In April, the news broke about the massive failure by General Motors to recall vehicles for a faulty ignition switch. I had some strong thoughts on the topic but got lazy on vacation and never wrote them down in a cohesive way. I recently dusted off my notes when the WSJ published a piece Friday, August 22 about the Government now investigating the GM legal department. The Feds want to know what those poor saps in the Legal Department knew, when they knew it, etc. Apparently GM has already let a dozen or so lawyers go (but not the boss…), and continues to “cooperate with” the government. Here’s what I think – the whole episode is just another wonderful example of broken merit models fueled by our collective greed as a society.

People have been making a lot of noise about the failure of GM to recall vehicles when the company allegedly first had notice of a potential ignition switch problem. We see a $1 fix on the one hand, and 13 young lives on the other and scream at the injustice of at all. The media shows us orchestrated grillings on Capitol Hill, and serves up inflammatory documents attributing prior knowledge to company management of the issue and simple fix. The lawyers will come. Scapegoats will be assigned. Settlements will be achieved. But until people are compensated based ethical action v. quarterly results, no one will stop the machine.

To me the real story here is having yet another shining example of an ethical lapse due to a lack of courage by corporate management. And this lack of courage directly results from Wall Street inspired societal pressure to achieve specific financial results. The tale has played out in the auto industry before. The mighty Pinto had a magic exploding gas tank in the 1970s. When the dust settled, it came down to a pure mathematical cost-benefit analysis where management literally rationalized that the cost of the fix far outweighed the potential benefit of minimizing the risk of explosion. It took a few innocent lives and a team of lawyers to remedy that situation, and still nobody fixed the root cause – our collective greed for enhanced shareholder value.

As a society, we have placed such a premium on delivery of positive earnings (through skewed compensation programs and other benefits) that corporate managers are actually encouraged to perform a clinical cost-benefit analysis even when human lives may someday be at stake. Many institutional investors are now driven by short-sighted economic incentives and have lost any notion of “patient capital.” Shareholders used to buy stock in a company and accept small dividends and long-term growth. Now we have a culture that demands maximum efficiency, and margin-focused tactics by public companies with the spotlight on every quarterly report. This crazy construct creates behaviors that are far too focused on the bottom line. Corporate executives are schooled and encouraged through compensation programs to conduct this very type of cost-benefit analysis. A few injuries and maybe a death or two down the road (not certain and very remote) would be hard-pressed to outweigh a negative impact on today’s numbers, annual bonus, option vesting, retirement money, etc.

As a student of ethics, no lesson has been more clear over the past 40 years (and one could argue 400 or even 4000): as a general rule, human beings will do whatever benefits them the most. It is all about self-interest. To fix the Pinto, GM ignition switch, NASA’s space shuttle debacle, or the countless other ethical case studies where safety warnings went unheeded to serve a greater perceived need for fame or fortune, we need to reward rather than punish the ethical decision-maker. Most ethicists end up fired or resigning in disgust. Instituting incentives for ethical action, and more bonus clawbacks, along with larger fines/penalties and possibly jail time for the bad actors who benefit from corporate malfeasance is a start. But we also need a societal shift to take place. We must begin to praise and encourage rather than criticize corporate decisions that may be painful in the short-term yet create tremendous positives in the long run. Milton Friedmann’s model and modern cultural norm suggesting shareholder value as the only purpose of the corporation is flawed. We need to balance corporate decisions after considering multiple stakeholders, and align merit based compensation and promotions with all the value created (or destroyed) – not simply shareholder value.

I know some brilliant minds are working on this. One example is the “social benefit corporation” and similar statutory creatures created in several states to date. Hopefully this is the beginning of a shift toward more responsible corporate and individual behaviors. People will act in their self interest, so we need to give them both the carrot and the stick that will help them make proper decisions guided by a more holistic view of “value.”

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