CH-2-3 Ethics and Governance Scandals – Business and Professional Ethics for Directors, Executives and Accountants : Book Guide

This Document Contains Chapters 2 to 3 Chapter 2 – Ethics & Governance Scandals Chapter Questions and Case Solutions Chapter Questions 1. Do you think that the events recorded in this chapter are isolated instances of business malfeasance, or are they systemic through the business world? The events chronicled in this chapter range over an eighty-year period from 1929 to 2010. During that time there were horrendous business failures, frauds and debacles that cost investors, consumers, taxpayers, and the general public billions and billions of dollars, not only in the United States, but around the world. The scandals were worldwide, involving hundreds of companies, only some of whom are mentioned in this chapter. At the same time, however, throughout the world, there were millions and millions of businesses that were supplying the goods and services needed by society, in an efficient and effective manner. They were operating within the law and ethical standards. The examples provided in this chapter, and throughout the textbook are aberrations. Most people and business, most of the time, act and behave in a responsible manner. They obey the law, ethical norms, and social standards of behavior. However, if executives, directors and accountants are not mindful of the ethical dangers that lurk in the business world, then they too can become part of this aberration that is so costly to society. These business exceptions challenge the integrity and humanity of everyone who has anything to do with business. 2. The events recorded in this chapter have given rise to legislative reforms concerning how business executives, directors, and accountants are to behave. Is this a case of too little legislation being engaged too late to prevent additional business fiascos? No amount of legislation can ever prevent crimes from occurring. One key to preventing additional business fiascos from occurring is to create a business environment in which the focus of business is clear. The purpose of business is not to make a profit at any cost. Moreover, profit is the consequence of providing goods and services required by society, in an efficient and effective manner, while operating within the law and ethical standards. The more efficient and effective the operations, the more profits the business will generate. For far-sighted corporations, profits are not the goal, they are the consequence. Many of the fiascos discussed in this chapter relate to greedy business leaders who, perhaps through hubris, lost sight of the goal of business. By focusing on profits they began to compromise their ethical standards, and so began a downward spiral that resulted in fraud and bankruptcy. 3. Is there anything else that can be done to curtail this sort of egregious business behavior other than legislation? Archie Carroll (“The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders,” Business Horizons, July-August, 1991) has argued that businesses must first and always obey the law. Then they must be economically viable. They do this by operating in an efficient and effective manner. Next, they must behave with the highest ethical standards. Finally, businesses must give back to society. If businesses follow these four steps, as well as the lessons contained in this textbook, there will be less need for legislation to govern business behavior. 4. Many cases of financial malfeasance involve misrepresentation to mislead boards of directors and/or investors. Identify the instances of misrepresentation in the Enron, Arthur Andersen, and WorldCom cases discussed in this chapter. Who was to benefit, and who was being misled? Enron Misrepresentation Result Who Benefited Premature recognition of revenue using ‘prepays’ Overstatement of revenue These frauds resulted in net income and stock to increase, which benefited senior management that had lucrative stock options Syndication of special purpose entities (SPEs) Understatement of expenses Conflicts of interest by  Senior management  Board of directors Financial rewards to the related parties Financial rewards to:  Jeffery Skilling  the board members False financial statements audited by Arthur Andersen Fraudulent financial reporting Senior management at Enron and partners at Arthur Andersen Investors, regulators, employees and the general public were all mislead and harmed by this fraud. Arthur Andersen Misrepresentation Result Who Benefited Culture focused on revenue production primarily through non-audit services Compromise on audit quality In the short-run, all the partners who shared in the profits derived from providing lucrative non-audit services to Enron Removal of Carl Bass, quality control partner, from providing oversight on the Enron audit Permitted David Duncan to accept the accounting policies of Enron The partners and employees of Arthur Andersen lost their jobs when the accounting partnership collapsed; all of Arthur Andersen’s clients had to find new accountants. WorldCom Misrepresentation Result Who Benefited Capitalized expenses Overstatement of net income Ebbers, Sullivan, and all the other WorldCom executives and board members that held lucrative stock options No oversight of the CEO Ebbers could orchestrate the fraud Investors, regulators, employees and the general public were all mislead and harmed by this fraud. 5. Use the Jennings “Seven Signs” framework to analyze the Enron and WorldCom cases in this chapter. Jennings ‘Sign’ Enron WorldCom Pressure to meet goals, especially financial ones Senior executives had lucrative stock options Pressure after the collapse of Sprint takeover. Ebbers ordered Sullivan to ‘hit the numbers’ Closed organizational culture Conflicts of interests became acceptable business behaviors This is detailed in Chapter 9 of the textbook CEO with sycophants Board ignored complaints from whistle-blower No one challenged Ebbers’ authority Weak board of directors Powers Report and Senate Subcommittee Report blamed the board for a failure to provide oversight This is detailed in Chapter 9 of the textbook Nepotism and favoritism None None Hubris This is detailed in Chapter 9 of the textbook Ebbers had unlimited power with no oversight Ethical trade-offs None None 6. Rank the three worst villains in the film Wall Street: Money Never Sleeps (2010). Explain your ranking.  