Business Ethics: Examining the Philosophies and Development of Business Ethics, Chronicling Its Impact and Adherence in Corporate America.
By:
Kevin McAllister
FredyMojica
Christina Rafeedie
Anshu Srivastava
Lamar University,
Summer 2002.
In today’s business environment, it is becoming increasingly important to have clearly defined ethics codes. These codes provide a road map to conducting business in an acceptable manner. This paper explores philosophies on business ethics and cites examples of companies that have good ethical practices and companies, which have not complied with their own ethical codes.
Attempting to define moral and ethics is not an easy task, and although they are usually used interchangeably, “moral” tends to be used for more practical elements, such as “moral problems” and “moral beliefs”, and “ethical” tends to be used for more abstract and theoretical elements, such as “ethical principle.”
The term “ethics” is used in and may be considered in several different ways (The online Ethics for Engineering and Science, 10-11):
· “ The name for the branch of philosophy concerned with the nature of morals and moral evaluation - e.g., what is right and wrong, virtuous or vicious, and beneficial or harmful (to others).”
· “ The standards for acceptable behavior of a particular group, such as “Buddhist ethics” or “nursing ethics” or "Roman Catholic morality” or "the professional ethics of engineers in the twentieth century United States.”
· Or according to some authors any code of behavior, even one that does not claim to have moral justification. For example, Robert Jackall in Moral Mazes describes what he calls a corporation's "ethics" or "morality" and takes it to include such judgments, as "What is right is what the guy above you wants from you."
When it describes codes and standards it is called descriptive ethics. Descriptive ethics does not require making a judgment as to whether the codes or standards of behavior have ethical justification. On the other hand if it examines the adequacy of moral or ethical values, standards or judgments is called normative ethics.
Philosophers
usually set their position somewhere between "ethical relativism" and
"ethical absolutism".
According to Hugh LaFollete,
"ethical relativism is the thesis that ethical principles or
judgments are relative to the individual or culture. When stated so vaguely,
numerous lay persons and a sizeable contingent of philosophers embrace relativism.
Other philosophers, however, find the thesis patently false, even wonder how
anyone could seriously entertain it" (LaFollete, 146-154).
Ethical
relativism includes several different views.
Ethical Subjectivism claims that the truth of some ethical judgment
applied to a person's behavior depends on whether the person believes the
actions to be right or wrong. That is, there is no right or wrong; it is only a
matter of opinion. It is a risky approach since the acceptance of this view
annuls the validity of ethical judgment since nothing is objectively wrong as
long as the individual committing any action sincerely believed that they were
not wrong. On the other hand, Cultural
Relativism reflects the cultural
context in which an action is committed. "Many, like Alasdair MacIntyre
and Annette Baier, who do not consider themselves relativists, argue that
moralities are social products constructed by particular people in particular
societal contexts and must be understood in relation to those societal
contexts. For example, the Hippocratic oath specifies extensive duties towards
those who have taught one medicine. In this oath physicians pledge to respect
and care for their teachers as for their own parents. The societal context in
which these duties of physicians were formulated was very different from what
it is in industrialized nations today. It is implausible that the same duties
should apply to physicians in all societies, but this does not mean that they
did not have validity when the oath was first formulated. What makes the
difference is not a person's opinion, but the social reality in which the
person participates" (Fieser, 8).
Dr Lawrence M Hillman highlights several ethical relativism important insights (Hillman, 1):
· The need for tolerance and understanding
· The fact of moral diversity
· We should not pass judgment on practices in other cultures when we don’t understand them
· Sometimes reasonable people may differ on what’s morally acceptable
As well, Dr. Hillman identifies some limitations:
· Presupposes an epistemological solipsism (We can not judge because we do not fully understand them, but do we fully understand ourselves?)
· Is unhelpful in dealing with overlaps of cultures (affecting directly commerce and trade, Media, World Wide Web)
· Is self-defensive: if we can’t judge others, neither can they judge us
On the other hand, the absolutism has as common element the belief that “there is an absolute truth.” In this case, Dr. Hillman also recognizes a bright and a dark side:
· We need to make judgments (sometimes)
· Certain things are intolerable
· Our truth is not necessarily "the" truth
· Adopting absolutism, we would not be able to learn from others.
