Liars and Outliers (26 page)

During the early years of Prohibition, there was an epidemic of paralysis in the American South and Midwest, caused by “Jamaica Ginger,” a popular patent medicine. It was mostly alcohol,
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but about 500,000 bottles were laced with what turned out to be a nerve poison. It's hard to imagine a reputational pressure system being effective enough to prevent this kind of thing from happening. Sure, the company that sold this product was vilified, but not before tens of thousands of people were affected. (The “United Victims of
Ginger Paralysis Association
” had 35,000 members.) And, in fact,
this incident led
to the passage of the 1938 Food, Drug, and Cosmetic Act and the establishment of regulations requiring pre-market approval for drugs.

Corporations are organizations. They come in all sizes. The company that made all that Jamaican Ginger consisted of two guys and an office; many corporations employ more than 100,000 people; and Wal-Mart employs over 2,000,000. They have some of the same characteristics as individuals—they try to maximize their trade-offs, they have a self-preservation instinct, etc.—but they are not individuals. In some very important ways, they differ from individuals.

These differences may affect corporations' defection characteristics:

• They have a single strong self-interest: the profit motive
  . The case can be made that it's the only relevant interest a corporation has. A corporation is legally required to
  follow its charter
  , which for a non-profit corporation means maximizing shareholder value. Individuals have many more competing motivations.
  
• They try to hire people who will maximize their selfish interest
  . The people who run corporations, as well as the people promoted within them, tend to be willing to put the corporation's selfish interest (and sometimes their own selfish interest) ahead of any larger group interest. Individuals can't hire arms and feet selected to meet their needs.
  
• They can be very large in several dimensions
  . They can have a lot of assets, products, sales, stores, and employees. This increases their potential scope of defection: they can defect with greater frequency, and each defection can have greater intensity.
  
• They can spread themselves over a large geographical area, so much so that they become unmoored from any physical location
  . This reduces the effectiveness of institutional pressure that's tied to physical location: laws. It also reduces moral and reputational pressure against senior executives in those corporations, as they can remain socially isolated from those they harm.
  
• They can be complex, especially if they're large
  . This creates more internal subgroups at varying scales and intimacies, and the competing interests within them can change what they do. This gives them more options for evading accountability. It can also make it more difficult for people acting locally to determine what the competing interests actually are. Sometimes a single corporation can encompass different business units that compete directly with each other.
  
• They can be powerful
  . The combination of money and size can make corporations very powerful, both politically and socially. They can influence national and local legislation.
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• Millions of people depend on corporations for their livelihood
  . When a major corporation has problems—or even if it makes strategic decisions about automating, outsourcing, shutting down or starting up new product lines, and so on—many people and their families are affected. Whole communities can be affected. This means there are unintended consequences to many societal pressure systems.
  
• They can be difficult to punish
  . Corporate employees or owners are not the same as the corporation. Also, punishing a corporation can have ripple effects through society, hurting those who were in no way responsible for the corporation's misdoings.
  
• They can live forever
  . They are not tied to their founders, or to any particular people. They can live far longer than human lifespans.
  
• They have more to lose than individuals do
  . A damaged reputation can have much larger effects on corporations than on individuals, especially the big ones. This makes them more conservative.
  

Because of these differences, societal pressures work differently.
Moral pressure is
dampened in corporations. We've already seen in Chapter 9 that adding financial incentives tends to trump moral considerations. At the extreme, by telescoping the complexities of human morality into a wholly financial risk trade-off, corporations can largely relieve themselves of moral considerations. We also saw in Chapter 12 that morals are dampened in hierarchical group settings. The research is pretty clear on this point.

The upshot, to paint with a broad brush, is that corporations' risk trade-offs are much more focused on making a financial profit than individuals' are.
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People are emotionally complicated, and will regularly forgo money in exchange for more subjective benefits. Corporations, because of their group nature, are simpler; they are far more likely to choose the more profitable trade-off. To take a familiar example, it's far easier for a chef/owner of a restaurant to forgo some profit to create the sort of restaurant that gives him the most creative satisfaction, while a corporate-owned restaurant chain will be more concerned about consistency and the bottom line.

Another example is a garment or shoe designer buying goods made in
overseas sweatshops
staffed with child labor. An individual might refuse to do that on moral grounds, recognizing that she is going to have to pay more for those goods made elsewhere and deliberately forgo the extra profits. A corporation is more likely to buy the goods, as long as it's legal to do so. And, as we've seen in Chapter 12, the person who is in charge of making this decision will do better personally if he ignores his own moral considerations and cooperates with his employer. Even worse, if the corporation doesn't maximize profits, it risks a shareholder lawsuit.

Additionally, market competition encourages sellers to ignore moral pressure as much as they can. Imagine if you were in a corporate boardroom, discussing the Double Irish tax loophole and how it could save your company millions. After it has been explained how the maneuver is perfectly legal, and how other companies are doing it, how far do you think a “but it's immoral” argument is going to go? Even if you don't want to do it, if you don't and your competitors do, you'll be uncompetitive in the marketplace—reminiscent of the sports doping example from Chapter 10. Morals have nothing to do with it; this is business. Likewise, on a smaller scale, hospitals tend to
replace management
teams who don't exploit Medicare billing loopholes, or engage in illegal upcoding, with teams that do.