Alan Loeb and Stephen Schiff, who wrote the screenplay, for simplifying a complex issue and attempting to make money by being the first to present a fictionalized account of the financial bailout associated with the subprime mortgage crisis.  Michael Douglas, the main actor, for reprising a role so that he could say, once again, ‘Greed is good’  The customers, who did not listen to the critics who panned the movie 7. In each case discussed at some length in this chapter – Enron, Arthur Andersen, WorldCom, and Bernie Madoff – the problems were known to whistle-blowers. Should those whistleblowers each have made more effort to be heard? How? Whistleblowers in these cases did not use all of the following steps:  Begin by talking to an immediate superior or relevant company official. At Enron and WorldCom this would probably have been someone in the accounting or internal audit departments; at Arthur Anderson, it would have been the partner in charge; and with Madoff it probably would have been someone in the accounting department.  Notify the audit committee of the board of directors.  Communicate with the external auditors.  Present a formal complaint to the Securities and Exchange Commission.  Failing all of the above, the whistle-blower could go public as a last resource (after seeking appropriate legal counsel). In the Madoff case, the whistleblower was outside the company, and tried very hard to be heard, but his warnings fell on deaf regulatory ears. He could have gone public earlier, and perhaps a knowledgeable journalist could have caused some action with a public article. Alternatively, a letter to Elliott Spitzer might have done the trick. 8. The lack of corporate accountability, and an increased awareness of inequities and other questionable practices by corporations, led to the Occupy Movement. Identify and comment upon additional recent instances that have led to concerns over the legitimacy of corporate activities. Shareholders were also disillusioned, and angry with management, the Board of Directors, and the firm’s performance. They had two options: they could sell their shares (vote with their feet), or fight for change by proposing shareholder resolutions addressing the issues to be voted on at annual shareholder meetings. Among the issues shareholders raised were: - Environmental issues, including climate change, renewable energy, pollution - Social issues, including human rights, worker safety, codes of ethical conduct - Governance issues, including the role and function of the board of directors - Transparency resolutions calling for greater stakeholder engagement & communication - Compensation issues, especially regarding executive compensation Also, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010), permitting shareholders to vote on pay packages for senior executives (say-on-pay), although the vote is non-binding. . 9. It seems likely that the top executives of the major banks involved in the manipulation of the LIBOR rate were unaware of the manipulations, and of the massive profits and losses caused by those manipulations. Why did they think that such manipulations could continue to be undetected, and/or unpunished? It is a mystery why so many business people think that their misdeeds would not be discovered. Bernie Madoff is the poster-child representing this thinking. Certainly, he knew what a Ponzi scheme was, and that it required continual inputs of new cash to maintain, and that this could not go on forever, given even normal financial cycles. But the crash of 2008 was hardly normal. 10. The new anti-bribery prosecution regime involves serious charges and penalties for bribery in foreign countries during past times when many people were bribing in the normal course of international business, and penalties were not levied. Is it unreasonable to levy extremely high fines at the beginning of the new regime, and/or not to limit the period over which bribery can trigger those fines? Why and whynot? The thinking behind punitive fines may be that they are the only thing that will make corporations alter their behavior. Most of the time, corporations view decisions about whether to comply with the law as “business decisions” decided by means of a costbenefit analysis. Ethics does not even figure into it. The baseline for many major corporations seems to be legal, not ethical conduct. But large fines make them pay attention. Additional deterrents are: - Large fines that follow conviction - Loss of reputation from a conviction - Possibility of being barred from seeking government contracts - The likelihood for a corporate executive convicted of bribery to be dismissed Case Solutions 1. Enron’s Questionable Transactions What this case has to offer The Enron Debacle is the icon for massive fraud allowed by failure of the company’s governance system and the conflicted interests of its executives, auditors and lawyers. It precipitated the loss of credibility and trust in financial markets and corporate governance and accountability that ultimately led to reform of corporate governance and accountability, and of the accounting profession, through the Sarbanes-Oxley Act of 2002. It is a case that all businesspeople and professional accountants should be familiar with and understand. Teaching suggestions I use the PowerPoint slides on my website for instructors. First, I set up the topic of governance; second, I use “Enron Affair” to review the important elements of the case; and finally I use “Enron Debrief” to debrief, and review the rest of the material in Chapter 2 and models used in the course. If you refer to the “Enron Affair” PowerPoint, you will see the order I have found to be very engaging and successful. I ask the audience to assume the role of a member of the Board of Directors, and then I challenge them throughout the case discussion with the following questions: • What is your role as a Board member? • What questions should you ask? • Why didn’t the Enron Board ask those questions? Depending on the audience (non-accounting or accounting), I review less or more of the details of the fraudulent transactions. My PowerPoint provides a basic set. The key is to reveal enough that all audiences understand: • Basic governance structure and roles of the Board, executives, professional accountants and lawyers, as well company