One of the things that makes it interesting to teach business ethics is the need to continually revise the curriculum. I usually spend a week discussing the latest “big scandal” in the corporate world – unfortunately, I almost never teach the same one twice, because something new always comes along. First time I taught the course it was junk bonds, and the Gordon Gekko stuff. Then along came Enron, against which all of that misbehaviour paled. Then the financial crisis. Then the Deepwater Horizon disaster. And now Volkswagen. At very least, “corporations behaving badly,” is an area where you never risk running out of material.

I’ve been following the Volkswagen fraud rather carefully in part because it affects me personally, since my wife has an Audi A3 with the TDI diesel engine. She also precisely fits the profile of a consumer who was defrauded by the “clean diesel” claim. Back when she bought her car, she had narrowed the choice down to two vehicles: the Lexus CT 200h (hybrid) and the Audi A3 diesel. Fuel economy and environmental impact were, in other words, a major priority. She wound up buying the A3 because of the more entertaining driving performance, in particular the superior torque. Obviously, if she had known that this performance was being achieved by disabling pollution controls, she would not have bought the car.

She’s been emailing Audi and has yet to get a response – they have not even responded to her request to confirm that her car is one of the ones affected. “This is a company that sends me a birthday card every year,” she pointed out. “Yet so far they have nothing to say about a massive fraud.” (Right now she wants a buyback, and will be joining the class-action lawsuit.)

One of the things I like to point out about these big scandals is that they are not, strictly speaking, “business ethics” problems, they are actually issues of corporate crime. Indeed, Enron, the financial crisis, Deepwater Horizon, and now Volkswagen, all involved very widespread violations of law (what we would call a “crime spree” if it were happening on the street). Of course, business ethics is highly relevant to the topic of white collar crime, because in the area of corporate conduct, the state relies more heavily upon voluntary restraint that it does when dealing with street crime. (This is because the state has much greater difficulty detecting, prosecuting, and securing convictions with white-collar criminals. The dominant view among criminologists is that it is often impossible to come up with a threatened punishment that is large enough, credible enough, and sufficiently well targeted to serve as an effective deterrent against corporate crime. And criminal prosecution of executives is not quite the magic bullet that many people take it to be.)

In any case, over the part few weeks, various commentators have been trotting out the usually “folk” theories of criminal motivation, in order to account for VW’s actions. I’ve spent some time in my academic work criticizing these theories (particularly in my paper, Business Ethics and Moral Motivation: A Criminological Perspective). Take, for example, the suggestion that these actions are motivated by “greed” or the pursuit of “profit.” The problem with this, as an explanation of corporate crime, is that these motives are too common. It therefore fails to explain why this firm, or this individual, turns to crime, when many other firms or individuals, facing roughly the same incentives and possessing roughly the same motives, do not turn to crime.

Furthermore, these “folk” theories are weak when it comes to accounting for the social character of crime. Corporate crime, for instance, tends to be concentrated in particular industries and firms. Consider, for example, this passage from my 2008 article (citing literature from 1980):

White-collar crime, just like street crime, has an important social dimension. If the individualistic approach were correct, then one would expect to find a fairly random distribution of white collar crime throughout various sectors of the economy, depending upon where individuals suffering from poor character or an excess of greed wound up working. Yet, what one finds instead are very high concentrations of criminal activity in particular sectors of the economy. Furthermore, these pockets of crime often persist quite stubbornly over time, despite a complete change-over in the personnel involved. For example, the petrochemical, automobile, and pharmaceutical industries have been plagued by corporate crime for years, in a way that, for example, the farm equipment or the beverage industries have not (Clinard and Yeager, 1980, pp. 340–341). Of course, some of this can be explained by the structure of opportunities in certain occupations (as with theft by dockworkers, or corruption among police officers), but much of it also has to do with the formation of deviant or criminal subcultures, often with their own internal rules and normative expectations, which in turn get reproduced over time (Mars, 1982).

What is striking about this passage is the singling out of “petrochemical, automobile, and pharmaceutical industries” as ones with a “crime problem.” This is why, when the Deepwater Horizon tragedy occurred, or now the VW scandal, it was hardly surprising to people who follow these things. Certain industries essentially harbour and reproducing deviant subcultures. This is one of the reasons that much of the best work on white collar crime has been inspired by, and draws upon, work in juvenile delinquency. Whereas delinquents tend to exist in subcultures that reproduce deviant attitudes toward authority, many corporations reproduce subcultures that promote organized resistance to regulation.

