Business Ethics & Corporate Governance
Everyone agrees that business managers must understand finance and marketing. But is it necessary for them to study ethics? Managers who answer in the negative generally base their thinking on one of three rationales. They may simply say that they have no reason to be ethical. They see why they should make a profit, and most agree they should do so legally. But why should they be concerned about ethics, as long as they are making money and staying out of jail?
Other managers recognize that they should be ethical but identify their ethical duty with making a legal profit for the firm. They see no need to be ethical in any further sense, and therefore no need for any background beyond business and law.
A third group of managers' grant that ethical duty goes further than what is required by law. But they still insist that there is no point in studying ethics. Character is formed in childhood, not while reading a college text or sitting in class. These arguments are confused and mistaken on several levels. To see why, it is best to start with the question raised by the first one: why should business people be ethical?
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Business ethicsis a form ofapplied ethicsthat examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and business organizations as a whole. Applied ethics is a field of ethics that deals with ethical questions in many fields such as medical, technical, legal and business ethics.
In the increasingly conscience-focused marketplaces of the 21st century, the demand for more ethical business processes and actions is increasing. Simultaneously, pressure is applied on industry to improve business ethics through new public initiatives and laws. Businesses can often attain short-term gains by acting in an unethical fashion; however, such behaviors tend to undermine the economy over time.
Business ethics can be both anormativeand adescriptivediscipline. As a corporate practice and a career specialization, the field is primarily normative. In academia descriptive approaches are also taken. The range and quantity of business ethical issues reflects the degree to which business is perceived to be at odds with non-economic social values. Historically, interest in business ethics accelerated dramatically during the 1980s and 1990s, both within major corporations and within academia. For example, today most major corporate websites lay emphasis on commitment to promoting non-economic social values under a variety of headings. In some cases, corporations have redefined their core values in the light of business ethical considerations.
Ethical Issues in Finance:
Importance of Financial Statements:
In ethical reporting of finance, financial statements play an important role.
* The internal financial reporting has to be fair and honest.
* To run a business ethically, it is necessary to have trustworthy internal auditing system.
The steps that a company's management should take into account for true, fair and reliable management accounts are:
1. Determining the key elements of the business like the objectives of the firm and see how they are defined and measured.
2. Making sure that the funds are allocated to different activities on the basis of their importance.
3. Frame rules that have a positive effect on business activities. It is important to ensure that each project or department is allotted its fair share of funds and that the projected earnings of the project or the department are in accordance with the funds allocated to it.
Ethical Issues in mergers and acquisitions:
The job of the management is to maximize shareholder value, and n most cases, using mergers and acquisitions can help a company develop a competitive advantage and thereby increase shareholders value. At the same time mergers and acquisitions, buyouts and takeovers present several ethical challenges. They are said to destroy the increase unemployment. Takeovers are said to harm the interest of stakeholders as they reduce employment, and disrupt the organizations relationships with suppliers and customers.
Some of the specific aspects that it must take into consideration regarding the expectations of the stakeholders of the acquired company are:
Always on Time
Marked to Standard
* The intensity of the expectation
* What is the replacement for such expectations?
* The future economic impacts that a company can have by rejecting such expectations as the workers may not perform as expected.
* The impact of such a situation of the future stakeholders.
Takeovers & Buyouts:
* Hostile Takeovers : Takeovers are labeled hostile not because they are against the interest of the stakeholders, or because they are damaging. Hostile takeovers are those that elicit opposition from the boards or employees of the target company.
Some of the popular ways in which managements use to protect themselves from unruly predators are :
1. Poison Pills: It is an anti-takeover devices used by a company's management to make a takeovers prohibitively expensive for the bidders. The company under target changes the ‘Articles of Association' so that groups a shareholder have special rights, which are evoked by takeover.
2. Greenmail: It occurs where a potential takeover agents purchases stock in a company. After the purchases have totaled five percent, the agent must announce his intention to takeover the company, if that is the intent.
3. Golden Parachute: When a company is taken over, many top executives are likely to lose their jobs. So to discourage an unwanted takeover attempt, a company gives lucrative benefits to its top executives- these benefits are awarded to those executives who lose their jobs after a takeover.