There is a mid way between
absolutism and relativism called pluralism. Professor Lars Østnor states, “Ethical
pluralism implies a middle road between monism [absolutism] and relativism.
According to monism, always a standpoint corresponds to the unified set of
norms. With regards to relativism, there will never be one definite, right
answer to an ethical problem. Pluralism will result in that sometimes there
will be one, right answer and sometimes not.” (Ostnor, 2).
Ethical pluralism offers three categories to describe actions: Prohibited actions or those actions that are not seen as permissible at all; Tolerated actions that are those actions and values in which legitimate differences are possible; and Ideal actions, which are a moral vision of what, the ideal society would be like.
What business does ethics have in business?
As seen previously, actions are susceptible to be evaluated at light of good and evil. We may say that a hurricane killed three people in Houston, but the hurricane is not open to moral evaluation. It is an amoral force. But can corporations make these evaluations? Can they be evaluated? Are they what philosophers call moral agents? Or are they amoral entities?
Analyzing what a corporation is we discover that it is a collection of individuals. All of these individuals have some degree of power in the organization. Then, should any individual, as a moral agent, be accountable in certain degree for those corporate actions? Or are corporations a different kind of entity above the individuals that compose it?
Some authors such Friedman ask about business and its social
responsibility, by which he means, essentially, any
effort to improve or protect social or environmental concerns outside the scope
of business transactions. He asks, in effect:
Are business people ever justified in trying to
realize social responsibility in their functions as business people?" His answer, is
“No.” and justifies it with 3 grounds:
1. Agent Loyalty
Managers have assumed a duty (often explicitly) to advance the
interests of their stockholders and/or employers. They are obligated to carry
out their principal's interests as the principals themselves would carry them
out. Unless stockholders explicitly
agree they are prepared to pursue some socially responsible course of action, a
manager has no right to assume that they are interested in anything except the
best possible return on their investment.
2. The “Invisible Hand”
On views such as Friedman’s, much
stock is put in the doctrine that society, as a whole, will be better off (in
terms of utility, as it is typically put), if all business transactions stick
to creating efficiency, by seeking profit, rather than by [inefficiently]
aiming at utility directly.
3. Libertarianism/”Classical” Liberalism
Individuals have certain rights and these rights are as absolutely sacrosanct as anything can be. Only free, open, voluntary exchange is justified, since any positive duty that is not voluntarily assumed (i.e. is a privilege) is unjustifiable. Therefore, it necessarily involves violating someone’s negative rights (in particular, his or her right to property). A consequence of this view is that no government intervention in business operation is justified beyond that which is necessary to secure protection against “force and fraud.”" (Poff and Waluchow, 1999)
Friedman himself considers some of the relevant
exceptions to his own rule: marketing – if socially responsible action can
promote a company’s image it may be a good investment anyway, not withstanding
the supposed lack of expertise on the part of executives to bring about the
desired end. Presumably any such
move, provided it does not violate the general structures on force and fraud,
is available to employees and executives. To have a right to do something
hardly presupposes that you have any special expertise in actually doing it. To
put that another way, it is the stockholders money (and the employees time and
energy) to waste (or not) on whatever they see fit. Including the promotion of
social goals.
On the other
hand, the American philosopher Peter French
(University of South Florida Ethics Center) holds
that moral agency can be literally ascribed to corporations:
"Corporations can be
full-fledged moral persons and have whatever privileges, rights and duties as
are, in the normal course of affairs, accorded to moral persons" (Buschert & Werhane, 1)
That is, a moral agent has a “liability to answer”
which, French implies, is equivalent to saying that a moral agent intends its actions. Intends is a way of attributing intentions
to the people who integrates the corporation, such as its board of directors.
Then there would be nothing to distinguish a corporation from a crowd.
Describing corporations as “moral persons” all we mean is that the corporation
stands for a number of individuals, each of whom is individually responsible,
the “moral personification” of the corporation.
Dr Will Buschert synthesizes Patricia Werhane's thesis about the corporations as moral
agents as follows (Buschert & Werhane, 1):
1.
"Corporations
are not morally responsible; as formal organizations they are so structured
that the attribution of responsibility is “inappropriate.”"
2.