policy (particularly on conflicts of interest) and compliance systems. • What a Special Purpose Entity (SPE) is, the operation of the 3% rule for accounting for transactions, and how income, assets and liabilities could be manipulated using it. • How and by whom the basic frauds were committed. • The motivation for the frauds. • Where the money went. • What the impact of manipulation was on Enron’s financial reports, and the investing public. • How the governance system was short-circuited – see overheads. • The role of an ethical or unethical corporate culture in preventing or abetting fraud. • Why whistle-blowing is important. • What Arthur Andersen contributed. • What the banks contributed by facilitating the SPE transactions? • How the Sarbanes-Oxley (SOX) Act arose. • What changes SOX originated. • How ethics risk management can help. Discussion of Ethical Issues The following questions are presented in the text for discussion of the significant issues raised in the Enron case: 1. Enron’s directors realized that Enron’s conflict of interests policy would be violated by Fastow’s proposed SPE management and operating arrangements because they proposed alternative oversight measures. What was wrong with their alternatives? The Board’s alternative controls were left to Fastow to institute, oversee and presumably report upon to the Board. He was the principal fraudster, and there was no internal audit follow-up (Arthur Andersen had taken the internal audit role as a subcontractor), nor did the Board demand feedback. No whistle-blower concerns reached the independent member of the Board. Like mushrooms, independent Board members were left in the dark. 2. Ken Lay was the Chair of the Board and the CEO for much of the time. How did this probably contribute to the lack of proper governance? “Kenny Boy” did not serve as a useful foil or overseer of his own CEO actions, as a good independent Chair of the Board should. The inherent conflict of interests in being CEO and Chair has led to increasing separation of these functions as a measure of good governance, and some jurisdictions are requiring it. For example, Lay’s handling of the Sherron Watkins whistleblowing letter showed either brilliance or evidence of incompetence on conflict of interest matters. He asked the lawyers who advised on creation of the SPEs if what they had done was all right. 3. What aspects of the Enron governance system failed to work properly, and why? See PPTs 2, 11, 12, 17 and 19 to focus the discussion. 4. Why didn’t more whistleblowers come forward, and why didn’t some make a significant difference? How could whistleblowers have been encouraged? See PPT 19. If you were contemplating coming forward, and you knew that Enron’s culture was unethical (see examples) and the bosses knew it, would you come forward – not likely because the risk was too high that you would be fired or not welcomed. There would have to be changes in the culture and systems to encourage whistle-blowers to come forward, such as measures to make the culture ethical (see text discussion, and a protected whistle-blower program. As a result of this apparent flaw, SOX/SEC has subsequently mandated that all SEC registrant companies have a whistle-blower system that reports to the Audit Committee. 5. What should the internal auditors have done that might have assisted the directors? They should have been alert for flaws in Enron’s conflict of interest policies, and any lack of compliance. When a policy was/is set aside by the Board, internal audit should have been advised or should have realized this by screening the relevant minutes. Also they should have been looking for any transactions with questionable economic substance. Their reports should go the Board of Directors as well as management. 6. What conflict of interests situations can you identify in: ❑ SPE activities ❑ Executive activities. The Enron Debacle shows conflicts of self-interest (personal gain of executives, employees, auditors, lawyers, bankers and directors) vs. shareholder (as many were misled and lost significantly) and other stakeholder interests (as the company objectives were not met and jobs etc., were lost. Each type of conflict has many examples. An interesting additional discussion, is how each conflict of interest situation developed, and why the professionals and directors lost sight of their need for independence, and what the professional accountants and banker thought that their mandate really was. 7. Why do you think that Arthur Andersen, Enron's auditors, did not identify the misuse of SPEs earlier and make the board of directors aware of the dilemma? It seems hard to believe that Arthur Andersen missed the import of these transactions. If they did know exactly what was going on, they shared in the profits from it, at least indirectly. To report the wrongdoing would be to lose the client and an incredibly valuable income stream. We do know that Arthur Anderson, upon Enron's collapse, destroyed literally tons of evidence, their work papers for Arthur Andersen. And we do know that the corporate culture of Arthur Andersen changed from one founded on integrity to one focused on profits, at the expense of quality, independence and objectivity. 8. How would you characterize Enron’s corporate culture? How did it contribute to the disaster? Enron’s corporate culture was unethical (see PPTs 17 and onward). It was fraught with conflicts of interest, unethical and also illegal and acts, poor examples were set by directors and executives, and the directors, professional accountants and lawyers involved were self-interested instead of in the sustainable interest of shareholders and other stakeholders. If the process of allowing the satisfaction individual self-interest of the company’s directors, personnel and agents, they ignored their fiduciary duty to the shareholders and other stakeholders. The Board members who were independent of management and not conflicted, were in the dark. Measures to make a corporate ethical culture are discussed in the text and Chapter PPTs. This set introduces ethics risk management and other governance and accountability paradigm changes. Subsequent Events May 25, 2006. “Enron Verdict: Ken Lay Guilty on All Counts, Skilling on 19 Counts”, by Gina Sunseri and Sylvie Rottman, ABC News, download from http://abcnews.go.com/Business/LegalCenter/story?id=2003728&page=1 “Lay, 64, was convicted on all six counts against him, including conspiracy to commit securities and wire fraud. He faces a maximum of 45 years in prison. Lay also faces 120 years in prison in a separate case. Lay posted a $5 million bond secured with family-owned properties at a hearing following the verdict. He was ordered to stay in the Southern District of Texas or Colorado. "I firmly believe I'm innocent of the charges against me," Lay said following the hearing. "We believe that God in fact is in control and indeed he does work all things for good for those who love the lord." Skilling, 52, was convicted on 19 counts of conspiracy and fraud. Combined with his conviction on one count of insider trading, he faces a maximum of 185 years in prison. Skilling was acquitted of nine other charges relating to insider trading. "Obviously, I'm disappointed," Skilling told reporters outside the courthouse. "But that's the way the system works." "I think we fought a good fight — some things work, some things don't," he said.” “In a separate, nonjury bank fraud trial related to Lay's personal banking, U.S. District Judge Sim Lake found the Enron founder guilty of bank fraud and making false statements to banks. Lake had withheld his verdict in the Lay bank fraud case until the Lay-Skilling jury announced its verdict. Lay faces up to 120 years in prison in that case.” Useful Links, Videos, and Films C-Span “Q&A with Bethany Mclean, author of All the Devils are Here and Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron” October 25th 2010 http://www.cspanvideo.org/program/296214-1 Gibney, Alex (2006) Film “Enron: The Smartest Guys in the Room” film preview, video footage and Enron timeline available at http://www.pbs.org/independentlens/enron/index.html# Charlie Rose “A Conversation about Enron” including a series of one-on-one discussions and panels with for journalists, the then SEC chairman, political critics and US senators discussing the Enron scandal from its beginnings http://www.charlierose.com/search/search/520?text=ENRON Time Enron Scandal webpage at http://www.time.com/time/2002/enron/ 2. Arthur Andersen’s Troubles What this case has to offer Arthur Andersen (AA) will forever be a key part of the Enron SOX chain that accelerated changes in the accountability and governance paradigm for corporations and the accounting profession. In fact, AA’s problems were systemic as their root was in the firm’s flawed governance system where the desire for profit was allowed to outweigh the firm’s fiduciary interests to client shareholders and the public interest. The case presents excellent opportunities to review conflict of interest issues, the need for inclusion of ethics in an organization’s strategy, operations and compliance processes, and for illustrating how the expectations of the public can dramatically affect an organization. AA’s disappearance dramatically illustrates how risk managers had been in the habit placed too low a value on losing the ability to operate – known as “franchise risk”; post-Enron and AA that valuation has changed upward considerably. Teaching suggestions I use the AA PPTs (13-22) in the “Enron Affair” set to discuss the case. The key issues are: • What happened and who did it? • The 3% SPE accounting rule and how it led to manipulation. • How following the 3% rule precisely, and ignoring the overall principle that there must be external validity (an independent outside buyer/seller) to allow the recording of profit, led to manipulation. • What the flaw was in AAA’s governance system that permitted the Enron, WorldCom, Waste Management and Sunbeam fiascos? • Other matters raised in the questions below. Discussion of ethical issues The following questions reveal the key points of the case: 1. What did Arthur Andersen contribute to the Enron disaster? AA failed to protect the interest of current and future shareholders, and stakeholders that relied upon the financial reports and integrity of the company. AA failed to form a reliable part of the Enron governance system, thereby leaving the directors and other stakeholders at risk. See the list of AA’s apparent mistakes in the case. 2. What Arthur Andersen decisions were faulty? See list of AA’s apparent mistakes in the text, as well as the section on AA’s internal control flaw. 3. What was the prime motivation behind the decisions of Arthur Andersen’s audit partners on the Enron, WorldCom, Waste Management, and Sunbeam audits – the public interest or something else? Cite examples that reveal this motivation. It was revenue generation and retention. They served their self-interest rather than the public interest by not acting upon the memos from their quality control personnel, and not challenging the manipulative practices and structures at Enron. 4. Why should an auditor make decisions in the public interest rather than in the interest of management or current shareholders? An auditor is the agent of the shareholders, and is elected annually at the Annual general Meeting of Shareholders by the shareholders. As such, the auditor must make sure that audited annual financial statements comply with GAAP, and GAAP are designed to produce statements that do not favor the interests of current shareholders or executives and mislead future shareholders and other stakeholders such as governments, taxing authorities and the like. GAAP is therefore designed to produce statements that are in the public interest, and the auditor is the agent who should ensure GAAP is properly applied. An auditor who does not protect the public interest can face reputational and legal consequences because the expectations of the public have not been met. 5. Why didn’t the Arthur Andersen partners responsible for quality control stop the flawed decisions of the audit partners? They tried via memos, but the firm’s governance structure had earlier determined that the audit partner in charge could over-ride them. Clearly, AA’s governing body made the wrong decision. 