Volkswagen will now be subject to the same fury that assailed BP. Just imagine if either company had been a bank that behaved so badly that it nearly took the world economy down.
Aspects of corporate behaviour have been a source of concern for centuries. Over 200 years ago Adam Smith remarked that “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”.
Scandals seem to be a constant of economic life. Most of us remember Worldcom, Enron and Bernie Madoff; all of us will be paying for Anglo Irish Bank for a long time to come. The list is long.
Smith would have had no idea what a “defeat device” was but he would have been unsurprised by its objectives. Rules and regulations are there for a reason, and no one should be astonished by illegal activity and regulatory capture and arbitrage. Fooling – or just playing – the regulator is often combined with rings being run around tax authorities.
The role of technology is of increasing importance here: the regulated have always been faster and cleverer than the regulator but that gap has widened, facilitated by rapid technological progress.
Clever software in VW defeated the environmental monitors; there is lots of fiendishly complex computer code out there, not all of it benign. “Big data” is likely to open up a new range of dodgy practices.
Some of these activities are by no means illegal. But are they ethical? In the opinion of some observers, high-frequency trading is ruining the structure of stock markets.
There are plenty of counter-arguments but not terribly convincing ones. Is high-frequency trading unethical? If ordinary savers are getting ripped off then it certainly is. Nobody is sure so nothing gets done; everyone is left with a queasy feeling that something is not quite right but the clever traders and even cleverer software just keep making money.
What seems absolutely certain is that the regulators haven’t got a clue: high-frequency trading could be stopped with one simple rule change. Just pass a law that says only one trade per second is allowed on any regulated stock exchange.
Resources
Hapless regulators are a feature of all corporate scandals. Sometimes it is incompetence but more often it is just a question of resources: the regulated always have more people, money and bigger computers. And, as with my example about high-frequency trading, the issues can be complex: it isn’t always as obvious as the VW example.
How ethical are the privacy and other agreements that we all sign when visiting our favourite web sites? The people that insist we promise to read and agree to these lengthy documents know, with absolute certainty, that nobody ever even glances at them. One UK study suggests the average web-user needs 124 working days per year to read the small print of each web site visited; a US piece of research reckons it would take even longer.
None of us has a clue what we sign up to every day. While most of this verbiage is benign, it surely represents an open goal for the unscrupulous.
It would be too easy to conclude that we have an epidemic of unethical behaviour: the business world is actually better behaved than the headlines suggest. Wrongdoing is more frequently discovered than in the past – hence the headlines.
But once it starts it’s hard to stop. Once something becomes commonplace, is done by everybody else and sanctioned by the entire company, it becomes potentially career-ending to protest. Ex-post-rationalisation become the norm: “nobody got hurt, everybody does it, I will change things when I get promoted.”
Better regulation requires more co-operation from the regulated. Senior executives need to stop moaning about too much regulation. More help and protection is required for whistle blowers.
Regulators clearly need better resources but we also need to demand more from them. Claims about products and services need to be randomly audited. A small suggestion: look at broadband speeds. Which telco really delivers on its promises? I would also ban the phrase “up to”, to be replaced with “at least” (in all contexts).