"It is not the
case, however, that corporations are responsible only for maximizing
shareholder value (á la Friedman); ‘social responsibility and moral
responsibility are not interchangeable concepts,’ says Werhane, ‘and profit
maximization and social responsibility are not contradictory corporate functions.’"
3.
"At the same
time, however, a free society (again,
a la Friedman) implies or requires moral accountability. Moreover, corporate
moral agency is required for the proper functioning of the free-enterprise
system."
Wehrane concludes that the corporation is like a machine. We may impose moral grounds for it, but we
cannot say that the corporation itself is morally responsible.
Collins Companies
based in Portland, Ore., which owns and operates forests, sawmills, and
manufacturing facilities in Oregon, California and Pennsylvania and has revenues
of more than $200 million.
In an industry not
known for its long-term thinking, Collins' goal is to maintain the health of
the forest ecosystem and support production of wood on a sustained, renewable
basis, as well as provide social and economic benefits to surrounding areas and
communities.
In 1992 Collins was
the first privately owned company to begin the process of having its
forestlands certified as sustainable. Every five years, its lands are evaluated
and independently certified by Scientific Certification Systems, in accordance
with the strict rules of the Forest Stewardship Council (FSC).
In 1941, Collins
Almanor Forest in northern California held 1.5 billion board feet of timber.
Loggers have since removed 1.7 billion board feet, but the forest has nearly as
much wood as it had when logging began.
Collins' biggest
contribution to changing the timber industry may not be on its own land.
Collins works to get other timberland companies that sell timber to its mills
to have their land certified, too. "We want to leverage our efforts to get
certified timber and get other people to value it," he says. "We only
have 300,000 acres of trees. That's not big enough to change the market, but if
we can leverage our success, we can have a bigger impact."
Home Depot has been a
good partner of Collins in pushing the certification movement forward in its
retail stores. Most customers now ask specifically for sustainability-harvested
timber (Raths, 2001).
Chatsworth
Products, Inc.
Chatsworth Products Inc. is a little known company in New Bern, NC, which is big on ethics. They are a “100 percent employee owned leading manufacturer of cabinet, rack and cable networks for more than 10 years.” They have an Employee Stock Ownership Plan (ESOP) that is understood by every employee. Their revenues are approximately $50 million and profit sharing is equal across the board. Not only do they contend that their ESOP is important in the office, they make sure that all their locations are aware of its importance the president Cabral talks nationally about it (Raths, 2001).
Chatsworth has several codes, which they adhere to. From their website www.chatsworth.com/about/quality.htm:
Customer Focus
Customer satisfaction is the paramount purpose of all company activities. Meeting the requirements and value expectations of out internal and external customers is the primary task of every employee.
Continuous Improvement
Our planning activities will recognize continuous improvement as a primary business objective. Our products and services, together with the process and systems that produce them, will be world class.
Employee Involvement
We will provide an environment and related value system in which all Chatsworth Products, Inc. people are personally involved, individually and as a team members, in establishing and achieving quality goals.
Supplier Partnership
We will develop and maintain mutually beneficial partnerships with suppliers who share our commitment to achieving increasing levels of customer satisfaction through continuing improvements in quality, service, timeliness and cost.
Highest Standards of Conduct, Ethics and Integrity
We will conduct our business in strict compliance with applicable laws, rules and regulations; with honesty and integrity and with a strong commitment to the highest standards of business ethics.
“CPI is committed to being a company of the highest quality in every aspect of its business. Quality products, Quality services, and most of all…Quality People” (Raths, 2001). The employees strictly follow these codes. This is why the company has been noted for their outstanding ethical practices. The ESOP is only as good as the employees that continue the progress. And to continue efficiently ethical standards must be strictly applied.
The Timberland Company has been continuously heralded for its concern and strong, dynamic presence in the community for decades. But these praises come through programs set forth by the company that allow employees the benefits, and not the adverse effects, of serving the community, even during work hours.
For instance, over ten years ago, Timberland’s efforts to encourage its employees to volunteer transformed into the “Path of Service” program. With this program, full time employees are given 40 hours of paid time to contribute the community during regular work hours. Because of this convenience to employees, more than 90 percent of them take advantage of this effort (Raths, 2001). The dedication of the Timberland Company was further shown during the events of September 11, 2001. The Timberland CEO Jeff Swartz and over 150 employees were volunteering at a school in the Bronx when these devastating events occurred, and although they were advised to leave the city, they stayed to fix windows, paint murals, and clean and repair the school.
