Cost-Benefit Analysis

Historically, corporate executives regularly deploy cost-benefit analyses that weight the potential cost of civil lawsuits or fines for criminal convictions against the cost of recalls or other safety measures.⁵¹ Fines are tax-deductible as a cost of doing business. Director of Automotive Safety for Ford, J.C. Echold, released the

cost-benefit analysis study entitled “Fatalities Associated with Crash-Induced Fuel Leakage and Fires.” The cost-benefit analysis was meant to determine if it would be

49 Mark Dowie, “Pinto Madness,” Mother Jones, Sept/Oct, 1977.

50 Hoffman, W. Michael, 1982.

51 Milchen, Jeff and Power, Jonathan. “Why Is Killing for Capital not a Capital Crime?”

http://www.reclaimdemocracy.org/corporate_accountability/ford_firestone_manslaughter.html

more costly to change the Pinto design or pay damages to compensate burn victims.

This report “apparently convinced Ford and was intended to convince the federal government that a technological improvement costing $11 per car which would have prevented gas tanks from rupturing so easily was not cost-effective for society”

(Hoffman 1982). Mark Dowie, general manager of Mother Jones Magazine, in an article entitled “Pinto Madness” noted that Ford was aware of the problem:

Ford knows that the Pinto is a firetrap, yet it has paid out millions to settle damage suits out of court, and it is prepared to spend millions more lobbying against safety standards. With a half million cars rolling off the assembly lines each year, Pinto is the biggest-selling subcompact in America, and the

company’s operating profit on the car is fa ntastic. Finally, in 1977, new Pinto models have incorporated a few minor alterations necessary to meet that federal standard Ford managed to hold off for eight years.⁵²

Ford waited eight years because of its internal “cost-benefit analysis,” which places a dollar value on human life, said it wasn’t profitable to make the changes sooner.

According to Ford’s estimates in its “cost-benefit analysis ” the unsafe tanks would cause approximately 180 burn deaths, 180 serious burn injuries, and 2,100 burned vehicles each year. It calculated that Ford would have to pay $200,000 per death,

$67,000 per injury, and $700 per vehicle, for a total of $ 49.5 million. (a more detailed table analysis appears on the following page). The cost of saving lives and injuries would cost the company much more: alterations would cost $11 per car or truck, which added up to $137 million per year.

Some internal documents showed that Ford knew as early as 1971 that the gas tank of the Pinto ruptured at impacts of 20 mph. Business ethicist Richard De George claimed that grounds for recklessness are made even stronger by the fact that Ford did not give the consumer a choice to make the Pinto gas tank safer by installing

52 Mark Dowie, “Pinto Madness,” Mother Jones, Sept/Oct, 1977, pp18 and 19. Subsequently Mike Wallace for “Sixty Minutes ” and Sylvia Chase for “20-20” came out with similar exposes.

a rubber bladder for a rather modest fee (Case Studies in Business Ethics, Thomas Donaldson, Case-Study The Ford Pinto by W. Michael Hoffman). Ford made the worst decision possible by placing a price on a human life for the purpose of a cost-benefit analysis.

Benefits

NHTSA (National Highway Traffic Safety Administration )study – broke down the estimated social costs of a death as follows:

Component 1971 COSTS

Insurance Administration $ 4,700

Legal and Court $ 3,000

Cost-Benefit Analysis is sited from Case Study- The Ford Pinto by W. Michael Hoffman

Table 1: Cost – Benefit Analysis

6.3 Ford Pinto Multiple Mistakes

The mistakes Ford Pinto had made had caused death and scared many families.

Unlike the previous two cases, Ford Pinto’s mistakes involved safety issues in the automobiles.

Mistake 1. Rushed into production

² During the early 1960s, Ford's market position was severely eroded by competition from domestic and foreign subcompacts, especially from

Volkswagen and the Japanese auto makers. Lee Iacocca, president of Ford, was determined to regain Ford's market share by introducing a new

subcompact, the Pinto, by 1970. Ex-Ford President Semon Knudsen argued that Ford should remain focused on medium and large models, which were showing strong sales. However, other officers disagreed.

Thus, the creation of the Ford Pinto.

