Bad eggs and oil slicks – making corporate crime pay

If courts were able to award appropriate punitive damages that punish wrongdoers at a level tied to a company’s financial worth, then businesses big and small would be at risk of being put out of business by punitive damages unconscionable offenses and would be deterred from bad behavior in the first place, according to Judy Feuer Zimet of the Phoenix School of Law in Phoenix, Arizona.

Writing in the International Journal of Private Law, Zimet points out that in many legal cases over the last two decades, companies have repeatedly been fined for breaking environmental and other laws, but have not suffered losses to their profit line that were adequate to deter them from repeating offences. She cites the case of Wright County Farm Eggs and owner Jack Decoster’s long list of repeated violations that culminated in 2010 with a national salmonella outbreak. She also cites the oil company BP, which since 2005 has been held to account for a staggering 760 safety violations that resulted in a mere $373 million in fines.

Meanwhile, BP’s annual profits are in the double figure billions of dollars. The serious oil spill in the Gulf of Mexico in 2010 forced the company to create a $20 billion victims’ compensation fund. Zimet suggests that had fines for the 759 prior violations been sufficiently punishing, BP might have been more effective in addressing the problems that led to the 2010 spill.

“A punishment that successfully deters future wrongdoing requires an amount sufficient to impact a defendant’s financial condition,” says Zimet, Current factors used to assess the amount of punitive damages should be reassessed. Courts can better punish and deter wrongdoing by calculating punitive damages based upon a defendant’s wealth rather than the relationship between compensatory and punitive damages.”

Zimet discusses two cases in which appropriate punitive damages had the desired effect on changing corporate behavior. Two successive cases against motor vehicle manufacturer BMW of North America saw the company accused of fraud after a customer discovered that it had repainted a car yet withheld that information when the car was sold. In this first case, the trial court awarded a mere $4600 in compensatory damages and BMW made no changes to its behavior. A second case saw BMW North America forced to pay $4 million in punitive damages. The company immediately thereafter changed its policy and began reporting refinishing work to new car purchasers. This shows that when the risk of liability is substantial, companies will reform bad behavior.

“No longer should compensatory damages steer punitive damages,” asserts Zimet. “The Supreme Court should replace this factor by a formerly existing factor: determine the financial position of the defendant and its ability to pay.”

“Bad eggs and oil slicks: a defendant’s wealth is an important factor in properly assessing punitive damages” in Int. J. Private Law, 2011, 5, 1-21

Leapfrogging cars

Setting standards for electric vehicles could make China a global leader

Can the rapidly expanding automobile industry in China leapfrog to electric vehicles and so avoid the environmental harm that further decades of internal combustion engine use could cause? In a paper published in this month’s International Journal of Automotive Technology and Management, management researchers Hua Wang and Chris Kimble of Euromed Management École de Marseille explain how China could make such a leap by setting standards.

The researchers explain how the idea of leapfrogging, where a newly industrializing nation moves directly to the use of more advanced technologies without following the path of its predecessors, is an attractive idea but is often poorly understood. They suggest that it is especially pertinent in the automobile industry where there is an urgent need to develop technologies that are more sustainable and reduce dependency on oil. Having reviewed previous research in the field, they describe three routes that China might follow as its electric vehicle industry develops and grows.

The first sees China import core technologies from abroad and, using the economies of scale available from its domestic market, take a global lead in volume production. In the second, a lack of clear government policies means that China only grows in one segment of an existing market, such as electric bikes or low-speed electric vehicles.

The researchers concede that neither of these scenarios is likely to be attractive to industry or the Chinese government. “In the first”, they explain “neither the social nor the technological pieces of the puzzle fall into place” and China ends as a volume production leader but a technology follower. In the second, “although the technology works, weak governance means that the potential dominance of a niche market could be lost.”

Their third scenario could prove more advantageous for China. Instead of following the lead of other nations, it could build on its recent domestic legislation on standards for electric vehicles and, through its sheer economic power and prowess in mass production, take the lead in setting the standards for the world market. In doing so China would take the high ground before the other nations were able to catch up and create their own standards.

“Based on its understanding of the technological constraints of EVs and systems of governance that allow it to implement a single standard across a globally significant market, it might be possible for China to implement a paradigm changing leapfrog that will make it a global leader”. However, until the race has been run, all of this will remain speculation. Will China successfully leapfrog to electric vehicles? Only time will tell, the researchers conclude.

“Leapfrogging to electric vehicles: patterns and scenarios for China’s automobile industry” in Int. J. Automotive Technology and Management, 2011, 11, 4, 312-325

The opposite of built-in obsolescence

Manufacturers should be encouraged to make products that last longer, retain their retail value and are more readily recyclable after use, according to green consultant Peter Lang. Lang is co-founder of the charity Green and Away and a former Adviser to the Green Deputy Mayor of London. Writing in the International Journal of Green Economics, he suggests sustainability will only be achieved by promoting growth in high-quality goods and the phasing out of “shoddy” products.

“Society should be seeking growth in the quality of goods and services,” he says, “This change from quantity to quality is necessary because Western industrialised economies are already consuming beyond the planet’s carrying capacity.”

Lang explains that without changes in taxation and regulation, there will not be a cultural shift towards such high-quality goods that last longer, are more easily repaired and maintain their value on the second-hand market. Eradicating the manufacturing culture that leads to stickers proclaiming “No user serviceable parts” on electrical goods and plastic cases that either have no screws or cannot easily be opened for do-it-yourself repair, under the guise of “health and safety” represents an important part of this. Without this and other changes, we will continue to dispose of electrical goods, furniture, kitchenware, household goods and other products prematurely.

“The suspicion is that manufacturers are confident that their goods will be reliable for a year, but not much longer,” says Lang. “The cost of the product when new seems to make little difference: a £50 video recorder has a one year warranty, as does a £15,000 car,” he adds. “A cynic might be grateful that our planet takes all of 12 months to circle the sun: if it was less then warranties might be shorter too.” Longer warranties and guarantees seem only to apply to things like cutlery, which tend to lack moving parts or any likelihood of falling into disrepair without particularly severe handling and use.

He suggests that changes that are both financially and also culturally attractive will encourage consumers to opt for better-quality products and so nudge the manufacturers to improving their goods. Essential to such endeavours is strengthening existing “fit for purpose” legislation that protects consumers. He believes that products should either be designed “for life” or at the very least come with a label indicating life expectancy so that consumers can make a more informed decision as to which product to buy.

“To some these changes may seem harsh, but the crises of climate change, water and air pollution, and waste from manufacturing are already becoming huge,” says Lang. If we can change the manufacturing and consumer culture to choose high-quality over shoddy, longer lasting and more easily repaired, then we might again achieve a society that appreciates this quality and reduces dramatically our demands on raw materials, energy and waste facilities. Who knows, we might one day see a market in antique kettles and televisions that still function when plugged in!

Peter Lang (2011). Promoting the growth of high quality goods and the phasing out of shoddy products International Journal of Green Economics, 5, 126-132