Product liability, moral hazard and compliance and ethics officers

Yesterday the New York Times reported that at the opening day of a trial last week in a law suit against Johnson & Johnson the plaintiffs “introduced  evidence [that] executives knew years before they recalled a troubled artificial hip in 2010 that it had a critical design flaw, but the company concealed that information from physicians and patients… .”  While obviously only one side of what is likely a very complicated issue, this story provides a fitting occasion to return to our exploration of moral hazard.

As described in several earlier postings,  moral hazard refers to situations where the interests/incentives of an individual in a position to take risk differ from those of individuals/entities who will bear the consequences of the risk taking in question.  Moral hazard issues are – despite its name – not necessarily ethics related, but they certainly can be.

While a moral hazard analysis in the product liability setting would typically entail looking at the allocation of risks as between the producer and consumers of a good (e.g. this paper on aviation safety risks)  there is another dimension to it, at least for publicly traded  companies. That is, the managers of an organization (who often can create or reduce risk) might have different (i.e., more short-term) interests than do the owners of the company (the shareholders) when it comes to deciding whether to disclose a product safety issue.  An early disclosure might imperil the managers’ compensation, but presumably the shareholders would prefer that alternative to a later but far costlier disclosure.

I’m not suggesting that this was at issue in the J&J case. However, I do have a pretty good sense – from having been in the C&E field for more than two decades –  that in a great many organizations  C&E officers are often not involved either in critical decisions concerning their companies’ products/services or in responding to crises.   A moral hazard analysis suggests that they should be.

(For further somewhat related reading, here is a post on C&E officer compensation/incentives  and here is a story from the mid-1990’s   about how a member of a company’s ethics committee took public his grievances concerning the company’s response to a product safety issue.)