07/10/2013 03:50 EDT | Updated 09/09/2013 05:12 EDT

The Lac-Mégantic Rail Disaster is a Corporate Crime

The Lac Megantic rail disaster is a terrible tragedy for the many who suffered loss. It is also an object lesson in why industries dominated by large corporations cannot be trusted to regulate themselves -- not even when there is nominal oversight by government, as is the case under Canada's Railway Safety Act which was passed during the deregulatory fad of the 1980s.

Corporations, when they grow large, go public, and take on professional management teams, devolve from being human institutions governed at least in part by genuine ethical constraints, into machine-like entities that are devoid of moral sensibility. Social responsibility comes to mean compliance with law and regulation.

Where small, family-owned business or partnerships are concerned, social constraints on behaviour, along with personal ethical principles, can be counted on to curb anti-social behaviour. And in markets dominated by such small to medium-sized firms, the harsh dynamics of competition provide an effective tool for meting out punishment on firms whose behaviour falls outside socially accepted boundaries. Customer bases are small enough that if even a small proportion switch to a competitor, the effect can be devastating on the offending firm.

But in continent-wide or even global markets that are dominated by a handful of enormous corporate entities (and that includes most important markets these days, from transportation and communication to agriculture and entertainment), neither of these constraint systems work.

Competition is no longer an effective disciplinarian simply because the market is controlled not by consumers, but by suppliers. On this scale, corporations have the power to shape markets to their own needs, and to control their nominal regulators. The economists' word for this is oligopoly.

Nor can human moral sensibilities and societal codes of behaviour be brought effectively into play. The design and function of these corporate entities, which I call cyber-corporations, is such that the focus at every level of operation is on maximizing short-term shareholder value, which is measured in terms of profit. If there is a conflict between profit and ethics, profit rules.

These conflicts are typically analyzed within the corporation in terms of cost-benefit analyses. Costs, in terms of potential lawsuits and regulatory penalties, along with the potential losses from bad publicity and the resultant consumer response, are carefully calculated and weighed against the costs of doing what an individual would term "the right thing" -- pursuing the ethically sound course of action.

Also sure to be considered in the analysis is the degree to which costs associated with risks-gone-wrong are likely to be distributed between the corporation itself, and the wider community of taxpayers. For example, to what degree are the costs of environmental damage likely to be assigned to the polluter, rather than being absorbed by government?

In these calculations, ethics is not a consideration. What is being examined is fiduciary prudence: what is the best course of action in terms of maintaining shareholder value? In behaving this way, corporations are merely operating according to their century-old design specifications. Modern business corporations were created to be perfectly rational economic agents, acting always out of self-interest.

As completely self-interested machine entities, corporations view risk differently than people do. People see risk in terms of the hazard a product or a practice may pose to the health, safety, and security of themselves, their families, and their communities. For the corporation, risk is assessed in terms of potential damage to the bottom line. Risk-taking is acceptable -- and even to be encouraged -- up to the point where the potential for financial loss reduces the promise of increased profit to zero. As we have seen over and over again, in industry after industry from petroleum to agribusiness to pharmaceuticals to automobiles, this includes risk to human life and wellbeing.

In jurisdictions where this absence of ethical sensibility is recognized as a problem inherent in big corporations, governments step in with tightly-enforced regulations and significant penalties for breaking them, which re-balances the corporate cost-benefit analysis, encouraging greater prudence and better social outcomes.

But in Canada, railway regulation has been progressively weakened, rather than strengthened, during both the Harper administration and previous Liberal governments.

The railway industry, despite astronomical growth in the shipment of crude oil by rail over the past few years, has calculated that the added profit to be gained by keeping personnel costs to a bare minimum, and putting off equipment upgrades and rail-bed maintenance as long as possible, is greater than the potential cost of any likely accident.

Their calculations apparently did not take into account the potential for an accident in the scale of the Lac Megantic disaster. Oops. Whether the eventual cost of regulatory sanctions and lawsuits will be high enough to provide a real deterrent in future remains to be seen. A move to re-regulation, as necessary as it may be, is probably out of the question before another federal election.

Wade Rowland is author of Greed, Inc.: Why Corporations Rule Our World, and Saving the CBC: Balancing Profit and Public Service. He is associate professor in the Department of Communication Studies at York University.

Lac-Megantic Explosions, Fire