VW And GM Prove It: Some Executives Should Go to Jail

This article originally appeared in Forbes on Sept. 28, 2015.

By Tim Calkins

This has been a rough month for the auto industry.

First GM announced that it had settled claims that the company knowingly sold cars with a flawed ignition switch that resulted in more than 100 deaths. GM apparently knew about the problem, didn’t fix it, and hid the situation from regulators.

Then VW had to face charges that it deceived consumers and regulators on auto emissions. It reportedly sold more than 11 million cars with a system that outsmarted emission tests.

These are astonishing stories. Two of the world’s largest, most respected corporations knowingly deceived consumers and government officials. In the case of GM, dozens of people died. The environmental impact of VW’s deception is nearly impossible to calculate. Events like this explain why so many people don’t trust the corporate world.

In both cases, company executives made a choice to deceive and mislead. These weren’t accidents, nor were they unfortunate, unexpected developments. These were the results of intentional choices. Someone at VW said (perhaps in German), “Oh, this sounds like a good idea. Let’s do it.”

How should we punish these people?

If history is any guide, a few individuals will step down and the companies will pay fines. VW’s chief executive, Martin Winterkorn, already announced that he is leaving the company. Other executives will likely follow his lead. VW will probably have to fix the problem and pay a fine, and that will be that. At GM, a few executives have resigned, and the company has paid a large settlement.

The problem is that these punishments are not likely to be sufficient to discourage corporate wrongdoing.

Leaving a company is not a huge punishment. People leave companies all the time. Martin Winterkorn will depart from VW having earned millions over the past several years. He never has to work again. He might actually be relieved to walk away from the mess and public pressure of being the VW CEO. Some of the GM executives involved in the cover-up left the company, but they may well have found other jobs already and moved on.

Fines are not a very severe punishment, either. Fines end up being paid by the shareholders, people who had nothing at all to do with the situation.

There are big incentives to do the wrong thing. The intense focus on business results encourages corporations to cut corners, to cover up, and deceive. GM saved potentially millions of dollars with a defective ignition switch. I suspect the move let someone at GM achieve their annual goals. VW was able to sell diesel cars with the emission deception. That probably helped some people achieve their targets and earn a nice bonus.

Business executives face enormous pressure. If they deliver great results, they will earn a bonus and remain employed. If they fail to meet their goals, they may well be fired. When forced to choose between doing the right thing and doing something wrong, all too many corporate leaders are willing to cheat and practice deception. Yes, you might be fired for doing the wrong thing, but only if the issue surfaces. Of course, you might have been fired for missing your goals, too.

We need executives to consistently do the right thing. This is the only way to rebuild trust.

Business leaders should have high ethical standards. Companies should have codes of conduct and value statements. CEOs should set a positive example. Building and maintaining trust needs to be a priority for companies.

Unfortunately, this all may not be enough. Business people need to know that if they do the wrong thing they may be held personally responsible and face jail time.

This would change the decision-making process dramatically; people might be less likely to do the wrong thing if they knew there was a real punishment at stake. It would alter the options. Rather than decide between job performance failure and job security and a financial reward, an individual might debate, “Would I rather stand up to my boss and risk being fired? Or would I rather cover up this situation and risk going to jail? I think I’ll stand up to my boss.”

GM and VW both deceived government officials. The companies knowingly did the wrong thing. The people responsible, the individuals who decided to cover up and deceive, whoever they are, should be looking at some time in jail.

- Tim Calkins is a clinical professor of marketing at the Kellogg School of Management at Northwestern University.