Even when a corporation engages in seemingly altruistic behavior—investing in the community, engaging in charitable activities, pledging to follow fair labor guidelines, and so on—it is primarily doing so because of the value of increasing its reputation. It's only a bit over the top to call corporations “
immortal sociopaths
,” as attorney and writer Joel Baken did. For corporations, the closest thing they have to morals is law. The analogy is pretty precise. Morals tell people what's right and what's wrong; the law tells corporations what's right and what's wrong. If corporations behave morally, it's generally because they believe it is
good for their reputation
, and to a lesser extent because it's good for employee morale. This is less likely to be true with smaller corporations run by individuals or small groups of individuals; there, the corporation is more likely an extension of the person.

Or as
Baron Thurlow
, a Lord Chancellor of England, put it sometime before 1792: “Corporations have neither bodies to be punished, nor souls to be condemned, they therefore do as they like.” In more modern language, John Coffee wrote that corporations have “
no soul to damn
; no body to kick.”
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Reputational pressure can also fail against corporations. There's a belief that the market's natural regulation systems are sufficient to provide societal pressure, and that institutional pressure—laws and regulations—are both unnecessary and have harmful side effects. From the perspective of this book, this is just another name for reputational pressure.

Let's take an example: toxins in bottled water. Assume there's no institutional pressures, only reputational. Consumers decide for themselves what sort of toxin levels they are willing to tolerate, and then either buy or don't buy the product. (The assumption here is that removing the toxins costs money, and will result in a more expensive bottle.) Companies that sell toxin-free water enjoy a good reputation. Companies that allow too much toxin in their bottled water face a diminished reputation, and as a result, will reduce those toxins in an attempt to repair their reputation. If this works, it effectively “regulates” the bottled water companies.

We already know how reputational pressures fail when arrayed against an individual, and those failures are even more likely in the case of corporate reputation.

• The corporation will try to manage its reputation. Just as a person tries to accentuate his good qualities and minimize his bad ones, corporations do the same. The difference is that corporations will employ people whose entire job is to do this. Corporate reputation management equals public relations, and corporations spend
  a lot of money
  on advertising—$130 billion annually in the U.S. alone. The science of advertising has completely changed over the past couple of decades. Today, it's more like
  psychological manipulation
  with a healthy
  dose of neuroscience
  .
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  As such, there can be a large difference between a corporation's behavior and what the public thinks is the corporation's behavior. It can be hard to remember the relative toxicity levels of different bottled water brands when the corporations are all engaged in advertising designed to make you believe you'll be more successful with the opposite sex if you would only drink their product.
  
• For reputation to work as a societal pressure system, there needs to be transparency. But consumers might not know enough about the relative toxicity levels to have it affect the reputation of the various companies. (They might not know what chemicals are in the water, they might not know at what concentrations those chemicals are toxic, and they might not know the toxic effects of those chemicals.) Corporations can be very private, especially about things that make them look bad. Sure, testing companies like Consumers Union can give consumers information about the various bottled water companies, but there seems to be very little demand for that sort of thing. Salience matters a lot, here. When you want a bottle of water, you're thinking about your thirst—not about independent third-party evaluations of water quality. To give a real example, corporations have successfully fought the labeling of genetically modified foods, so consumers aren't able to decide for themselves whether to eat them.
  
• Corporations might co-opt the testing and rating process. Those “independent third-party evaluations” aren't always so independent, and without transparency, consumers won't know.
  
• The damage resulting from the bad behavior might be so severe that no reputational consequences would be enough. Imagine that the bottled water is toxic enough that people start dying. Sure, the company will be out of business. But that seems like an inadequate penalty for killing people. And while this is an extreme story, there are lots of real-world examples of corporate decisions resulting in long-term disease and even death. In 2007 and 2008, at least ten Chinese companies produced contaminated batches of the blood-thinning drug heparin, substituting a cheap synthetic ingredient for a costlier natural one. At least
  150 people died
  as a direct result of the contaminated drug; we may never know how many secondary deaths or related illnesses there were.
  
• There can be a long time lag between the bad behavior and the reputational consequences. If the toxin in the bottled water is slow-acting, people might not know about its effects for years or even decades. So a corporation could continue selling toxin-laced water for a long time before it suffered any reputational damage. Remember “I'll be gone, you'll be gone”? That's an economically rational self-interest strategy in that instance.
  
• Consumers might not be able to penalize the company that's making the bottled water. In an open-air market, customers know who their suppliers are. In the complex world of international outsourcing and subcontracting, it can be much harder. In 2011,
  Cargill recalled
  36 million pounds of ground turkey because of salmonella risk. None of that turkey was sold under the Cargill name, making it difficult for customers to penalize Cargill. In 2005, the data broker
  ChoicePoint allowed
  a criminal group to steal the identifying information of 140,000 consumers. If consumers wanted to penalize the company by not doing business with them anymore, they couldn't—consumers aren't ChoicePoint's customers.
  
• The profit resulting from the bad behavior might be large enough that it'd be worth the reputational loss. If customers have no choice but to buy the bottled water—maybe there's no competition and the groundwater is even more toxic—then the corporation doesn't have to worry about what customers will think. Less-extreme versions of this scenario happen all the time in the real world; many industries benefit from the difficulty customers have in switching to a competing product.
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All this is made worse by the various substitutes people use in place of direct reputation when it comes to brands.
There's recognition
: people buy what is familiar to them.
There's social proof
: people buy what others buy. There's even something called
attribute substitution
: people buy the red bottle because they like the color red and don't have any other way of choosing. These are some of the reasons consumers can be manipulated so easily.