6. Should all of Arthur Andersen have suffered for the actions or inactions of fewer than 100 people? Which of Arthur Andersen’s personnel should have been prosecuted? I don’t think so, because it seems unfair to the many innocent partners, staff and audit client stakeholders that lost value because of the resulting discontinuity. I further do not believe that society was well-served by the loss of one of the Big 5, thus concentrating the choices for independent audit work in the future. On the other hand, the disappearance of AA sent a significant signal to the rest of the audit world. I would have preferred larger fine and imprisonment for AA’s decision makers who determined and carried out the policy of audit partner primacy, plus a very large fine and sanctions (no new SEC clients for 3 months) for the continuing firm. I would also consider carefully whether non-partner audit personnel had a responsibility for whistle-blowing, and would signal how this should be done in the future. 7. Under what circumstances should audit firms shred or destroy audit working papers? Given the developments in the AA Case, audit working papers should not be destroyed before they could be of assistance and/or relevant in any legal, tax or other dispute. This means that the auditor should retain paper or digital versions for a very long time. In some jurisdiction, the statute of limitations might come into play at the end of seven or ten years, but may not where fraud is concerned. An audit firm may chose not to follow the statutory limits because they might wish to be able to respond to protect themselves for a longer period. Public expectations that affect reputations are not bound by legal limits. 8. Answer the “Lingering Questions” in the case (p. 105 in the text). See the answer to Question 6 above. I do not think that the Big 4 firms could be shrunk to the Big 3 in the future because it would not be seen to be in the public interest. I think that other AA partners will be brought to trial, but not many. Perhaps only the head of the firm, the lawyer involved and the partners-in-charge of the firm and the region or function will be brought before the courts. Finally, I am sure that a similar tragedy will occur again – probably after the pain of ignoring the public interest abates again as is has from earlier scandals in earlier decades. Our memory fades as generations retire, and unless the education system plays a stronger role with students in the future, ethics lessons will be forgotten again. Subsequent events July 15, 2003. “Andersen Worldwide settles Enron Suits”, JeffFeeley, Financial Post, July 15, 2003, FP9. “The network of foreign accounting firms once linked to Arthur Andersen LLP will pay US$40-million to resolves lawsuits stemming from Enron Corp.’s collapse… Andersen Worldwide Société Cooperative is seeking to erase liability in suits filed by Enron investors and workers over the accounting firm’s role in helping Enron hide more thanUS$1-billion in losses… The accord doesn’t cover Arthur Andersen LLP, Enron’s auditor for more than a decade… Andersen Worldwide also agreed to pay US$20miooion to Enron’s bankruptcy creditors. The settlement is a small fraction of the US$29-billion that shareholders and former workers say they lost in Enron’s meltdown.” May 31, 2005. In the case of Arthur Andersen, LLP v. United States, 544 U.S. 696 (2005), the Supreme Court of the United States unanimously reversed AA’s conviction due to serious flaws in the jury instructions. As of 2008, there were over 100 civil lawsuits pending against AA. Useful Links, Videos, and Films C-Span – Washington Journal “Arthur Andersen and Enron” Jan. 21, 2002. http://www.cspanvideo.org/program/168280-2 • Participating by remote connection from Chicago, Mr. Greising discusses the Arthur Andersen accounting corporation and the Enron bankruptcy. C-Span – Department of Justice Briefing Room “Arthur Andersen Indictments” Mar. 14, 2002 http://www.c-spanvideo.org/program/169155-1 • The deputy attorney general announces that a federal grand jury has indicted the accounting firm Arthur Andersen with obstruction of justice. C-Span – Washington Journal “Accounting Regulation” Mar. 28, 2002 http://www.cspanvideo.org/program/169358-5 • Mr. Castellano discussed proposals to regulate the accounting industry as a result of the Enron bankruptcy and the failures at Arthur Andersen. Oppel, Richard and Kurt Eichenwald (2002) “Enron’s Collapse: The Overview; Arthur Andersen Fires an Executive for Enron Orders” The New York Times Jan. 16 http://select.nytimes.com/gst/abstract.html?res=F50A1EF9385C0C758DDDA80894DA404482 Ackman, Dan (2002) “The Scapegoating of Arthur Andersen” Forbes.com Jan. 18 http://www.forbes.com/2002/01/18/0118topnews.html 3. WorldCom: The Final Catalyst What this case has to offer When WorldCom announced massive overstatements of profit in June 2002, it completely shattered the trust in corporate accountability and governance that President Bush and others had been trying to rebuild. Sarbanes and Oxley combined their separate efforts in the U.S. Congress and Senate, and the Sarbanes-Oxley Act emerged in late July 2002, thus triggering a change in corporate accountability and governance, and well as the accounting profession. The WorldCom case involves simple manipulations, but once again offers lessons about the need for an ethical corporate culture, whistle-blower protection, over-dominant CEO, no independent Chair of the Board, and incompetence of Directors. The prosecution and dissolution of AA was so far along by June/July 2002, that their role in not finding the problems earlier was overshadowed by the emergence of SOX. Teaching suggestions I review the events after Enron and up to SOX, and I indicate how it galvanized the development of SOX. I then deal with the questions listed below. Discussion of ethical issues The following questions were presented for discussion of the significant issues raised in the case: 1. Describe the mechanisms that WorldCom’s management used to transfer profit from other time periods to inflate the current period. Details are in the case, but the major mechanisms use included: • Capitalization of current costs to move them to future periods • Reduction of current costs by drawing down reserves 2. Why did Arthur Andersen go along with each of these mechanisms? AA may not have known about the manipulations, or at least some of them. Cynthia Cooper, Vice-president for Internal Audit was apparently the first to identify the irregularities. According to the SEC quotations in the case, WorldCom went to some lengths to conceal the manipulations from AA. However, this raises the question of how effective AA’s audit work was because the manipulations were significant. Moreover, if AA knew of some of the manipulations, then is it another case of AA wishing not to confront management and preferring to protect future fee revenue. 