4. Sandbag: This is a defensive strategy for warding off a hostile takeover. In this case management threatens that, in the events of a takeover, the entire management team will resign.
· Management Buyouts: Management buyouts occur when the management decides to bid for the company. When successful in the management buyout then can convert the company into a private company and at a later date, bring it back to market to make substantial profits.
Case 1: Madoff, Dreier and Ponzi Schemes:
What is a Ponzi Scheme? How Do Ponzi Schemes Work?
A Ponzi scheme is a scam investment designed to separate investors from their money. It is named after Charles Ponzi, who constructed one such scheme at the beginning of the 20th century, though the concept was well known prior to Ponzi.
The scheme is designed to convince the public to place their money into a fradulent investment. Once the scam artist feels that enough money has been collected, he disappears - taking all the money with him.
Five Key Elements of a Ponzi Scheme
1. The Benefit: A promise that the investment will achieve an above normal rate of return. The rate of return is often specified. The promised rate of return has to be high enough to be worthwhile to the investor but not so high as to be unbelievable.
2. The Setup: A relatively plausible explanation of how the investment can achieve these above normal rates of return. One often-used explanation is that the investor is skilled and/or has some inside information. Another possible explanation is that the investor has access to an investment opportunity not otherwise available to the general public.
3. Initial Credibility: The person running the scheme needs to be believable enough to convince the initial investors to leave their money with him.
4. Initial Investors Paid Off: For at least a few periods the investors need to make at least the promised rate of return - if not better.
5. Communicated Successes: Other investors need to hear about the payoffs, such that their numbers grow exponentially. At the very least more money needs to be coming in than is being paid back to investors.
Steps in the Ponzi Scheme
Ponzi Schemes are quite basic but can be extraordinarily powerful. The steps are as follows:
1. Convince a few investors to place money into the investment.
2. After the specified time return the investment money to the investors plus the specified interest rate or return.
3. Pointing to the historical success of the investment, convince more investors to place their money into the system. Typically the vast majority of the earlier investors will return. Why would they not? The system has been providing them with great benefits.
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4. Repeat steps 1 through 3 a number of times. During step 2 at one of the cycles, break the pattern. Instead of returning the investment money and paying the promised return, escape with the money and start a new life.
How Big Can Ponzi Schemes Get?
Into the billions of dollars. In 2008 we saw the fall of arguably the largest Ponzi scheme in history - Bernard L. Madoff Investment Securities LLC. The scheme had all the ingredients of a classic Ponzi scheme, including a founder, Bernard L. Madoff, that had a great deal of credibility as he had been in the investment business since 1960. Madoff had also been the chairman of the board of directors of NASDAQ, an American stock exchange. The estimated losses from the Ponzi scheme are in between34 and 50 billion U.S. dollars. The Madoff scheme collapsed; Madoff had told his sons that "clients had requested approximately $7 billion in redemptions, that he was struggling to obtain the liquidity necessary to meet those obligations."
Who is Bernard Madoff?
Bernard Madoff (Bernie) is a former Chairman of the NASDAQ stock exchange who started his own investment advisory firm. He pled guilty to defrauding investors in the amount of over $50 billion by running the largestPonzi schemeon record over at least two decades.
What did Bernard Madoff do?
In early December 2008, during the economic meltdown in the United States, Madoff could no longer honor his investor's cash requests. He finally had to come clean and admit what he had been doing. When he admitted to this Ponzi scheme, Wall Street and the world was knocked back on its heels. It was a massive investment fraud that had affected many people including high profile investors.
Who did Madoff defraud?
Madoff had such a good reputation in the financial community that many of his investor had their life savings invested with him. Some of Madoff's investors included a charitable organization funded by Steven Spielberg, actor Kevin Bacon, the owners of the New York Mets, and others. Some of Madoff's investors are actually out on the street, living out of cars and RV's.
What happened to Madoff?
He is awaiting trial in a high-security prison in Manhattan, NY. His trial is set for June 2009. Since he pled guilty, he is scheduled to be sentenced for 150 years in prison for securities fraud among other charges.
Protecting Yourself From Scams
The most at danger are new investors and seniors. Inexperienced investors are usually the most eager and open to taking risks, and scammers use that to their advantage. Many of their older counterparts have seen their life savings eviscerated and are desperately searching for an investment that will help recoup their losses.