M 1 M 2 M 3 M 4 M 5

M1: rushed into production M3: faulty design

M5: lack of morality and integrity

M2: problematic corporate culture

M4: cost-benefit analysis table

Figure 7: Chain of Crisis Development for Ford Source: This Research

² Unusually short development time for a new car model. The normal time span from conception to production of a new car model is about 43 months.

The Pinto schedule was set to commence production in under 25 months.

² Top management refused to change faulty tooling because it would add more time and cost to reduction of the automobile. Tooling has a fixed time frame of about 18 months. However, Lee Iacocca ordered Ford engineers to speed up production of the Pinto, so tooling was placed on the same time schedule as product development. It goes without saying that auto companies should wait until most important design processes are completed before beginning tooling procedures. In the case of the Pinto, by the time crash tests revealed a serious defect in the gas tank, tooling had already been completed.

According to documents from Ford’s research and development division the product objectives for the Pinto included:

1. True Subcompact l Subcompact Size l Subcompact Weight 2. Low Cost of Ownership

l Low Initial Price l Low Fuel Consumption l Reliabile

l Simplified Serviceability

3. Clear Product Superiority l Appearance

l Comfort l Features

l Ride and Handling l Performance

In the above list of product objectives, safety was nowhere to be found. One Ford engineer, when interviewed by Mark Dowie of Mother Jones Magazine, said, “this company is run by salesmen, not engineers, so the priority is styling, not safety. ”

Mistake 2. Employees were reluctant to speak up because of Ford’s problematic corporate culture. Engineers know that Lee Iacocca would not be willing to address the Pinto safety problems. No action that might delay production was taken.

² Hiring Lee Iacocca from General Motors was a major mistake made by Ford. At one management meeting, Iacocca reportedly said, that safety

“doesn’t sell. ”

² Iacocca took no action when Ford engineers discovered the faulty design.

² More than eight years after war with the rupture fuel gas tank, Ford

successfully lobbied, with extraordinary vigor and even blatant lies, against

“Standard 301”, a key government safety standard that would have forced the company to modify the Pinto’s fire-prone gas tank. Analysts have noted that most of the serious injuries sustained in Pinto crashes would not have occurred if the vehicle had not exploded into flames.

Mistake 3. Faulty design. Due to the first mistake of limiting production time, production was rushed. Employees, specifically engineers, were afraid to speak up about problems with the design knowing that top management would take no action that might delay production. No corrective action was taken to minimize or avoid the mistakes.

² Ford engineers discovered in pre-production crash tests that the Pinto’s fuel tank system extremely susceptible to rupture in rear end collisions.

Engineers reported this problem to top management, but were told safety wasn’t the main issues to be concerned.

² Because assembly-line machinery was already tooled by the time engineers found that the “rupture-prone fuel tank ” could cause dangerous explosions, top Ford management decided to continue production even though Ford owned a patent on a much safer gas tank.

² One of the overriding goals set by Iacocca was “the limits of 2,000.” The Pinto was not to weight an ounce over 2,000 pounds, and not to cost a cent over $2,000.

Mistake 4: Ford’s cost-benefit analysis placed a dollar value on a human life

² The cost- benefit analysis table shown on page 45 showed the total cost per human life to beUS$200,725. Based on this figure, Ford decided that they would rather pay for insurance and medical care, than make the ethical decision to recall the Pinto. Hence, the chain of mistakes continued.

Mistake 5: Lack of morality and integrity. If Ford managers believed that their own family members might be exposed to danger by driving the Pinto. Perhaps, the first mistake would have been corrected.

² One confidential internal document obtained by Mother Jones Magazine showed that Ford had run some tests on the gas tank. The document stated that crash fires could be largely prevented for considerably less than $11 a

car. The cheapest method was to place a heavy rubber bladder inside the gas tank to keep the fuel from spilling if the gas tank shattered.

² If morality and integrity had been a priority for Ford, the horrible death and disfigurement of Pinto crash victims could have been prevented..