In 1993, Timberland created a Social Enterprise Department that placed employees in direct contact with volunteer opportunities with non-profit organizations, school, and community organizations. Since this company markets its products to the community, they felt it only fair that they give back to the community that gives to them in consumer shopping. They state that this volunteerism is not done to leverage the consumer buying power or increase sales, but only to give in areas of identified need. Furthermore, in 2001, Timberland added a sabbatical program to its list where, each year, it would allow four employees to take six months off to use their professional skills in a non-profit organization.
But Timberland’s dedication has gone even further. In September 2000, they launched City Year New Hampshire in its headquarters offices. Founded in 1998, City Year is a national youth service organization that employs young people in a yearlong community service. With the students being housed in the corporate headquarters, employees were able to give one-on-one mentorship to these students in areas such as resume writing, day-to-day corporate environments, and seminars of various career paths. The employees are able to interject enthusiasm into the students during their community service tenure (Raths, 2001).
With the global environment in mind, and with Timberland being an international company, in 2002, it launched its 5th Annual Serv-A-Palooze. This is the first international effort of the kind. The purpose of this initiative is to give back to the community by “working in the vineyard.” Employees help to remediate natural parks and recreation areas, rebuild homes and schools in the areas where stores are located, and teach students in economically deprived areas about the importance of educational and staying drug free. The 5th Annual service project was held in Japan, Holland, Panama, and Italy.
With all that Timberland does to serve and protect its community, it is no small wonder that it was bestowed one of the 13th Annual Business Ethics Awards in the category of Corporate Citizenship in 2001.
In 1998, the
760-store UK supermarket chain Iceland had become the world’s first retailer to
ban Genetically Modified ingredients from its own-label products. In June 2000,
the company moved its own-label frozen vegetables to 100 percent Organic. And
it paid $13 million subsidy to farmers for the higher cost of production but
held the cost for consumers down to the cost for non-organic foods. In a
stroke, it moved organic food from the margin to the mainstream. This path
breaking, leadership stance has led Business Ethics to name Iceland the winner
of this year’s Environmental Excellence Award.
Although Iceland is
currently subsidizing the move to organic, it may not have to do so for long.
Increased sales could more than cancel out money lost from lower prices. A company
spokesperson said that if Iceland achieves growth of 12 to 15 percent, and
convinces enough farmers to grow organically, it could eliminate the subsidy in
two years.
Organic farming is
"incomparably superior" to conventional farming in environmental terms,
he said. Organic produce is grown without synthetic pesticides or chemicals,
making it safer for consumers, farm workers, wildlife, and the entire natural
environment. Pesticides can devastate wildlife habitat and contribute to
endocrine disruption in wildlife and humans. Pesticide-free organic farming, on
the other hand, promotes biological diversity and resource recycling through
methods like crop rotation, planting of cover crops, and animal and plant waste
recycling.
Organic and GM-free
foods are only a part of Iceland’s overall commitment to what it terms
"ethical food retailing." In October 1999, the company made its
store-brand foods free of artificial colors and flavors. It also eliminated
artificial preservatives, "wherever this can be done without compromising
safety." That same year, it reduced salt content in store-brand foods,
banned Aspartame, eliminated artificial dyes from its eggs, and removed GM
ingredients from poultry feed -- and did the same with animal feed for all
meats this October. The company also sells energy-efficient refrigerators and
freezers called Iceland Kyoto, for the site of the famous 1997 climate-change
summit meeting. They are the first products in the world to be endorsed by
Greenpeace.
"Supermarkets
have a huge responsibility for the health of the nation. Everything Iceland has
done environmentally is part of "our fight for better food" -- better
food that is affordable for everyone (Business
Ethics, 2000).
The Bureau of
National Affairs, Inc. (BNA) Based in Washington, D.C it is the oldest wholly
employee-owned company in the U.S. It
is also the only major legal and business publisher to remain independent,
despite a wave of mergers and acquisitions in the industry.
In 1984, when Thomson
International made offers to buy BNA, at
$65 a share -- or about four times the going stock price, the proposal
was voted down, two to one by BNA employees.
