How can events like the recent G.M. recall scandal be prevented?

The United States is in the midst of yet another auto recall crisis; one which could prove to be larger and more damaging than the Toyota “sudden acceleration” scandal. This one involves General Motors and its decision to recall approximately 2.6 million vehicles due to a faulty ignition switch.

Issued within the past two months, the recall was anything but timely. There is evidence to suggest that top G.M. officials first learned of the problem in the early 2000s but apparently decided not to warn the public or pay for replacement switches – each of which would have cost just 90 cents. The result has been dozens of serious car accidents responsible for at least 13 deaths.

Who, exactly, should be held responsible? And how can we make sure this type of negligence or intentional misconduct is not allowed to happen again? Most people would say that a company’s top officials should take on these responsibilities and liabilities. Sadly, this is not how most of corporate America seems to work.

When a huge, publicly traded company is accused of wrongdoing, shareholders and the company as a whole suffer financial consequences. But this doesn’t necessarily affect the pay or bonuses given to the CEO and other executives. Many companies have compensation policies that only allow bonuses to be taken back under a very narrow set of circumstances. These are commonly referred to as “clawback policies.”

General Motors made a change in leadership at the beginning of 2014, which means that former executives left the company with presumably generous bonuses. They may have done so with full knowledge of the defective ignition switches and with the knowledge that it was no longer their problem.

A recent article in the New York Times suggests that executive misconduct may continue to be a major problem until or unless large companies expand their clawback policies. No longer should CEOs be allowed to get in a lifeboat and leave a ship which they were responsible for sinking, especially when the sinking ship resulted in the injuries and deaths of innocents.

Source: New York Times, “The Wallet as Ethics Enforcer,” Gretchen Morgenson, April 5, 2014