Role of Fines in Corporate Ethical Decision-Making

Exxon Valdez

In a case such as with the Exxon Valdez, the company essentially saw the two arguments of shareholder value and ethics as mutually exclusive. To resolve the issue, the company chose to focus on shareholder value as a means of making its decision, and ultimately chose not to retrofit the ships. Thus, the company chose to look at the situation strictly from the shareholder model, where management is the agent of the shareholder only, and only seeks to increase shareholder wealth.

For many firms, this is not the normal approach. Many companies take different approaches to corporate social responsibility, perhaps with a stakeholder theory. Under the stakeholder theory, the environment and the citizens of the areas that could be potentially affected by a spill would be taken into account. This approach has an appeal because it forces managers to think about the broader implications of their actions, and to recognize that enhancing shareholder wealth at all costs is simply not a human value, comes with potentially tremendous costs (tragedy of the commons) and is not aligned with the interests of very many people at all in this world (Orts & Strudler, 2002).

There is no common ethical compass in the corporate world, however. Oil companies in particular seem to lack ethical decency. This is where fines in particular play a role in encouraging companies to adopt ethical standards that are aligned with those of society as a whole. The fines increase the cost of something like an oil spill. The idea is that the cost of the spill, plus the fines, will be higher than the cost associated with avoiding the spill. The fines, therefore, are a tool used by government to influence the way that managerial decisions are made. The government understands that most corporations - or many, anyway -- will make decisions on strictly financial terms, and impose fines in order to increase the chance that the organization will make more ethical decisions. The fines are thus a means by which the government can more closely align the interests of the corporation with the interests of society.

The cost of the cleanup is not really relevant to the discussion, however. The cost of the cleanup was estimated by the company, and was included in the decision. The decision was based on financial considerations, so the cleanup cost was simply a number, and was not an ethical consideration at all.

Back to the fines, the other role that fines play is that when the fines are large enough, they encourage a company to rethink the approach that it pays with respect to ethics. The company, if facing enough fines, may start to rethink its ethical framework. If focusing on shareholder wealth seems to get the company into trouble -- which specifically reduces shareholder wealth, then the company may realize that it needs to start taking a more comprehensive shareholder approach. So there may be long-run effects, in addition to the known short-run effects, of government-imposed fines for things like oil spills (or whatever the undesirable behavior is).