The company’s
revenues for 1999 were nearly $281 million. And with its devotion to quality,
BNA spent 36 percent of that on editorial expenses, a figure probably double
the industry average. Operating profits, likewise, are about half the average
-- about 9 percent when for publicly ownned competitors it may be 20 percent.
But BNA comments, “Our bottom line has allowed us to pay people well, and still
give a 15 to 20 percent annual return to stockholders for ten years." In
50 years, the company’s stock has never gone down, which is a nice thing in
turbulent times.
It is little wonder
employees want to preserve BNA intact, because it is a gem of a workplace. BNA
has made Fortune’s list of the 100 Best Companies to Work for in America for
the past three years. For nine consecutive years, it was one of Working
Mother’s 100 Best Companies for Working Mothers.
BNA is a union
company -- which is not unusual for employee-owned firms. The Newspaper Guild
has been part of the company’s history almost since inception. If ownership
gives employees a stake in wealth creation, union membership provides a vehicle
for input into wage decisions, and a way to bring inherent conflicts into the
open.
Employee ownership is
not a path to nirvana. But it is a way to make employees genuine stakeholders
-- ones whose concerns can be heard, andd whose interests are company
interests (Business Ethics, 2000).
Texaco,
Inc.
Business torts, or legal wrongs, are very visible in the media and talked about extensively in the classroom and in the community. A wrong by a business can affect its patronage and financial stability across the globe. Even with this being said, there are some companies who have placed themselves in this situation over the years of business. Recent torts have cost companies billions of dollars, a loss of consumer and business customers, and put them on the fast track at an attempt to remedy the situation.
Texaco is a company who, to their dismay, has a long history of business torts that have cost them billions overall. One example of this is what Meiners, Ringleb, and Edwards chronicles as intentional interference with contractual relations. This is one of the more common business torts, which bases its claim that “business’s contractual relations were wrongfully interfered with by another party” (Meiners et al., 227). There are also certain elements to this tort:
Texaco was found liable for this tort in 1985 during negotiations where Pennzoil attempted by acquire Getty Oil. During this time of their negotiations, Texaco also came into the picture thinking that no formal agreement had been made. Within a week of the Pennzoil-Getty implied verbal agreement to sale, where Pennzoil reached what it felt was a binding agreement to acquire 3/7th of Getty, Texaco Inc. had purchased all of the Getty stock at a higher price per share. During this time, Texaco also indemnified Getty against all possible litigation. After these events had occurred, Pennzoil sued for breach of contract, making Texaco liable for damages (Cutler and Summers, 1988). A decision was reached on November 19, 1985 by the Texas State Court, with a judgment of $7.53 billion in actual damages, $3.0 billion in punitive damages, and $1.5 billion is accrued interest. Many felt that that the total damages awarded were unreasonable and a media frenzy followed this case.
Texaco was hit hard by this lawsuit because in this case, the judgment was based on the replacement cost of the oil that Pennzoil would have obtained from Getty and not necessarily on the damages that Pennzoil suffered by failing to acquire Getty at the negotiated price. Many who followed the case state that Texaco lost because of its lawyers overconfidence and lack of appeal to the “twelve ordinary, working class citizens” in that Houston, Texas courtroom (Lydenberg, 73-74). Despite the multiple appeals that would follow through the Appeals Court and the Supreme Court, the original judgment for damages was upheld. On April 12, 1987, Texaco filed for bankruptcy due to liens being placed on its assets. Eventually both Pennzoil and Texaco would enter into alternate dispute resolution and reach a $3 billion settlement in favor of the slighted Pennzoil. On December 18, 1987, both companies formally agreed on this amount.
Later in its history, Texaco again finds itself in the courtroom over a patent issue with five other oil companies fighting UNOCAL. The patent involved the selling of clean-burning gasoline formulations in which UNOCAL claimed exclusive patents and infringement by Texaco Refining and Marketing, Inc. A jury in U.S. District Court for the Central District of California awarded UNOCAL Corporation 5.75 cents per gallon. The total number of gallons involved was 1.2 billion, or $69 million. Although there was no breakdown of how much each defendant would have to pay in the case, Atlantic Richfield Co., Chevron U.S.A. Inc., Exxon Corp., Mobil Oil Corp., and Shell Oil Products Co. were named in the suit, with Texaco being the unit of purchase base.