While there are many different scams out there, nearly all can be avoided by following Rosenzweig's advice: “If it seems too good to be true, it could be a scam.” That's the guiding principal of many of the following tips from the Securities and Exchange Commission (SEC), he Better Business Bureau (BBB) and the Internal Revenue Service (IRS) to avoid being the victim of an investment scam
From the Better Business Bureau
• Buy only from licensed or credentialed financial professionals. Avoid buying investments from people who aren't licensed to sell stocks, bonds and mutual funds.
• Review your account statements: Make sure the name of the company cashing your check matches the name on your statements. If something seems incorrect, ask questions immediately. If questions aren't answered and complaints aren't addressed, notify authorities.
• Make sure you are buying registered investment products: Most legitimate products have to be registered with the SEC and with the state in which they are sold. Check these both out before you buy.
• Ignore spam e-mail: E-mail filters are already sending many of these spurious “investment opportunities” to your junk/spam folder. But that doesn't mean the ones that reach your inbox are legit. It's best to just avoid all of these, as many link to fake Web sites and blogs set up specifically to provide false information - and to separate you from your hard-earned savings.
• Never make an investment payable to the salesperson: Always make your payment to the investment company.
Rosenzweig, the Metro New York BBB president, says “I don't care what age you are, educate yourself about investments,” says the BBB's Rosenzweig. “Don't be afraid of it. I won't say it's easy, but there's enough info out there that's written for you and me - easy to digest and puts you in the position of control. Why not make good decisions?”
Case 2: Enron Corporation Case:
Introduction to Case :
Enron Corporationwas an Americanenergycompany based inHouston,Texas. Before itsbankruptcyin late 2001, Enron employed approximately 22,000and was one of the world's leading electricity, natural gas, pulp and paper, and communications companies, with claimed revenues of nearly $101 billion in 2000.Fortunenamed Enron "America's Most Innovative Company" for six consecutive years. At the end of 2001 it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively plannedaccounting fraud, known as the "Enron scandal". Enron has since become a popular symbol of willful corporate fraud and corruption. The scandal also brought into question the accounting practices of many corporations throughout the United States, resulted in the creation of theSarbanes-Oxley Actof 2002.
Enron filed forbankruptcyprotection in theSouthern District of New Yorkin late 2001 and selectedWeil, Gotshal & Mangesas its bankruptcy counsel. It emerged from bankruptcy in November 2004 after one of the biggest and most complex bankruptcy cases in U.S. history. On September 7, 2006, Enron soldPrisma Energy International Inc., its last remaining business, to Ashmore Energy International Ltd. Following the scandal, lawsuits against Enron's directors were notable because the directors settled the suits by paying very significant sums of money personally. The scandal also caused the dissolution of theArthur Andersenaccounting firm, affecting the wider business world.
In early 2007, Enron changed its name to Enron Creditors Recovery Corporation, reflecting its status as a predominantly asset-less shell corporation. Its current goal is to liquidate all remaining assets of the company. For most of 2007, Enron continued to operate under the name Enron Corp. by filing aDoing Business As, or "dba" certificate inHarris County, Texas.
TheEnron scandal, revealed in October 2001, involved theenergycompanyEnronand theaccounting,auditing, andconsultancypartnership ofArthur Andersen. Thecorporate scandaleventually led to Enron's downfall, resulting in the largestbankruptcyin American history at the time. Arthur Andersen, which was one of thefive largestaccounting firms in the world, was dissolved.
Enron was formed in 1985 byKenneth Layafter mergingHouston Natural GasandInter North. Several years later, whenJeffrey Skillingwas hired, he developed a staff of executives that, through the use of accounting loopholes,special purpose entities, and poor financial reporting, were able to hide billions in debt from failed deals and projects. Chief Financial OfficerAndrew Fastowand other executives were able to mislead Enron's board of directors and audit committee of high-risk accounting issues as well as pressure Andersen to ignore the issues.