This is a well-known feature of the automobile industry, and apparently this is what was happening at VW as well. One executive, speaking anonymously, blamed “the company’s isolation, its clannish board and a deep-rooted hostility to environmental regulations among its engineers. “

These deviant subcultures, once established, can be extremely difficult to dislodge (much like official corruption in, say, a police force). I was struck, for instance, by the following description of a pharmaceutical company executive, G. Kirk Raab, who was hired by Genentech “to smooth the company’s journey through the regulatory process.” The only way to do this, it turned out, was to fire a lot of people. “In practice, dealing with the fact of FDA power meant a fundamental change in corporate structure and culture. At Abbott and at Genentech, Raab’s most central transformation was in creating a culture of acquiescence toward a government agency. As was done at other drug companies in the late 20^th century, Raab essentially fired officials at Abbott who were insufficiently compliant with the FDA.” (This is from Daniel Carpenter’s book, Reputation and Power, p. 7).

This is probably what needs to be done in the automotive industry as well — with respect to both environmental and safety regulation.

If pharmaceutical companies have been moving in the direction of improving their corporate culture, there is one sector that probably should be added to the list of “criminogenic” industries, and that is finance. For instance, I often show the following list to my students (from a great blog post on Naked Capitalism – here), which summarizes a report on JP Morgan Chase, documenting the illegal activities that the bank has admitted to (or effectively admitted to, in various settlements), in the period following the 2008 financial crisis (and thus excludes mortgage fraud and abuses):

It’s hard to summarize all of the documented instances in this report of JPM has been breaking the law, but here’s my best shot. I try to keep up on these matters, and yet some of these I’m learning about for the first time:

• Bank Secrecy Act violations;
• Money laundering for drug cartels;
• Violations of sanction orders against Cuba, Iran, Sudan, and former Liberian strongman Charles Taylor;\
• Violations related to the Vatican Bank scandal (get on this, Pope Francis!);
• Violations of the Commodities Exchange Act;
• Failure to segregate customer funds (including one CFTC case where the bank failed to segregate $725 million of its own money from a $9.6 billion account) in the US and UK;
• Knowingly executing fictitious trades where the customer, with full knowledge of the bank, was on both sides of the deal;
• Various SEC enforcement actions for misrepresentations of CDOs and mortgage-backed securities;
• The AG settlement on foreclosure fraud;
• The OCC settlement on foreclosure fraud;
• Violations of the Servicemembers Civil Relief Act;
• Illegal flood insurance commissions;
• Fraudulent sale of unregistered securities;
• Auto-finance ripoffs;
• Illegal increases of overdraft penalties;
• Violations of federal ERISA laws as well as those of the state of New York;
• Municipal bond market manipulations and acts of bid-rigging, including violations of the Sherman Anti-Trust Act;
• Filing of unverified affidavits for credit card debt collections (“as a result of internal control failures that sound eerily similar to the industry’s mortgage servicing failures and foreclosure abuses”);
• Energy market manipulation that triggered FERC lawsuits;
• “Artificial market making” at Japanese affiliates;
• Shifting trading losses on a currency trade to a customer account;
• Fraudulent sales of derivatives to the city of Milan, Italy;
• Obstruction of justice (including refusing the release of documents in the Bernie Madoff case as well as the case of Peregrine Financial).

And, exhale.

The sheer litany of illegal activities just overwhelms you. And these are only the ones where the company has entered into settlements or been sanctioned; it doesn’t even include ongoing investigations into things like Libor, illegally concealing inclusions of mortgage-backed securities in employer funds (another ERISA violation), the Fail Whale trades, and especially putback suits for mortgages, where a recent ruling by Judge Jed Rakoff has seriously increased exposure.

What can be said about this? Perhaps a few lessons: First, it serves as a helpful reminder that white collar crime remains a very serious social problem, one that attracts far too little public concern. This is partly because of an almost entirely supine business press – it remains that case that while the “news” section of newspapers focuses very heavily on criticizing the government, the “business” section almost never criticizes business, and does almost no investigative reporting or muckracking. (Notice that while political scandals are almost always uncovered by political reporters, the VW story was not broken by an “automotive” reporter.) Second, it is important to be aware that these criminogenic business subcultures, once developed, can be extremely difficult to eliminate. Thus it is a very important responsibility of management to set the right tone, to keep a careful eye on the corporate culture, and to take hard line when things start to get out of hand. Finally, there are many people who, for reasons of political ideology, are strongly critical of environmental law, health and safety regulation, financial regulation, the FDA, etc. These political ideologies are often appealed to by corporate criminals, as a way of legitimating their law-breaking activities. It seems to me, therefore, that those who express an ideological hostility to regulation bear a special responsibility for ensuring that their views are not misused in this way. This can be achieved, in part, by emphasizing the very significant difference between claiming that a law should be repealed and claiming that a law need not be obeyed.