On June 9, 1978, Ford finally stopped the chain of mistakes by announcing a recall on 1.5 million Ford Pintos and 30,000 Mercury Bobcat sedan and hatchback models for fuel tank design defects which made the vehicles susceptible to fire in moderate-speed rear end collisions.⁵³ Yet, even at that stage, Ford was still

unwilling to admit to the defect in the design of the Pinto. Ford sent letters to inform Pinto owners that, although the Pinto was no t defective, Ford was willing to provide an “optional shield kit to enhance the rear-collision performance” of the vehicle.”⁵⁴

53 “Disasters of the Ford Pinto” http://www.fordpinto.com/blowup3.htm

54 Ford ’s letter to the car owner.. September 2005 Attached as on page XX Table5???

Chapter 7. Lessons Learned from the Study

The three cases discussed in the previous chapters are telling us to cut off the chain of mistakes as early as possible. If the corrective actions weren’t taken on time, the problems will be catastrophic. Of the three cases discussed, the best example of dealing effectively with a crisis is Dynegy. Even though Dynegy was fined US$3 million by not assisting with the initial SEC investigation, Dynegy wisely cooperated with the SEC during the subsequent full investigation. Dynegy accepted the responsibility to confront the problems and solve the difficult situation at hand.

Whereas top Enron executives enjoyed bonuses and perks for themselves while leaving an enormous debt to investors, shareholders, employees, or anyone financially related to Enron, Dynegy shouldered the problem and tried to find solutions.

Even though Enron and Dynegy are two very similar energy companies, the final outcome of each company’s scandal differed dramatically. Enron once dominated the energy trading industry and used its success to influence lawmakers to enact regulations in its favor. Most of Enron’s attorneys received political donations as well. Due to the Enron’s complete failure to break the chain of multiple mistakes, the company was forced into bankruptcy. As for the Ford Pinto, one of Ford Motor Company’s major mistakes was its willingness to make a business decision to continue production of an unsafe product after placing a dollar value on a human life for the purpose of a cost-benefit analysis. This case stands as one of the most egregious examples of unethical conduct by a major corporatio n. Despite the rush to production, which was the first mistake in the chain, and the faulty design, Ford still had time to correct the unsafe gas tank. If Ford had recalled the automobiles to correct the problem, thousands of human lives could have being saved.

The following table shows the major mistakes made in the Enron, Dynegy, and Ford cases.

Table 2: Table of Mistakes

Enron Dynegy Ford

Problem 1 Arrogant belief that Enron was invincible.

Problem 3 Willingness to disregard the law.

Problem 4 Filing knowingly false financial information to Problem 6 Lack of corporate

governance

Source: This Research

Chapter 8. Conclusion

In the three cases discussed above, Enron, Dynegy, and the Ford Pinto, top management had taken corrective action too late, either because they were unaware of the significance of the situation or they did not know the consequences of their actions.

Failure to correct the mistakes at early stages eventually led to additional mistakes, thus starting the sequence of mistakes that led to a crisis. Each of the mistakes started from an initial problem that built on itself until a full blown corporate scandal emerged.

If Enron’s and Dynegy’s board or auditing firms had diligently tracked the company’s financial management, problems would not have grown unmanageable.

Enron’s case came to a close on May 25, 2006, when a federal jury convicted former Enron CEO Kenneth Lay and former president Jeffrey Skilling of conspiracy and fraud charges. Lay and Skilling were convicted of conspiring to perpetrate a massive fraud through repeated lies about Enron’s financial strength. [Two lives were lost in Enron’s top management as the result of the scandal; J. Clifford Baxter had committed suicide in early 2002, while Kenneth Lay had heart attack on July 5^th, 2006.

Both Enron and Dynegy can be summed up as cases of failed corporate

governance, accounting abuse, and outright greed. Investors in both companies were repeatedly misled by false corporate filings and financial data indicating present and future profitability. Both corporations released false financial information with the intent to mislead the general public. Most of the employees in Enron had invested their life savings in company stock, and ultimately ended up with nothing.

Enron is perhaps one of the biggest corporate scandals in the U.S. business

history. Arthur Anderson, once one of the Big Five accounting firms performing auditing, tax, and consulting services for large blue chip companies, agreed to surrender its Certified Public Accountants license. Its reputation was ruined and considered unsalvageable.⁵⁵ Although not discussed in detail herein, Arthur Anderson also suffered from multiple chains of serious mistakes, including the willingness to participate in fraudulent activity.

