August 16, 2005

The Fundamental Problem of Business Ethics

From the Unfogged comments:

Tripp: [long story of being overcharged on a bill...] but why should a modern company have so much trouble with accurate billing?

Chopper: Because someone, somewhere, weighed the benefits of overcharging and being impenetrable for the bottom line versus actually having good customer service and saw that the company would make more money by being evil?

Posted by Matt Weiner at August 16, 2005 04:01 PM

What strikes me as being even more accurate is that in fact no one did those calculations - everyone just assumed that if they did them the result would be that evil=profitable. This sort of assumption is not entirely surprising, but always appalling to me - at the very least I wish it were slightly less common knowledge.

Posted by: Dr Pretorius at August 17, 2005 08:50 AM

Well, of course, Ford did do exactly such a calculation with the Fiesta (a.k.a. "Hibachi"), and decided they'd come out ahead, considering profits from skimping on safety versus losses from lawsuits from widows and orphans. And they probably would have, if their interoffice memos on the subject hadn't come out in the course of trial...

Posted by: theophylact at August 18, 2005 08:08 AM

Was that the Fiesta or the Pinto? Or did it happen with the Fiesta after it happened with the Pinto? (In my driver's ed text someone had gone through and circled every Pinto.)

I was once talking with a friend--who worked as a defense lawyer--about Liebeck, the case where a jury awarded major punitive damages (later reduced by the judge) against McDonald's because it knowingly served its coffee hot enough to cause third-degree burns when spilled. I said something along the lines of, "McDonalds had a memo saying that they knew the coffee caused burns, but it was better to have the hottest coffee." (Not exactly true but close--this Wall Street Journal story explains exactly what happened.)

He said, "Juries hate those memos."

A banal point--this is why there needs to be the possibility of sky-high punitive damages if we're going to rely on lawsuits rather than regulation to prevent corporations from engaging in damaging behavior. If there are no punitive damages or similar fines, and lawsuits only can recover the damages that the victim suffers from some corporation's action, then the corporation can always perform a cost-benefit analysis and may deliberately allow the victims to suffer harm if the profits outweigh the damages they'd have to pay. A role of punitive damages is to make such calculations impossible.

(Note: AOTW the top ten Google hits for McDonald's hot coffee lawsuit all present some version of the actual facts instead of the talk-show joke version! Except for the spam page. Anyway, weird.)

Posted by: Matt Weiner at August 18, 2005 11:46 AM

I don't agree with the phrasing. If cost-benefit calculations were really made impossible, then how would corporations behave? Randomly? Rather, the possibility of punitive damages is included in the cost-benefit analysis and the intent of punitive damages is to alter the outcome of the calculation.

I think sky-high punitive damages for corporations probably have dubious deterrence value, like the death penalty for individuals, and for much the same reasons: (1) there's a low probability of occurrence, (2) if it does occur, you get a lot of appeals, and (3) there's a belief among the target population that juries don't do justice anyway.

Posted by: Richard Mason at August 19, 2005 08:20 PM