Business·Analysis

From Bell to VW, shareholders pay for executive sins: Don Pittis

Volkswagen executives have admitted they knew VW was cheating on EPA regulations. Last week, Bell paid $1.25 million after employees wrote fake reviews. Don Pittis looks at why companies, and therefore shareholders, pay the fines when it's company employees and executives who knowingly break the rules.

Why do innocent shareholders pay fines when company executives go scott-free?

Volkswagen North America CEO Michael Horn testified last week that he had known since 2014 that VW was cheating on EPA rules. Don Pittis looks at why companies, and therefore shareholders, pay the fines when company employees and executives knowingly break the rules. (Reuters)

Martin Winterkorn stepped down from his job as CEO following the Volkswagen emissions scandal last month and will get a golden goodbye worth as much as $90 million. The figure was calculated by the Wall Street Journal from information in the company's annual report.

While Winterkorn and other departing executives enjoy their perks, shareholders face up to $18 billion US in fines in the United States alone after VW cheated the U.S. Environmental Protection Agency, plus the cost of lawsuits and fixing millions of affected cars.

Experts say the actual fine will be a fraction of the maximum, but shareholders, who cheated no one and knew nothing of the scheme to defeat the EPA test, will foot the bill. 

It's still not clear which executives knew about the emissions rigging and when they knew it, but Volkswagen's U.S. CEO testified last week that he learned about the "non-compliance" in 2014. Other employees knew it long before that.
Canada's Competition Bureau fined Bell Canada $1.25 million after employees wrote glowing reviews for a company app without disclosing where they worked. (Galit Rodan/Canadian Press)

Volkswagen shareholders aren't alone in taking the rap for executive mistakes.

Last week, in a much less significant flouting of the rules, Bell Canada faced a $1.25 million fine after it was revealed its employees were writing glowing reviews about Bell's telephone apps. Once again. it was the company, and therefore the shareholders, who will pay the fine.

The contradiction here is that the corporation is legally structured to make profit. It's not a charity."- Steven Bittle, author Still Dying for a Living

In cases like Bell, Volkswagen and SNC Lavalin — the Canadian infrastructure firm that has been fingered for paying officials to get contracts — there is a good reason to charge the company rather than just the guilty employees, says Neil Sargent, a law professor who teaches regulation of corporate crime at Carleton University in Ottawa.

Pointing fingers

"If the company has actually benefited from the illegal activity," says Sargent, "they basically get to hive off the consequences by targeting individuals while still retaining the benefits."

He says that for regulators and prosecutors, it can also be a matter of practicality. When corporate decisions are made as a collective, it is almost impossible for outside investigators to point a finger at the individual or individuals who led the way.

It's true that, similar to ministerial responsibility in government, senior executives in charge of the affected division could be declared responsible because they should have known, even if they didn't.

"It's like having a vice-president responsible for going to jail," says Sargent. 

At the same time, there are strong arguments for going after individuals directly. Former U.S. central banker Ben Bernanke said that in the financial meltdown of 2008, a bit of jail time might not have been a bad thing.

'It would have been my preference to have more investigation of individual action, since obviously everything that went wrong or was illegal was done by some individual, not by an abstract firm,' said the former Fed chairman in an interview with U.S.A. Today. "You can't put a financial firm in jail."
Sometimes company executives do face the music in U.S. courts. Former Enron CEO Kenneth Lay was found guilty of securities fraud but died before facing a sentence of as much as 30 years in prison for his role in the collapse of natural gas trading company Enron.

Certainly in previous financial crimes, such as the scandal that brought down the giant natural gas trading firm Enron in 2001, individuals did face jail time. Enron CEO Kenneth Lay was expected to serve 20 to 30 years in prison but he died before sentencing. Enron COO Jeffrey Skilling is still in prison. 

Criminal intent

"The contradiction here is that the corporation is legally structured to make profit," says Steven Bittle, a professor of criminology at the University of Ottawa who specializes in workplace health and safety. "It's not a charity."

Bittle is the author of the award-winning book Still Dying for a Living about Nova Scotia's Westray mine disaster in 1992 where 26 underground workers died in a methane explosion. He says that in the case of corporations, it is difficult to prove mens rea or criminal intent. 

"I tell my students that nobody's sitting around a boardroom table saying 'How many workers are we going to kill today,' " says Bittle, adding that too often in collective decision-making, profits begin to dwarf other responsibilities.

"At times, and quite often as we've seen, companies can and do make decisions that are not in line with environmental standards, health and safety standards or financial accounting standards."

Bittle still believes it is important that companies and their shareholders pay the price for irresponsible profits, but he thinks the thought of jail time could have its own effect, counter-balancing the corporate pressure on executives to focus exclusively on profit.

"If they were in a position where they genuinely believed they would be held to account, they would certainly watch over things with much more vigilance," he says.

Follow Don on Twitter @don_pittis

​More analysis by Don Pittis

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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