Ethical problems of Ethical problems of organizations (part 2)organizations (part 2)

Geoffrey G. Bell, PhD, CAGeoffrey G. Bell, PhD, CA

University of Minnesota DuluthUniversity of Minnesota Duluth

November, 2003November, 2003

Conflicts of Interest @ EnronConflicts of Interest @ EnronEnron top managementEnron top management

Fastow’s creation of partnerships placed him in conflict (he won only if Enron lost).Fastow’s creation of partnerships placed him in conflict (he won only if Enron lost).Ken Lay told people to buy Enron stock while he was selling.Ken Lay told people to buy Enron stock while he was selling.Changed plan administrators for employee 401(k) plan, locking employees’ holdings Changed plan administrators for employee 401(k) plan, locking employees’ holdings in during last month when top management was bailing.in during last month when top management was bailing.

Arthur AndersenArthur AndersenGarnered large consulting fees, so couldn’t jeopardize them with negative audit Garnered large consulting fees, so couldn’t jeopardize them with negative audit results.results.Audit review partner answerable to local partner in charge of audit; not CEO of AA.Audit review partner answerable to local partner in charge of audit; not CEO of AA.

Wall Street financiersWall Street financiersBecause Enron brought large investment banking fees, didn’t want to issue negative Because Enron brought large investment banking fees, didn’t want to issue negative analysts’ opinions.analysts’ opinions.Gained fees by developing instruments that helped Enron remove debt from books (& Gained fees by developing instruments that helped Enron remove debt from books (& then sold same products to other firms).then sold same products to other firms).

Law firmsLaw firmsFirms advising Enron on legality of partnerships profited by developing them with the Firms advising Enron on legality of partnerships profited by developing them with the bankers & AA.bankers & AA.

Costs of Enron debacleCosts of Enron debacle

Text estimates costs of Enron failure at Text estimates costs of Enron failure at $35 billion.$35 billion.

Arthur Andersen went out of business, Arthur Andersen went out of business, leaving only 4 major accounting firms in leaving only 4 major accounting firms in US.US.

Other conflicts of interestOther conflicts of intereston Wall Streeton Wall Street

Problems with IPO market.Problems with IPO market.See video “don.con” for examples.See video “don.con” for examples.Basically, firms went IPO too soon, before they Basically, firms went IPO too soon, before they were ready. Made them more risky than normal.were ready. Made them more risky than normal.Investment bankers purposely under priced IPO Investment bankers purposely under priced IPO issues, leading to a big “pop” and increasing issues, leading to a big “pop” and increasing attractiveness of IPOs, but costing new IPO attractiveness of IPOs, but costing new IPO valuable start-up funds.valuable start-up funds.Allocation of IPOs based on favors by Allocation of IPOs based on favors by investment banks, not on equal availability to all.investment banks, not on equal availability to all. Clear conflict, as market is not equal, but bankers can Clear conflict, as market is not equal, but bankers can

use IPO allocations to develop relationships.use IPO allocations to develop relationships.

Employees and ethicsEmployees and ethics

Employees should be able to expect:Employees should be able to expect:

PrivacyPrivacy

Not to be fired without just causeNot to be fired without just cause

A safe workplaceA safe workplace

Due process and fair treatmentDue process and fair treatment

Freedom of speechFreedom of speech

A work environment free of bias.A work environment free of bias.

Employee safetyEmployee safety

Employees can expect to work without Employees can expect to work without death or injury on the job.death or injury on the job.

OSHA was created both to protect workers OSHA was created both to protect workers from possible harm, and to inform them of from possible harm, and to inform them of possible risks.possible risks.

Employee layoffsEmployee layoffs

By their nature, layoffs involve misery.By their nature, layoffs involve misery.

Employers must hire and fire responsibly.Employers must hire and fire responsibly. That means they shouldn’t hire knowing the That means they shouldn’t hire knowing the

demand is only temporary.demand is only temporary.

What are ethical alternatives to What are ethical alternatives to downsizing? Can they be good business downsizing? Can they be good business too?too?

Ethics and shareholdersEthics and shareholders

The text argues that organizations and The text argues that organizations and managers have an ethical obligation to the managers have an ethical obligation to the owners of the business.owners of the business.Managers must serve the interests of owners.Managers must serve the interests of owners.Shareholders have a residual interest in the firm, Shareholders have a residual interest in the firm, and often their long term interests are served by and often their long term interests are served by meeting the needs of other stakeholders.meeting the needs of other stakeholders.

Question – why should shareholders have a Question – why should shareholders have a residual interest in the firm? Why should their residual interest in the firm? Why should their needs supercede those of other stakeholders, or needs supercede those of other stakeholders, or do they?do they?