However, the one lawsuit that will forever burn in the minds of the community and Texaco as a betrayal of company morals and stated ethics is the case involving race discrimination of African Americans in the company by top white executives. In this case, Texaco agreed to pay the plaintiffs $176 million, which made it the highest race discrimination award in history. This award stems from the secretly recorded conversation of top Texaco executives by Richard A. Lundwell, a former senior coordinator of personnel services in the financial department. Lundwell recorded these executives using racial slurs to describe the company’s African American employees and discussion about the proposed destruction (i.e. shredding) of corporate documents relevant to these litigations (Khasru, 1997). After retiring from Texaco, Lundwell handed the tapes over to the lawyers suing Texaco. The tapes were made public and Texaco, in turn, disciplined two executives and discontinued benefits of two retirees, one of which was Lundwell.
In this case, Texaco was quick to settle the suit with employees and adopt new employment policies for hiring and promotion of minorities. This distinguished many of the controversies that could otherwise still be brooding today (Houlding, 1996). It is also rare that an employer cannot gain leverage in negotiating a settlement of some kind, however, due to the nature of this case, Texaco had none. Although boasting an affirmative action policy on hiring and treatment of minority employees, one African American senior pension fund manager found that “hundreds of minority workers throughout the company were systematically paid less than the minimum salary for their job levels—which should have come at no particular surprise in a culture where a division vice president dressed up as black sambo for a company party” (Fisher, 186). In once instance, David Keough, a senior assistant treasurer, called pension fund manager Ellen Roberts a “little colored girl.” Despite Texaco’s $230.2 million with minority and women owned businesses as part of its diversity initiative, some minority groups still chastise the oil giant by saying that what is being doing is not enough for the injustices levied by top executives (Broody, 1999).
Just recently, Merrill Lynch & Co. reached a $100 million settlement with New York’s attorney general, Eliot Spitzer, over conflict of interest that affected its research analysts. In this bizarre turn of events, Merrill Lynch settled out of court, even with no charges being filed officially. The settlement comes from Merrill Lynch analysts advising investors to buy stocks that, in secret, they did not have confidence in growth. The majority of the settlements come from the Internet Investment team, where stock prices can be very volatile and many time unpredictable. Merrill has agreed to pay $48 million to New York and $52 million to other states and regulatory agencies, in addition to creating a committee to monitor the “objectivity” of it future research and its e-mail communications (Spitzer, 2002).
Merrill Lynch was caught up
in a pool of the “dog-eat-dog” world of gaining new clients by any means
necessary. Many times, new stocks
issued increasing went to those firms that had star analyst to recommend
stocks. For this case, star analyst for
Merrill, Henry Blodget, “privately called stocks ‘a piece of junk’ or ‘crap’ or
‘a dog’ [in private e-mails, now made public], while advising client to buy
them” (Kadloc, 2002).
Now the Securities and Exchange Commission (SEC) has stepped in to make new rules that serve to moderate the collaboration of bankers and analysts within the brokerage firms. In this fast pace and high dollar world, only the analysts with the high dollar profit margins were able to remain with the company. These high dollars came from investment advisement on the banking side. In a 1999 memo, Blodget outlined that 85% of his time was spent with banking and 15% on stock research. With the swinging in the stock market and the loss of millions of dollars by large clients, the analysts and investment firms were desperate to keep margins up. Some securities lawyers even contend that the real crime is that regulators did nothing to stop this practice until such time that investors lost billion of dollars. And now the SEC has come to regulate too little, too late. The SEC is currently engaged in numerous probes of companies like Citigroup, CSFB, and Salomon, where analysts have earned more than $10 million a year in underwriting clients. At Salomon, Jack Grubman is the source of this interrogating. For example, even though WorldCom stock was down 88% since its June 1999 peak, he rated it a strong buy until mid-March 2002. In a surprising twist of events, Grubman did not save any of the e-mail between analysts and bankers, a requirement from the SEC.
Despite the settlement and the seemingly long laundry list of ethical violations to the investors, Merrill’s CEO David Komansky is downplaying the host of events. He states that “[Merrill feels] that we have very strong defenses against the class-action suits” (Varchaver, 2002). Merrill has begun a trend for the government agencies to further scrutinize the practices and standards of these investment firms. However, there will be no shortage of future cases, continuing investigations, and more settlements and potential court cases. The question remains that even if the investment world drives itself to such high and rigorous standards, why do investments companies feel that they can maneuver around the ethical laws of doing business. If a large company like Merrill Lynch thinks that this is ethical, who else could be next in this web of deceit?