3. How should WorldCom’s board of directors have prevented the manipulations that management used? An ethical corporate culture should have been developed that would have encouraged the personnel who were ordered to manipulate to whistle-blow. If scrutiny and analysis by internal and external auditors were known to have been tighter, then perhaps the manipulation attempts would not have been attempted. Moreover, if WorldCom had not been so dominated by Bernard Ebbers (i.e. if an independent Chair of the Board and appropriate whistle-blowing mechanisms had been in place) then he might not have tried to manipulate, and/or other might have reported the attempt. Ebbers might not have attempted the manipulation if the Board had not allowed him to borrow $408 million and spend it in ways that required rising WorldCom stock prices and/or cash. 4. Bernie Ebbers was not an accountant, so he needed the cooperation of accountants to make his manipulations work. Why did WorldCom’s accountants go along? Because they thought they could get away with it for a while, and that when profits returned that “adjustments” would be restored. They might have thought that everyone was manipulating and that smoothed earning were ‘good”. They did not see their duty as protecting the shareholders’ interests or the public interest. 5. Why would a board of directors approve giving its Chair and CEO loans of over $408 million? The Board did not recognize the risk that Ebbers would misuse the funds borrowed. To some extent the Board was at fault for allowing a loan arrangement for Ebbers where he could draw down amounts on his own without reporting mechanism to the Board and for subsequent approval as amounts rose beyond reasonable levels, and they did not check on the specific use of the money and the value of that usage as collateral.. They trusted Ebbers who had built the company up from its early roots. They did allow him to borrow money for the purpose of buying the largest ranch in Canada, which was also unusual. 6. How can a Board ensure that whistleblowers will come forward to tell them about questionable activities? A protected whistle-blower mechanism is vital, and its use must be encouraged by top management. Even then, there is no guaranty. In the end, an ethical corporate culture is essential to the promotion of whistle blowing and ethical behavior in general. This topic is discussed further in Chapter 3. Useful Links, Videos, and Films WorldCom Fraud Info Center http://www.worldcomfraudinfocenter.com/information.php The CNBC news show, "The Big Lie: Inside the Rise and Fraud of WorldCom," January 2007 http://video.google.com/videoplay?docid=6560803301631269691# • This 55 minute CNBC news documentary exposes the extent of the WorldCom fraud. Viewers will gain insight into the actions, decisions, and deception of several key participants, including the then-chairmen of AT&T and Sprint as well as the WorldCom capacity planner who constructed the growth model. “WorldCom Chief Guilty” CBS Video March 16, 2005 http://www.cbsnews.com/video/watch/?id=680422n Bayot, Jennifer and RobenFarzad (2005) “Ex-World Com Officer Sentenced to 5 Years in Accounting Fraud” The New York Times August 12 http://www.nytimes.com/2005/08/12/business/12worldcom.html 4. Bernie Madoff Scandal – The King of the Ponzi Schemes What this case has to offer Bernie Madoff’s investment scandal is the most recent high-profile corporate fraud in the U.S. As stated in the case, the story of how Mr. Madoff began his scheme, what he actually did, who suspected he was a fraudster and warned the SEC, why the SEC failed to find wrongdoing, who knew, and who did nothing is a fascinating story of ethical misbehavior, greed, innocence, incompetence, and misunderstanding of duty. As in previous scandals (Enron, WorldCom, etc.), managers, auditors, regulators, and other stakeholders failed to stop the fraud that went on for a long time. This case raises questions about the role of the SEC in regulating and overseeing hedge funds, as well as the effectiveness of currently existing legislation in protecting investors of hedge funds. Teaching suggestions I start this case by asking students what a Ponzi scheme is. According to the SEC: “A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.” I continue explaining students that this is one of the oldest known forms of securities fraud. Following, I ask students what are the potential red flags to identify a Ponzi scheme and whether or not these flags where evident in Madoff’s operation, for example: • High investment returns with little or no risk (i.e. “guaranteed” returns). • Overly consistent returns regardless of overall market conditions. • Unregistered investments. • Unlicensed sellers or a network of investment companies. • Secretive and/or complex strategies. • Poor disclosure or obscure account statements. • Difficulty receiving payments. Finally, I close the case highlighting that, as it was the case with other corporate scandals, several parties failed to detect and act on the potential signs of fraud. Discussion of ethical issues 1. Is Madoff’s sentence too long? The 150 years sentence was the maximum possible penalty for Bernie Madoff’s crimes. A week before the sentencing took place, Judge Denny Chin received a letter from Mr. Madoff’s lawyer, Ira Lee Sorkin, asking for a prison term substantially below the 150-year maximum. The lawyer listed several reasons, including Mr. Madoff’s confessing to his sons, knowing he would be turned in, his “full acceptance” of responsibility for his crimes, and his efforts to assist in the recovery of lost assets. Furthermore, the lawyer asked a chance for Mr. Madoff to be free before his death. In response, Judge Chin stated that he understood Mr. Sorkin’s plea. “It’s a fair argument that you want to give someone some possibility of seeing the light of day,” the judge said in an interview, “so that they have some hope, and something to live for.” Nevertheless, Judge Chin’s reasoned that “In the end, I just thought he didn’t deserve it,” he said. “The benefits of giving him hope were far outweighed by all of the other considerations.” Judge Chin explained in a series of interviews that 20 or 25 years would have effectively been a life