The Good Guy’s Dilemma

Corporate fraud is common. Every week brings a new discovery: Airbus, Boeing, Volkswagen, Theranos, Nissan, WeWork, Wells Fargo,… (See links at the bottom.) All of these frauds have one thing in common: insiders knew about the fraud for years before the story broke – yet no one blew the whistle. Thousands of corporate employees stayed silent about the crimes of their employers. Volkswagen’s officers and engineers knew the company designed cars to cheat on emissions test. That’s obvious. The cars didn’t design themselves. Wells Fargo’s officers knew the bank was opening millions of accounts for customers without their consent. The accounts didn’t open themselves. A few insiders committed these frauds, but many more learned about them after the fact. I think we should look at the preventing corporate fraud from the perspective of these knowledgeable, but otherwise innocent, insiders.  These executives are mostly good people. They studied in college. They rose to positions of responsibility based on merit. They’re competent. They participate in their communities. They love their kids.  They want to do the right thing. They’re “good guys.”  The good guys at each of these companies could have blown the whistle. But they didn’t. Why not? 

The “good guys” were put in a dilemma: who to betray? If they blow the whistle, the company will be investigated. This would betray their employer and coworkers. And it might end their career which would betray their families. Goodbye private schools and nice vacations. If they stay silent, however, they compromise their integrity and most likely break the law. Laws, like the US Sarbanes Oxley (SOX) law, criminalize covering up corporate crimes. Every quarter, executives are required to sign, under penalty of perjury, an attestation that they know of no corporate crimes. This means that if the good guys don’t report the crime, over time, the crime becomes their crime even though they had no part in the original fraud. The executive has to decide who to let down: his coworkers and family or his conscience and society?  

 Let’s focus on an example: In 2005, Walmart US received a whistleblower report that Walmart officials were bribing government officials in Mexico to facilitate opening stores - including a location in Cancun.*  Thirty senior Walmart officers learned of this crime.  If you were one of those US executives, would you report it? Would you sign the SOX form saying there are no FCPA violations or would you refuse to sign? Would you resign? Would you report the crime to the SEC or the press?   

 In determining the correct behavior, it makes sense to look at who will be hurt and helped by alternate actions. What good would come from blowing the whistle versus who would be hurt by staying silent?  The victims of the original fraud were the Mexican people, environmentalists concerned about uncontrolled growth on the Yucatan, and Walmart’s competitors in Cancun. But by the time the US executives learned about the issue, the damage was done.  Blowing the whistle wouldn’t remedy the problem.  The store was built. The environmental damage was done. On the other hand, blowing the whistle would lead to a criminal investigation and fines for the company. People, including the whistleblower, would likely be fired. Blowing the whistle would do no direct good, and it would do some harm.  But the correct answer cannot be to lie and break the law; can it?

 Before deciding what the Walmart executives should have done, let’s look at an ethical quandary with much higher stakes. In 1967, US Secretary of Defense, Robert McNamara, knew the US could not win the Vietnam war. (See quote below.) At the time, 300,000 people had been killed in the war including 15,000 US soldiers. 700 to 1,000 US soldiers were dying every month. Additional deaths were unnecessary, and McNamara knew it. He wrote several memos to President Johnson (LBJ) saying so. LBJ ignored him. McNamara abstained from LBJ’s media campaigns to convince the population the US was winning, but McNamara did not go public with what he knew. Instead, in 1968, McNamara resigned as Secretary of Defense and took the job as President of the World Bank. The US continued to fight the war. Seven years later, when the war ended in 1975, the death toll exceeded 1.5 million including 58,000 US soldiers. Imagine how many lives McNamara would have been saved if he had “blown the whistle” and gone public with the truth - if he had simply told the US population the truth. Of course, he would probably have been arrested – possibly for treason. But he would have saved hundreds of thousands of lives - including tens of thousands of innocent Vietnamese children. What a burden McNamara must have had. To know and not to be able to tell when telling would stop the useless slaughter of innocents. Imagine your local elementary school. Now imagine a foreign force is going to kill every child in that school based on a lie. How painful it must have been for McNamara to resign and stay silent.  