The Ford Pinto can be described as the most notorious example of a corporation willfully marketing a product known to be dangerous.⁵⁶ If Ford had enough business morality to insist on building a safer automobile, or if top management had acted properly by making the recalls earlier, thousands of innocent victims would have been saved from horrible death or disfigurement. Ford is probably not the only company in history to have placed a cost an a human life for the purpose of a cost-benefit analysis, but Ford might just be the only company careless enough to let such an embarrassing and cold calculation slip into the public record.⁵⁷

Ford knowingly produced and sold millions of defective Pintos. The design of the gas tank was inferior and dangerous to human life. Yet, the value of lives that would be lost was considered to be outweighed by the cost of a recall. Ford’s estimated value of a human life was US$20,000 per human being. Not until after all of the tragic accidents, the ensuing civil and criminal product liability trials over the issue of product safety, and the negative publicity did Ford finally make the decision to recall the Pinto. “Such is the mentality and the morality of profit-seeking

enterprises.”⁵⁸ Although the company finally compensated victims of Pinto accidents, Ford’s incredibly cold cost benefit analysis is more likely to be

55 http://en.wikipedia.org/wiki/Arthur_Andersen

56 Ermann, M. David, Lee, Matthew T. http://www.lib.jjay.cuny.edu/reserve/eco360/c713_1.html

57 Mark Dowie, Pinto Madness http://www.motherjones.com/news/features/1977/09/dowie.html

58 McGee, Business Ethics & Common sense 1992

remembered.

The three cases discussed above are similar in that they demonstrate the consequences of ignoring or allowing a sequence of mistakes to continue, whether due to an arrogant company culture or a business decision to maximize profit and/or minimize losses. In each case, the multiple chains of mistakes was not effectively managed or terminated.

References

Donaldson, T. (1984) Case Studies in Business Ethics

George Richard T. DE., (1995) Business Ethics, 4^th Edition, Pretice Hall, Englewood Cliffs, New Jersey.

Hage, J., (1988) Futures of Organizations: Innovating to Adapt Strategy and Human Resources to rapid Technological change.

Harrigan, K. R., (1985) Strategic Flexibility: A Management guide for changing times.

Hartman, L. P., (2002) Perspectives in Business Ethics., 2^nd Edition. McGraw-Hill Higher Education

Hurst, N. E. (200)4. Corporate Ethics, Governance and Social Responsibility:

Comparing European Business Practices to those in the United States.

McGee, R W. (1992) Business Ethics and common Sense. Quorum Books Mitroff, I. I. and M. C. Alpaslan: (2003), “Preparing for Evil”, Harvard Business Review 81(4), 109-115.

Mitroff, I. I., P. Shrivastava and F.E. Udwadia: (1987), “Effective Crisis Management”, The Academy of Management Executive 1(4), 283-293.

Mittelsatdt, R. R. (2005), “Will Your Next Mistake Be Fatal? Avoiding the Chain of Mistakes That Can Destroy. ” Wharton School Publishing.

Paine, L. S (1997), “Cases in Leadership, Ethics, and Organizational Integrity: A Strategic Perspective.” Irwin/McGraw-Hill.

Pearson, C. M. and A. C. Judith (1998), “Reframing Crisis Management ”, Academy of Management Review 23(1), 59-76.

Post, J. E., Lawrence, Anne T., Weber., James (1999) Business and Society: Corporate

Strategy, Public Policy, Ethics, 9^th Edition., Irwin/McGraw-Hill.

Schwartz, P. (2000), “When Good Companies Do Bad Things”, Strategy and Leadership 28 (3):4-11

Simola, S. (2003), “Ethics of Justice and Care in Corporate Crisis Management”, Journal of Business Ethics 46(4), 351-361

Synder, R., M. Hall., J. Robertson, T. Jasinski., and J. S. Miller (2006), “Ethical Rationality: A Strategic Approach to Organizational Crisis”, Journal of Business Ethics 63: 371-383.

Weick, K. E. (1988), “Enacted Sensemaking In Crisis Situations”, Journal of Management Studies 25(4): 305-318.