sentence, and that any additional years would have been purely symbolic. Yet symbolism was important, given the enormity of Mr. Madoff’s crimes. The judge weighted the fraud’s unprecedented scale, its duration over two decades and its thousands of victims. At that point, the judge said, symbolism “carried more weight.” The Judge decided that 150 years would send a loud, decisive message. He felt that Mr. Madoff’s “conduct was so egregious,” he said, “that I should do everything I possibly could to punish him.” Moreover, any sentence of less than 150 years could be seen as showing him mercy. “Frankly, that was not the message I wanted to be sent,” the judge said. Following the Judge’s criteria, the sentence was not too long but just tough in accordance to the U.S. laws. 2. Some SEC personnel were derelict in their duty. What should happen to them? Arguably, the SEC personnel that failed in their duties should be punished; however, it is difficult to determine the extent of the SEC’s negligence in investigating this fraud. SEC Chairman Christopher Cox stated that the agency would follow up on its own failure to investigate this case. The SEC had been tipped as early as 1999 that Madoff was running a Ponzi scheme. The SEC sent examiners to the firm twice, including an enforcement team, but came up with nothing. Moreover, since no subpoena power was requested, the SEC conducted its investigations with documents provided by Madoff, and he kept providing false records. After an extensive investigation, the Office of Investigation (OIG) of the SEC concluded: “The OIG did not find that the failure of the SEC to uncover Madoff’s Ponzi scheme was related to the misconduct of a particular individual or individuals, and found no inappropriate influence from senior-level officials. We also did not find that any improper professional, social or financial relationship on the part of any former or current SEC employee impacted the examinations or investigations.” Overall, the investigation uncovered that this case was a failure of the SEC’s policies, procedures and internal controls but, according to the OIG, it appears not to be the direct result of professional negligence of the investigators. The fact that most investigators were lawyers, fresh out of law school without a sufficient understanding of the capital markets seems to bear this assessment out. As well, the failure to have a central registry/oversight of complaints by a senior, fully-knowledgeable person points to a systemic failure. Moreover, the failure to check on Madoff’s answers to interview questions demonstrates a ridiculous lack of appreciation for sound evidence-gathering and verification. On the other hand, Markopolos’ testimony before members of the U.S. Congress seems to indicate that some individuals within the agency choose not to investigate the fraud in depth. 3. Are the reforms undertaken by the SEC (http://www.sec.gov/spotlight/secpostmadoffreforms.htm) tough enough, and sufficiently encompassing? The reforms undertaken by the SEC include: • Revitalizing the Enforcement Division • Revamping the handling of complaints and tips • Encouraging greater cooperation by 'insiders' • Enhancing safeguards for investors' assets • Improving risk assessment capabilities • Conducting risk-based examinations of financial firms • Improving fraud detection procedures for examiners • Recruiting staff with specialized experience • Expanding and targeting training • Improving internal controls • Advocating for a whistleblower program • Seeking more resources • Integrating broker-dealer and investment adviser examinations • Enhancing the licensing, education and oversight regime for 'back-office" personnel These reforms seem to address some of the biggest problems uncovered after Madoff’s scandal; nevertheless, only time will tell if these measures are effective in preventing similar frauds. 4. Does it matter that Madoff’s auditor, Friehling, was his brother-in-law? It matters because it is a clear conflict of interest. Auditing Standards and professional accountants Codes of Ethics require auditors to be free of conflicts of interests in order to be objective. In the case of an audit engagement, it is in the public interest that the auditor be independent of the entity subject to the audit. The auditor’s independence from the entity safeguards the auditor’s ability to form an audit opinion without being affected by influences that might compromise that opinion. Independence enhances the auditor’s ability to act with integrity, to be objective and to maintain an attitude of professional skepticism. Independence issues were central to prior corporate scandals and were addressed in the independence rules included in the Sarbanes Oxley Act of 2002; however, these rules would not necessarily apply to the audit of Madoff’s funds as these companies were not a public company. Investors should be mindful of the potential problems of a lack of proper audit by a qualified auditor, and they should always make sure their interests are properly protected. In this case, investors failed to inquire. 5. Does it matter that Friehling did no audit work? Not conducting any audit work was in clear violation of the auditing standards that require that the auditor exercise professional judgment and maintain professional skepticism throughout the planning and performance of the audit. Moreover, it is the auditor’s responsibility to: • Identify and assess risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entity’s internal control; • Obtain sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks; and, • Form an opinion on the financial statements based on conclusions drawn from the audit evidence obtained. As a result of the fraud, the PCAOB has been given the additional responsibility to supervise the audits of registered securities dealers in the U.S. 6. Comment on the efficacy of self-regulation in the form of FINRA, and in respect of the audit profession. What are the possible solutions to this? Professional self‐regulation is the regulation of a profession by its members. A central purpose of professional self-regulation is protection of the public from harm. Professional self‐regulation should encourage professional conduct and competence, fairness, transparency, accountability, and public participation. Individual members are personally accountable for their practice through adherence to codes and standards. A fundamental problem with self-regulation is maintaining independence from the interest of individuals or firms influencing the decisions of professional standard setters and enforcers. FINRA was not strong enough or sufficiently independent from Bernie Madoff to investigate the fraud. The self-regulation of the accounting profession, and particularly in regard to audit standards, was put to test after the scandals that led to the passage of the Sarbanes Oxley Act of 2002. In essence, the US government decided that self-regulation was not enough to protect the public interest and created the Public Company Accounting Oversight Board (PCAOB), this organization is” “a non-profit corporation established by Congress to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports. The PCAOB also oversees the audits of broker-dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection.” 