Enron again made headlines at the end of 2001 and began 2002 with the biggest bang yet. Once thought to be most innovative company with soaring profits, Enron, filed for Chapter 11 bankruptcy. People have been shocked by this outcome. The debt that Enron is believed to owe is more than $55 billion, which has made the world record for largest corporate bankruptcy (Lewis, 1). However, there have been hints to this demise practically since the company’s inception in 1985. From HoustonChronicle.com a brief on Enron’s timeline:
While it seems that all is well with the company legally since it’s beginning, the upper echelon managers were cutting corners edging ever closer to the unethical abyss. Interestingly, Michael Milken, Lay’s hero that was also found guilty of securities fraud, financed the merger that created Enron (Thomas, 2-3). Not only should that have made investors wonder but Lay also initiated the switch in accounting firms to Arthur Andersen from Deloitte Haskins Sells, his reasoning was that they were not creative and imaginative enough (Thomas, 3). Lay was interested in making Enron the largest company in the world, trading everything possible from gas, to broadband cable to water (Thomas, 3). The very creation of Enron and its early beginnings had clouds of doubt hovering above them and yet nothing was questioned, until now.
What really hit Enron hard is their accounting methods. The managers always wanted to have great numbers so that the stock price would remain high (Thomas, 5). They did this by creating partnerships that were not on the books that would not be understood by outsiders (Thomas, 5). While this is not illegal, it is unethical. However, Enron went a step further by using their stock for collateral in the partnerships (Thomas, 5). These partnerships are considered special-purpose vehicles.
Anatomy of a special-purpose vehicle explained by Robert Dribrell in HoustonChronicle.com:
While the setup looks legitimate, according to the SEC, it only works if the special-purpose vehicle does not claim bankruptcy.
Enron’s accounting practices actually showed them to have $1 billion more in profits than they actually had (Fowler & Goldberg, 1). They used several partnerships that began simply but ended very complex and as we have seen, detrimental. These partnerships were Chewco, LJM-Cayman, and LJM2 Co-Investment, and these partnerships led to a loss of more than $1.2 billion in shareholder equity (Fowler & Goldberg, 2). It was these partnerships that led to Enron’s demise that caused the earnings restatement because the partnerships did not follow the appropriate accounting rules (Fowler & Goldberg, 2). On November 8, 2001 Enron admitted to the SEC that they had hid losses in the partnerships (Mason, 2). Enron’s downward spiral centered around its addiction to these partnerships because they hid debt and therefore, made them look more profitable (Barnes, 9).
Another accounting practice Enron employed to make itself look better was in its future payments calculations. They would determine what their future income would be from their long-term contracts and used an inflated form of this number for collateral to borrow money (Barnes, 10). This arrangement will only last as long as those future payments actually come in. If for some reason those contracts are unfulfilled Enron would be left with an un-payable debt and no collateral as those payments are no longer being paid.
Yet, another aspect of Enron’s rise to the unethical throne was in the company’s culture. The employees coined the term “Rank and Yank.” This refers to their policy regarding managers and their bonuses or their pink slip. Skilling’s goal each year was to keep the top 80 percent performers (Barnes, 9). It was found that the way to stay among the top 80 percent was to agree to anything (Lewis, 5). This meant not objecting to anything unethical or illegal. Another way the managers found to stay among the best was to make the numbers whether by “hook or by crook” (Lewis, 5). This led the managers to bring in as few people on their projects as possible, because this meant sharing recognition as well as bonuses (Lewis, 6). Obviously, this is prime breeding ground for organizational politics. Each person was out for themselves and basically the paycheck and bonuses. It became common practice to blame things on others, switch numbers in others paperwork, and lie to get others fired (Lewis, 6).
