and disclosed. While we may never be able to stop all the special interest lobbying that goes on, all parties should be accountable to the public.

Enough is enough. As a society, we need to realize that corporate scofflaws are dangers to the American people. Corporate responsibility needs to become more than an advertising slogan. Companies need to pay a heavy price when they act irresponsibly, and Congress and the president should be held accountable for ensuring that our government truly acts in the public interest.

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