Enron'sstock price, which hit a high ofUS$90 per share in mid-2000, caused shareholders to lose nearly $11 billion when it plummeted to less than a $1 by the end of November 2001. TheU.S. Securities and Exchange Commission(SEC) began an investigation, andDynegyoffered to purchase the company at afire saleprice. When the deal fell through, Enron filed forbankruptcyon December 2, 2001 underChapter 11of the United States Bankruptcy Code, and with assets of $63.4 billion, it was the largest corporate bankruptcy in U.S. history untilWorldCom's 2002 bankruptcy.Enron's auditor, Arthur Andersen, was found guilty in a state court, but by the time the ruling was overturned at theU.S. Supreme Court, the firm had lost the majority of its customers and had shut down.
In the aftermath of the scandal, many executives at Enron were indicted for a variety of charges and were later sentenced to prison. Employees and shareholders received limited returns in lawsuits, despite losing billions in pensions and stock prices. In 2002, theSarbanes-Oxley Actwas passed as a result of the first admissions of fraudulent behavior made by Enron. The act expanded criminal penalties for destroying, altering, or fabricating records in federal investigations or for any attempt to defraud shareholders.
The near collapse of our economic system really began sometime back with the financial failure of firms like Enron. TheEnron Corporationwas a huge energy company that went bankrupt in 2001. It employed 22,000 people and had innumerable shareholders. It collapsed due to an accounting scandal, or “cooking the books,” perpetuated by its own auditing firm, Arthur Andersen, one of the premier accounting firms in the U.S., which also collapsed. Tens of thousands of employees were left without a job and more shareholders were left with a retirement portfolio full of worthless Enron stock.
Enron was the country's largest bankruptcy until 2008 andLehman Brothers, a huge Wall Street financial services firm. Lehman went under primarily due to the subprime mortgages it made during the 1990s and the early 21th century. The bankruptcy of Lehman Brothers began a domino effect on Wall Street. In order to prevent massive financial firm failures, the Bush Administration put together a huge financial bailout, called TARP, to save most of the other large Wall Street banks.
Since the fall of 2008, we have had many financial firm failures, and failures in other business sectors. Failures have not been confined to large businesses. Small business has had its share of failures, primarily due to the economic recession that resulted from the collapse of Wall Street andthe credit crisisthat resulted.
The only way for capitalism to truly prosper is for every business, large business and small business alike, to subscribe to a doctrine of financial and business ethics. If business tries to take shortcuts to profits, they will fail in the long run as we've seen during the early part of the 21st century. Small business plays a crucial role in the American economy. It can make the difference between success and failure of our economy and financial system.
Findings and Conclusion:
Ethics are making a comeback. To begin with, more and more corporations and businessmen and woman are now realizing that ethics aren't checked at the door when entering the workplace. Ethics have every bit as much a place in the public as they do the private. How is it there should be separate sets of ethics, depending upon whether it is your personal life or your work life? The answer is that there shouldn't be a separate set and in light of recent events that we see on our television sets as of late, more and more companies are realizing this fact.
Some companies are incorporating ethics into their training. It is s subject that can go hand-in-hand with business and when employees and CEO's alike understand what ethics are about, business can improve. Not only will the community take note of the ethical nature of a business but also so will customers.
Periodic reevaluations are suggested in ethics training as well, since times change many things that some would never consider ethical or non-ethical. For instance, when the first computer hacker to send a work into a university computer system crippled the entire network that the system was a part of, including that of public utilities ï¿½ simply because he could do it ï¿½ a question of ethics is hard to pose. Computers were new, at the time. And, no one had ever been able to do such a thing before. With new times comes new technology and new ways of doing things. Ethics will still play a part of it all and refreshing ethics training only re-strengthens what has already been learned, when new ages come about.
In the end, it's all about what a person understands about ethics. Many university curriculums are now heavily applying the teaching of Ethics and for good reason. Young minds will take this information into the workforce and understand that ethics need to be applied there as well as in the private sector. Corporations will be able to avoid embarrassing scandals that are presented all over national news. Small business will be able to keep and attract more clients and customers. Negotiations between businesses could be accomplished with more consideration for the other company in mind, which would only help both.
Above all, a high level of ethics in your business should be in place at least for the customers. If anything, it is the customer that should be considered the most when it comes to ethical business practices. In the long run, a company will reap great profits from a customer base that feels it is being treated fairly and truthfully.
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