Consequences 6.75 Moral hazard

When people are not held accountable for bad behavior, it encourages more bad behavior. This is called moral hazard. This is one reason we have laws to punish harmful behavior. However, we deliberately remove consequences in three basic ways for money creators, and for money-makers-profit-takers who cause harm to others: systemic backup and bailout for the bankers (as previously described); a general corporate liability shield for businesses; and freedom from prosecution for crime if you are a big enough financial entity.

Corporate liability shield

When the 1st Bank of the United States was formed, 80 percent owned by private citizens, the investors were held fully and personally liable for the bank’s decisions. By the time the 2nd Bank of the US was formed, the private investors were only liable for up to double their investment.281 Today, the private owners of banks, their boards, and their management are not held personally liable for the banks’ mistakes at all – zip, zero personal responsibility.

This is generally true for any business enterprise under corporate law. Corporations are created to shield owners, boards and executives from personal liability for their decisions. There are a few instances in which people will be held personally accountable for corporate decisions. However, in general, people who make decisions in any kind of corporation are protected from personal liability; they are exempt from consequences for harm-causing decisions, even when they make deliberate decisions to sacrifice the lives of a few of their customers – the approach now recommended and taught by many schools under the patronage of the money power.

The idea is, if executives were personally responsible it would curb entrepreneurship, risk-taking, and money-making. Yes, it would. It would shift the burden of consequences back onto the corporation, instead of privatizing the profits while socializing the risks. It would require businesses to carefully and independently test a new product before introducing it into our lives. And it would require executives accept responsibility for their choices. So, if a pharmaceutical CEO knowingly pushed a drug for unauthorized purposes and people died as a result, the CEO would face murder or manslaughter charges. A CEO who thinks he’s worth 500 times his average employee’s salary is well enough paid to know what is going on in his company, take responsibility and accept consequences.

Some businesses take advantage of this liability shield to make money at our expense. Executives willfully decide to ignore unsafe work conditions, or maintenance on a drill rig, or research that says their product is killing bees, or causing developmental delays in children, or changing the climate. They ignore the poisons they are spewing into the air and rivers, and no individual will be held accountable, because this is how a “proper functioning economy works.” They make choices that kill you and walk away with their lives and fortunes intact.

In the very rare instances when a CEO is held accountable, punishment is not commensurate with the crime. For example, Massey Energy repeatedly violated mining safety standards – knowingly putting its employees at risk to increase its profits. CEO Don Blankenship was fined $250,000 and sentenced to a year in prison for his role in the deadliest US mine disaster in 40 years – the Upper Big Branch mine explosion.282 This may sound like a big fine, but when he started with Massey in 2000 he was taking home nearly $6 million a year. He made deliberate decisions that resulted in the predictable deaths of 29 people and paid a very small price in time and money. And, the jail time was notably rare for a corporate executive and a pittance for deliberate manslaughter. In 2018, Don Blankenship ran for a US Senate seat in West Virginia and got 20 percent of the Republican votes.283

If corporations are people, why not try the company itself for willful murder. If the company deserves the death penalty for killing people, sell the company off to the highest bidder, put the proceeds into a community fund so stockholders lose their stake, and ban the executives and board from ever heading a company of more than 10 people again. AND, try the people for manslaughter who deliberately hide the data about dangers and make decisions that kill.

Here’s another recently publicized example of unpunished criminal wrongdoing in the name of profit-making: The patent ran out on a Johnson & Johnson anti-psychotic drug. To hold on to this market they created a new drug, Risperdal, with a new patent they released in 1994. It wasn’t deemed any better than the old drug, which could now be manufactured and sold as a generic, but it was especially good for schizophrenia in adults – a small market. J&J wanted a blockbuster, billion-dollar drug so they deliberately set out to market it to the elderly with dementia and to children with autism – unapproved uses, but sadly, increasing markets. J&J used corrupt practices to essentially bribe gatekeepers and prescribers to order the use of this drug. Despite an FDA report of “an excess number of deaths” in the elderly taking the drug, and the growth of pendulous breasts in over 5 percent of the children, they continued to market the drug to these populations.

The company made about $30 billion in sales of this drug, killing people and altering lives along the way. The company may pay a total of $6 billion in settlements and fines for this misconduct, but from a making-money-is-our-highest-value standpoint, it was worth it; a $6 billion fine is less than 20 percent of the $30 billion they made on this one drug alone. With a willingness to kill some consumers, the corporation made $17.1 billion on adjusted net earnings of $74.3 billion in sales in 2014. And, whatever they pay in fines, they will deduct it from their earnings before calculating taxes.284

Alex Gorsky, the man who was in charge of marketing this drug falsely, was elevated to chief executive of J&J, and earned over $25 million in 2014. It is deeply immoral and repellent that a man who may have destroyed so many lives is rewarded. But, this is our current system, and those are the values of this family company.

They are also clearly the values of the GOP. They are slashing monitoring and enforcement action on corporate wrongdoers to the nubbins. Public Citizen issued a report in July 2018 showing that penalties for corporate violations plummeted by double digits under Trump. “When it comes to large corporations, the supposedly ‘tough-on-crime’ Trump administration is undertaking an epic retreat from law enforcement – slashing fines, declining to bring cases against corporate wrongdoers and cutting enforcement programs,” said Robert Weissman, president of Public Citizen. Just to list a few: Department of Justice penalties against corporations fell 90 percent from $51.5 billion in President Obama’s last year to $4.9 billion in Trump’s first year. Penalties at the EPA dropped 94 percent, and existing fines were dropped from $23 billion to $1.4 billion. Nearly every department tasked with monitoring and assuring safety whacked its enforcement. Taking a plane? Transportation’s Department of Aviation Consumer Protection’s penalties are down 11 percent. Trading on the Commodity Futures Exchange? Enforcement is down 80 percent. Stock market? – Securities and Exchange Commission down 68 percent. Using consumer products? The Safety Commission is down 43 percent. And, so on.285 Beware.

The GOP is as clear as it can be: it believes that if you are in the business of making money, then you should not be hampered by fear of consequences for harmful choices. When there are no individual consequences for corporate choices, immoral, cruel and harmful behavior gets a free pass. With a focus on short-term profits, harmful behavior becomes more likely.

While the GOP invites moral hazard, there are exemplary corporations that look out for their employees, their customers, the communities in which they prosper, and the environment. Many businesses have discovered when they make their highest value contributing a service, while treating employees and customers well, they make even more money. Patagonia, a clothing manufacturer, is one such company. Costco is a standout example of this approach. But lazy, short-sighted and immoral businesses ignore this opportunity. And, WE, the people have not yet demanded this higher standard of behavior and responsibility from them all.

Without serious consequences for criminal and immoral behavior, the bankers and the very rich will continue to take us down the path to destruction. There is an alternative.