Corporate Fines and Justice

The  National Highway Traffic Safety Administration (NHTSA) is seeking the maximum civil penalty of $16.375 million against Toyota Motor Corporation for failing to notify the auto safety agency of the dangerous “sticky pedal” defect for at least four months, despite knowing of the potential risk to consumers. Approximately 2.3 million vehicles in the U.S. were recalled in late January for the sticky pedal defect. The penalty being sought against Toyota would be the largest civil penalty ever assessed against an auto manufacturer by NHTSA.

 NHTSA learned through documents obtained from Toyota that the company knew of the sticky pedal defect since at least September 29, 2009. That day, Toyota issued repair procedures to their distributors in 31 European countries and Canada to address complaints of sticky accelerator pedals, sudden increases in engine RPM, and sudden vehicle acceleration. The documents also show that Toyota was aware that consumers in the United States were experiencing the same problems. Auto manufacturers are legally obligated to notify NHTSA within five business days if they determine that a safety defect exists.  The reason NHTSA requires automobile manufacturers to notify the government of safety defects is to prevent the risk of harm to others.   Prompt reporting, the theory goes, permits the government to order a recall if the manufacturer refuses to do so and give consumers a warning of the risk posed by the defect.

$16.375 million is a lot of money – but not to Toyota.    Last year Toyota’s revenues exceeded $200 billion.  It has assets of some $300 billion and its shareholder equity exceeds $100 billion.  If it agrees to pay the fine of $16.375 million, or the fine is upheld by a court, the fine will amount to .000081875% of its revenue last year.  

To put it in perspective, in Tennessee the maximum fine for a first offense of driving under the influence of alcohol in Tennessee is $1500.    The average household income in Tennessee for people under 65 is $46,000.   Thus, the Tennessee Legislature has determined that those people who chose to drink intoxicating beverages to the point that their driving skills are impaired and then go onto our roadways should face a fine amounting to 3.3% of average household income.   A person convicted of DUI also faces jail.

Why do we punish people for DUI?  Because the voluntary conduct of these drivers – consumption of a drug – poses a risk of harm to other drivers, pedestrians, and the property of others.  We seek money from and impose jail sentences on intoxicated drivers to punish conduct that could harm others and, we hope, to deter other people from driving under the influence.  Those that actually caused harm to others face even greater penalties. 

Toyota is facing a fine because it is alleged to have knowingly refused to timely report a safety defect, thus exposing hundreds of thousands if not millions of people to a risk of harm.  However,  the potential fine against Toyota is miniscule, an amount that is less than its revenue in any given hour.   (That is not a typo – Toyota’s revenue per hour exceeds $22 million.)  Indeed, one wonders if $16 million will even cover the costs that NHTSA will incur investigating the company and trying to force the company to pay the fine.

This is true of so many fines the government imposes against companies engaged in wrongdoing.  Our penalty provisions simply do not take into account the enormous wealth of the companies that expose others to the risk of harm.  We see it time and time again in the pharmaceutical industry, the financial services industry, etc.   It seems the misconduct never stops, and it never will stop unless we do two things.

First, civil penalties imposed by government agencies and criminal fines imposed by courts need to take into account the wealth of the defendant.  Obviously, there should be a cap on civil fines (so people and corporations can predict and hopefully be deterred by known consequences of their behavior), but the cap should not be a dollar amount.  Rather, it should be a percentage of net worth, revenue, profit, or some combination of the above in an amount sufficient to both punish and deter.

But this is not enough, because at this only punishes shareholders – people who almost always had no advance knowledge of the decisions made to violate the law.  Sure, adequate fines will cause a reduction in earnings per share, causing some shareholders to throw the rascals out, but that still is not enough.

No, we need laws that will permit us to send executives who knowingly make decisions that expose people to the risk of harm, or that actually cause harm,  to jail.

But, you might argue, these executives are good people who just made bad decisions, and they certainly didn’t mean to hurt anyone.  Well, the same thing is true with many of the people who drive under the influence.  Drunk drivers made an error in judgment.  These people  had one or two drinks too many and got behind the wheel of a car.  Despite the fact that tens of thousands of people drive while intoxicated every single day and don’t hurt a soul, we still punish drunk drivers if we catch them violating the law.  Why?  Because their conduct  creates  an unreasonable risk of harm.  Why should corporate executives who knowingly create an unreasonable risk of harm be treated any different? 

Let me hasten to add that I do not know if any Toyota executive should be punished by imprisonment concerning the current problems with numerous Toyota vehicles.  I know only what I have read in the press, and have no idea if what I have read is correct.  Indeed, I am certain that the full story has not been told.

My only point is that we should not permit decision-makers in corporations to avoid personal, criminal responsibility for knowingly exposing others to an unreasonable risk of harm.  We certainly should not permit corporate executives to avoid personal, criminal responsibility for knowingly causing harm to others.  History has demonstrated that miniscule fines paid by shareholders will not deter some executives from making decisions that knowingly create a risk of  serious injury or death.