War propaganda in media and the ethics of conflict reporting
Ethics and Business: An Inherent Conflict?
description
Transcript of Ethics and Business: An Inherent Conflict?
Ethics and Business: An Inherent Conflict?
Dr. Wayne H. ShawHelmut Sohmen Distinguished Professor of
Corporate Governance
Corporate “Bobbleheads”
What went wrong in early 2002 Wall Street
Firms managing earnings short-term because analysts glorified and overvalued steady earnings
Any level of compensation was viewed acceptable
What went wrong Wall Street
Special purpose entities marketed to create revenue of remove debt from balance sheet
Analysts accepted pro forma earnings Hot IPOs became a currency for courting
favor Media extolled the “new era” SEC and Congress ignored problems Collapse of large corporations
What went wrong Corporate Governance
Boards of directors independent in name only
CEOs dominated boards Ethics codes were waived by directors Board meetings were short and unfocused Audit committees did not understand
accounting and failed to insist on adequate explanations
What went wrong Corporate Governance
Whistleblowers were silenced Non-management directors had no leader or
forum Companies made unsecured loans to
officers Large stock profits realized by managers
shortly before stock price declines
What went wrong Corporate Governance
Executive compensation increased exponentially
Decisions on compensation often accepted based solely on recommendations by compensation consultants
What went wrongAccountants
Accountants failed to demand true transparency
Auditors routinely went to work for client after leaving CPA firm
Auditor also did internal audit Could use rules-based GAAP rules to
present a misleading picture
What went wrongAccountants
Auditor’s basic relationship with management not board
Auditors were paid more and better for consulting rather than auditing◦ Might “low ball” audit fee to get engagement
What went wrongGatekeepers
CEO’s and CFO’s used creative accounting◦ Blamed subordinates and accountants for failure
Board of directors blamed management and accountants
Accountants blamed management
What went wrongGatekeepers
Lawyers approved questionable transactions and did not force recognition of disclosure violations
Investment bankers assisted accountants and management by developing more sophisticated financing vehicles◦ Sometimes “suggested” alternatives
What did we do? Enacted the Sarbanes-Oxley Act of 2002 Shifted power to board Made majority of board independent Limited board interlocks Excluded CEO from some board meetings Enhanced shareholder powers
What happened? Board meetings became longer and more
meaningful Dissent began to be viewed as an obligation Board now made strategic reviews
customary Only independent directors were permitted
on key board committees Executive compensation receive more
scrutiny Accounting became more transparent
A Board of Directors consisting primarily of “independent” persons
Independent members on the important board committees◦ Such as the audit, compensation and nominations
committees A whistle blower structure An establishment of a company wide code
of ethics
Structure set up to assure the system works
Collapse of our financial markets Failure of many large, well-known firms Development of large Ponsi schemes Spiraling CEO salaries and buy-out
packages Continued difficulty in determining any tie
between pay and performance Raises given to management as employees
are laid off or required to take pay-cuts Warnings again ignored by Congress and
the SEC
What was the result?
A letter from Cicero to his son Marcus
Conclusion: Consider the deliberations and soul
searching of the sort of man who would keep the Rhodians in ignorance
If he thought this would be dishonest but was not certain that dishonesty would
be involved.
On Duties
Rules or The rightness or wrongness of the act or The quality of the outcome
Basis for judging the decisions made in business
We have an agent, management, whose behavior can affect the system
We have a principal, the company’s shareholders, whose grander purposes and values are to be served
Resources are consumed in taking action A variety of courses of action are available
to management Many of the actions taken are unobservable
by the shareholders
Why ethical issues may crop up in business decisions
The Board of Directors Management The Auditor Legal and other advisors
Who might be at blame for failure to address ethical issues?
The Board of Directors, including the CEO, have a fiduciary obligation to the shareholders
Because of this obligation, they have a duty of care and duty of loyalty they must fulfill.
Role of the Board and the CEO
Duty of Care The duty of care describes the level of competence that is
expected of a board member and members of management◦ is commonly expressed as the duty of "care that an ordinarily
prudent person would exercise in a like position and under similar circumstances.”
Duty of Loyalty The duty of loyalty is a standard of faithfulness.
◦ Board members and members of management must give undivided allegiance when making decisions affecting the organization.
◦ This means that they can never use information obtained as a member for personal gain at a “cost” to the stakeholders, but must instead act in the best interests of the organization.
Established Duties of Boards of Directors and Members of
Management
One author suggests the following common pitfalls:
◦ Focusing on short-term profit and shareholder only impacts,
◦ Focusing only on legalities,◦ Conflicts of interest,◦ Interconnectedness of stakeholders,◦ Failure to identify all stakeholders, and◦ Failure to rank the specific interests of
stakeholders. Brooks, Leonard J., Business & Professional Ethics for Directors, Executives & Accountants, Mason, OH, Thomson South-Western,
2007, citing Pastin, M., The Hard Problems of Management: Gaining the Ethics Edge, San Francisco, Jossey-Bass Inc., Publishers, 1986.
So what is the difficulty in meeting the Duty of Loyalty?
Brook’s (2007) definition A conflict of interest occurs when the
independent judgment of a person is swayed, or might be swayed, from making decisions in the best interest of others who are relying on that judgment.
A director or employee is expected to make judgments in the best interest of the company.
A director is legally expected to make judgments in the best interest of company and its shareholders, and to do so strategically so that no harm and perhaps some benefit will come to other stakeholders and the public interest.
My focus is on the issues relating to a conflict of interest
(1) avoidance, (2) disclosure to those stakeholders relying
on the decision, or (3) management of the conflict of interest
so that the benefits of the judgment outweigh the costs.
So what actions should be taken in facing a conflict of interest
Reporting of earnings by a corporation Selling a firm Taking a firm private A corporate acquisition Setting CEO compensation Meeting a CEO’s desires to expand her
horizons or give to charitable organizations Use of company assets by a CEO for
personal reasons
Application to business situations
Based on internal knowledge of the issues or Based on an outsider’s perceptions
How should the process be judged?