 If a man like Robert McNamara, the former president of the Ford Motor Company, could decide to stay silent with those stakes, we can all understand the Walmart executives’ decision to stay silent – which is what they did. They stayed silent. The filed their SOX forms without disclosing the crime. They committed a small crime to cover up a larger one. What a burden that must have been. They knew they were committing a crime. But they needed to protect their companies’ and their families’ wellbeing. They sacrificed their integrity. There was solace. They were promoted to senior jobs at Walmart or Walmart’s vendors. They retained the mantle of global business leader. They got rich.   But they already had those things. They had to give up something valuable to keep them.

McNamara and the Walmart insider’s dilemmas are of the same type. They were both placed in a position where they had to decide who to betray. McNamara would have had to commit treason to save the lives of thousands of innocent children.  He didn't. The Walmart insiders would have had to abandon their life’s work to obey a law that wasn’t enforced (Sarbanes Oxley).   They didn't.

 So how do we solve the dilemma? We need to remove the conflict between doing the right thing for the company and obeying the law. I believe the answer is robust whistleblower programs. If companies know they can’t keep secrets, they will instruct their executives to comply with the law. If McNamara had leaked the Pentagon Papers – or if LBJ and Nixon knew McNamara was going to leak the Pentagon Papers, the Vietnam War would have ended sooner. The executives at Walmart didn’t want to break the law, yet all thirty of them had to personally break US federal law over many years to keep the company’s bribery campaign in Mexico, India, China and Brazil a secret. Good guys shouldn’t be placed in that dilemma. For society it’s a game theory problem. If we can solve the “good guy’s dilemma” by changing the risk reward landscape of blowing the whistle, companies will learn they cannot keep corporate fraud secret, and they will stop trying. Corporate fraud will plummet. Companies should make it safe for good people to tell the truth, and we will all benefit - including the companies.   

 Corporate frauds: 

• Big ones: https://en.wikipedia.org/wiki/List_of_corporate_collapses_and_scandals  
• Current ones:   https://observer.com/2019/10/corporate-scandals-demand-accountability-c-suite/  
• Top ten tax for 2019: https://constantinecannon.com/2020/01/17/top-ten-tax-actions-2019/ 

This excerpt from McNamara’s Nov 1, 1967 memo to LBJ makes it clear McNamara knew the US could not win the war: 

“Nor is there any reason to believe that the steady progress we are likely to make, the continued infliction of grievous casualties, or the heavy punishment of air bombardment will suffice to break the will of the North Vietnamese and the Viet Cong to continue to fight. Nothing can be expected to break this will other than the conviction that they cannot succeed. This conviction will not be created unless and until they come to the conclusion that the US is prepared to remain in Vietnam for whatever period of time is necessary to assure the independent choice of the South Vietnamese people. The enemy cannot be expected to arrive at that conclusion in advance of the American public. And the American public, frustrated by the slow rate of progress, fearing continued escalation, and doubting that all approaches to peace have been sincerely probed, does not give the appearance of having the will to persist. As the months go by, there will be both increasing pressure for widening the war and continued loss of support for American participation in the struggle. There will be increasing calls for American withdrawal. 

There is, in my opinion, a very real question whether under these circumstances it will be possible to maintain our efforts in South Vietnam for the time necessary to accomplish our objectives there.” 

• https://history.state.gov/historicaldocuments/frus1964-68v05/d177 

* According to the New York Times and the SEC, Walmart paid bribes in Mexico, China, India and Brazil over a multi-year period.  https://www.nytimes.com/2012/04/22/business/at-wal-mart-in-mexico-a-bribe-inquiry-silenced.html  https://www.sec.gov/news/press-release/2019-102 Walmart settled the matter with a fine of $282M to the SEC and DOJ in 2019 after paying its lawyers $1B.  https://www.nytimes.com/2019/06/20/business/walmart-bribery-settlement.html Walmart paid a billion dollars in legal fees for this matter because it had to cover the legal bills of the thirty senior employees who knew about the crime.   What an immense waste of resources!