Is it Ethical if it is Legal?

In her book The Seven Signs of Ethical Collapse Marianne Jennings analyzes the indicators of possible ethical collapse in companies and provides advice how to avoid impending disaster. She starts with a description of ethical collapse saying it "occurs when any organization has drifted from the basic principles of right and wrong." She points out that "not all companies that have drifted ethically have violated any laws." According to Jennings, "When an organization collapses ethically, it means that those in the organization have drifted into rationalizations and legalisms, and all for the purpose of getting the results they want and need at almost any cost." I agree because there is a difference between following the law and being ethical in business. A good example is how Toyota mishandled its problems with the shift gears on its 2002 Lexus sedan.  It has been ten years since the incident and a good time to look back at the ethical failings at Toyota.

Five months before the new 2002 Lexus ES hit showroom floors, the company's U.S. engineers sent a test report to Toyota City in Japan: The luxury sedan shifted gears so roughly that it was "not acceptable for production."

The warning was sent to Toyota Executive Vice President Katsuaki Watanabe on May 16, 2001. Days later, another Japanese executive sent an e-mail to top managers saying that despite misgivings among U.S. officials, the 2002 Lexus was "marginally acceptable for production." The new ES went on sale across the nation on October 1, 2001.

In years to come, thousands of Lexus buyers would discover firsthand that the vehicle's transmission problems, which caused it to hesitate when motorists hit the gas, or lurch forward unintentionally, were far from fixed.

The 2002-2006 ES models would become the target of lawsuits, federal safety investigations and hundreds of consumer complaints, including claims of 49 injuries. Toyota was fined a record $16.4 million for delays in notifying federal safety officials about defects that could lead to sudden acceleration.

Internal Toyota records reviewed by the L.A. Times show that the automaker sought to cut costs by limiting the scope of repairs. "The objective will be to limit the number of vehicles to be serviced to those owners who complain, and to limit the per-vehicle cost," a Toyota staff attorney wrote in an August 15, 2005, memo explaining the automaker's legal defense strategy.

In statements to the Times, Toyota Motor Corp. officials said they followed industry practice for notifying customers about repairs. The documents released show that Toyota repeatedly tried to solve the lurching problem by modifying the car's computer software. But Toyota rationalized the problem by saying that the Lexus ES issues concerned "drivability" and were not related to the sudden-acceleration problems experienced in other vehicles.

In an August 3, 2005, e-mail to a superior, then-Toyota staff attorney Dimitrios Biller described a meeting he had with the then-head of Lexus in the U.S., Bob Carter, on whether to notify ES owners about a new software update. "Bob is opposed to the idea of sending such a letter out to all owners of all 2002 to 2005 ES 300 and ES 330 vehicles because a substantial majority of these people are satisfied with their vehicles," Biller wrote. "Once they become sensitized to the hesitation and/or lurching, they will become 'dissatisfied' Lexus owners."

Two weeks later, Biller wrote a memo indicating that Toyota's "objective will be to limit the number of vehicles to be serviced to those owners who complain, and to limit the per-vehicle cost."

Toyota sent the letter to the 3,000 customers "who have actually complained about the performance of the transmission" in their cars, the documents show. In its statement, Toyota said that issuing a technical service bulletin "versus direct notification to customers" is "commonplace for addressing issues such as this" and is a practice used by other manufacturers.

Notice all the rationalizations for unethical conduct offered up by Toyota. The company made the same mistake dozens before it had made, including the Ford Pinto in 1970 that is the classic example of ethical legalism taught in all business ethics classes. What Ford and Toyota failed to do was to admit the mistake right away instead of rationalizing its compliance with existing saftey standards and correct the problem. Of course, the Lexus is still a popular car and the Toyota brand does not seem any the worse off for its ethical crisis. Still, I have to wonder about the culture at a company that includes the following statement in its code of ethics while reacting to a crisis in the opposite fashion: “honor the language and spirit of the law.”