7. Answer Markopolos’ questions: “How can we go forward without assurance that others will not shirk their civic duty? We can ask ourselves would the result have been different if those others had raised their voices and what does that say about self-regulated markets?” There is no straight forward answer to these questions. In principle, it is an individual decision to act in accordance to ethical principles. In this case, it seems that there were many people who could have raised the flag about the fraud, for example Madoff’s employees and auditors, the SEC investigators, and a number of investment professionals that did not believe in Madoff’s investment strategy. If these individuals had raised their voices earlier, the fraud could have been uncovered sooner. Of course, the regulator (the SEC) would have to be ready and able to investigate thoroughly, diligently and with proper professional scepticism. 8. How could Markopolos and the other whistleblowers have gotten action on their concerns earlier than they did? Being a whistleblower is not an easy task. In this case, Markopolos contacted the SEC, which is the top authority in charge of investor protection in the U.S. Moreover, Markopolos had strong suggestive evidence to back up his claims. Beyond going to the SEC, he and other whistleblowers could have “gone public”, talking to the media about these issues. Media attention can help to direct the public’s attention towards fraud cases; however, it can encounter fierce criticisms, for example, Bethany McLean, a 31-year-old Fortune magazine reporter challenged Enron’s accounting practices, asking how the company made its money. Enron’s CEO, Jeffrey Skilling, called McLean unethical and hung up on her. The chairman, Kenneth Lay, called Fortune's managing editor to complain. The CFO, Andrew Fastow, flew to New York to tell McLean and her editors that Enron was in great shape. 9. Did Markopolos act ethically at all times? Arguably, Markopolos was driven not only by the public interest, but also by its personal interest as Madoff’s competitor. Markopolos was a former chief investment officer at Rampart Investment Management in Boston. His investigation began in 1999, when a colleague learned of Madoff’s investment returns and urged Markopolos to replicate his strategy. Markopolos soon concluded that the numbers did not add up. Markopolos confronted bosses who urged him to match Madoff’s results, investors who did not want to hear the truth, and SEC’s officials who either did not listen or could not understand his arguments. Moreover, Markopolos initially thought he might be eligible for a sizable reward if the fraud involved insider trading, but that turned out not to be the case. Nevertheless, it seems like Markopolos acted ethically in blowing the whistle about the fraud. 10. What were the most surprising aspects of Markopolos’ verbal testimony on YouTube at http://www.youtube.com/watch?v=uw_Tgu0txS0? Markopolos’ statement highlights that: • The SEC repeatedly ignored Markopolos’ detailed warnings. • The SEC’s personnel appear to be incapable of understanding the financial transactions involved. • The SEC is staffed by people without professional investigative or audit experience. • The fraud could have been stopped earlier when Madoff’s investments reached $7 billion. • SEC officials at the Boston office were ignored by their superiors and their colleagues at the New York office. • The SEC appears to be afraid of investigating high-level cases. 11. Did those who invested with Madoff have a responsibility to ensure that he was a legitimate and registered investment advisor? If not, what did they base their investment decision on? It seems like the decision to invest in Madoff’s fund was a result of affinity, greed and trust in other investment advisors recommending Madoff’s fund. Individuals should do some research before investing in public or private firms. Furthermore, if an individual relies on an investment advisor, the advisor should perform a more thorough examination before issuing a recommendation involving, for example, analysis of portfolio composition, portfolio stress testing, risk management, and asset verification. An article by CBS News on the Madoff scandal, also featured in the Show 60 Minutes, cites Markopolos explaining that "Bernie was Jewish, so he ran it on the Jewish community in the United States. But that wouldn't get him enough customers, 'cause he always needed new money to keep the scheme going." Madoff extended his reach from New York to Palm Beach, Fla., where he enlisted hundreds of wealthy clients, many of them recruited from his own country clubs. And he also made connections that gave him entree to Europe, and the hedge funds capital of America, Greenwich, Conn. It was in Greenwich that Bernie Madoff made some of his biggest deals with large investment firms that were willing to feed him billions of dollars of their clients' money to manage. And in return, Bernie Madoff agreed to pay the so-called feeder funds a fortune in annual fees. The largest of the feeder funds was the Fairfield Greenwich Group. Boies, Schiller & Flexner LLP, one of the most prominent law firms in the US, is representing Fairfield Greenwich investors, who lost nearly $7 billon when Madoff went under. They are suing the firm for gross negligence, claiming it failed to investigate Madoff thoroughly or monitor his activities as it promised to do in its marketing materials. 12. