Corporate Honesty

April 26, 2011 by Gabe | [mmd] |

This post is a bit of a departure, but bear with me since I think it has relevance to the Tech sector.

The WSJ is reporting on federal efforts to oust the CEO of Forest Labs after the company was found to be responsible for marketing violations (I'd rather not get into a discussion of the specifics or of Pharma in general. This is just an example). The efforts simply amount to barring the CEO from doing business with the Federal Government (i.e. Medicare, Medicaid and the VA). However, this is a groundbreaking move by the Feds.

Typically companies are penalized for bad behavior with simple (but large) fines. However, this is a minor deterrent for most companies, and specifically for most company executives. In the case of marketing violations, the pay-off for misrepresenting a product is so large that there is almost no fine that could deter the behavior. This is particularly the case in the world of pharmaceuticals.

By barring the CEO of a pharmaceutical company from doing business with the government, they are effectively shutting down the business until the CEO is gone. Essentially, this action lays responsibility for violations at the feet of the CEO. This is the way it should work. This is the way responsibility has worked all through your childhood and young adult years. Responsibility for your actions is part of the membership fee for living in a society.

I'd like to see this kind of responsibility spread to other industries. Wouldn't it be great if you could trust advertising again. Imagine if a company was banned from TV advertising because they misrepresented the features of their tablet computer or the battery life of their laptop. I understand that the FTC has the authority to make this happen, but it rarely makes a difference. If a business can sell billions of dollars worth of junk before they are fined, then what is the deterrent. I'd guess that if the CEO had a vested interest in the penalties of bad behavior, then honesty might actually become a corporate goal. No one is perfect. Everybody makes bad decisions sometimes. For the majority of us, market forces keep us honest.

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