Of course Enron’s upper echelon was no better. When they wanted someone out they would simply tell them to find a new position within the company in 45 days because they were being redeployed (Lewis, 6). However, there were no other jobs and HR was told to keep other divisions from hiring them (Lewis, 6). Not only did these upper managers find underhanded ways to eliminate employees they also cashed in approximately $1 billion in stock prior to the bankruptcy (Lewis, 6). This implies that they were very aware of the situation and the results that were inevitable. However, they still promoted their company. Lewis says that “…keeping the share-price high at any cost encourage corruption, greed and financial impropriety and discourage transparency…the incentive system at Enron frequently spawned the worst” (Lewis, 6-7).
Finally, Enron could not help but be unethical as it began on shaky grounds. Lay wanted an innovative accounting firm to handle the books so that these practices could culminate. Even on top of that they encouraged cutthroat attitudes that deteriorated the organization. Every one was out for self and if that meant getting rid of a competitive co-worker then that was all right. The only thing that mattered was getting good numbers so they would not be yanked but instead ranked.
Arthur Andersen, a company seen to be ethical and full of integrity, has apparently been caught up in the greed of Enron. And it is costing them everything. They now have nothing. As seen in the headlines Andersen has lost the ability to audit in publicly held company (Hedges, 2). It was found that Andersen had obstructed justice by shredding tons of Enron-related documents in lieu of Enron’s pending investigation (Hedges, 1). Andersen claims that shredding documents is a normal process once an audit is complete claimed Nancy Temple, company lawyer (Hedges, 2). However, Temple claims that the email was sent benignly, it was not meant to initiate any shredding of Enron related document (Hedges, 2). Not only was Temple under fire for this, but also David Duncan. David Duncan was the person in charge of the paper destruction (Fowler, 1). He pleaded guilty, admitting that at first he saw nothing wrong with his actions but found that they were indeed obstructing justice (Fowler, 1).
Now “Andersen, once the gold standard of the accounting industry, has seen its U.S. staff shrink to about 10,000 from 26,000” due to this Enron debacle (Reuters, 2). Once a thriving part of the Big Five accounting firms worldwide, they are now nothing. Their fall happened because greed got the best of them. After all Enron provided them with approximately $47.5 million dollars in revenue (Hedges, 2). Andersen probably did not want to end up like the Deloitte accounting firm that Enron switched from because they did not practice accounting the way Lay wanted. Now, because of unethical practices Andersen is left with nothing, they can no longer do what they started out as and that was a top-notch auditor.
Microsoft is in a legal battle with the U.S. Justice Department over Sherman Antitrust Act. Microsoft is charged with edging out its competitors by its unethical business practices.
Monopolies "in restraint of trade"
The US Department of
Justice alleged that Microsoft had used its domination of the operating system
market to restrict competition in the browser market. Microsoft forced its
Internet Explorer (IE) browser to power in a market that had been dominated by
Netscape's Navigator. The trial held that Microsoft not only gave away IE but
also "bundled" it into its Windows operating system, forcing
manufacturers to pre-load it on to their computers. Microsoft swiftly succeeded in winning a half share in the
browser market.
Predatory pricing
Pricing was set below
cost to drive out competitors. Microsoft licensed its operating system more
cheaply to computer makers such as Dell and Compaq, if they exclusively
installed its software.
Price-fixing
There was an
agreement among several competitors to fix prices or restrict output. Netscape
CEO James Barksdale testified that Microsoft illegally urged a division of the
browser market with Netscape, but then tried to compel industry partners to
only use their Internet Explorer.
The Legal Battle
The court ordered
Microsoft to modify its conduct to give its competitors a better chance of selling
their own software:
Microsoft had broken
anti-trust laws, abusing its dominant position in the computer operating system
market. Washington D.C. Federal District Court ruled to split the company into
two separate businesses. One of the businesses will market and produce Windows
and the other will handle Microsoft Office and other applications software,
along with the Internet Explorer web browser.
The Appeals Court
decided to overturn the ruling that Microsoft be split in two. The Appeal Court
sent the case back to a lower court to be reconsidered by a different judge. The two sides have agreed to have an
out-of-court settlement and are still working on resolution.
As recent history of companies’ daily transactions
have unfolded before the stockholders’ eyes the public has been made aware of corporations’
practices versus their ethical codes.
In essence the public has been betrayed. After billions of dollars of settlements and attorneys fees
companies find that not only must these codes be published throughout an
organization, but also must be followed to the letter in a top down
hierarchy. The only way to restore the
public’s faith in big business is by forming and complying with ethical
philosophies and standards.
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