Monday, April 19, 2010

Reputation Tarnished; Not Good Enough for Headhunters

Toyota today agreed to pay more than $16 million in penalties because of the faulty gas pedal fiasco, representing the

Although it sounds good to stick it to a company that has hurt its customers, an investigation and penalty like this (a favorite pastime of headhunters like Henry Waxman) is a redundant penalty unnecessary to keeping companies honest and consumers protected in a free market.

Why? Reputation. Toyota has already lost millions in sales from its tarnished reputation. It has lost the faith of its consumer base, and millions of people in the next few years will think twice before buying a Toyota, which is a much larger cost than any arbitrary penalty anti-business congressmen can think up.

As economist John Lott puts it in his book Freedomnomics:
"...future profits are what a firm stands to lose if it cheats its customers. The potential loss of profits stemming from the loss of a good reputation helps keep businesses honest. This holds true so long as a business is concerned with its future profits."
How many moms out there do you think will be buying a Toyota any time soon?

To get a little more conspiratorial, it's interesting to note that General Motors (Government Motors) is more than 50% owned by the government, so perhaps the government is simply trying to kick the legs out of its non-union worker automaker competition?


caheidelberger said...

If I do something that kills people and destroys property, you'll be clamoring for my head. You won't consider my "damaged reputation" as sufficient punishment to keep me out of jail. But let a corporation commit such malfeasance, and you're quick to defend their ability to pay a relatively small fine and go on with their corporate life without further infringement on their liberty.

By the way, GM won't be government owned for long. They're planning to repay their bailout early.

Brandon said...

If you intentionally kill people or damage property, that's not necessarily in your best interest. You may have the short term gain of taking someone's money, etc., but the long term costs are jail time.

Likewise, companies don't necessarily face jail time or fines, but they do face huge losses or even insolvency if they knowingly betray their customers. They do not intentionally hurt customers--as in your example, if you accidentally destroy property or kill someone, the penalties are minimal.

This is one of the first commercials Toyota put out after the recent issues, trying to get back customers and trust, and I don't think the government forced them to issue this commercial:

Brandon said...

I did see that they are paying back their bailout, plus interest...just goes to show they don't want the government running (ruining?) the show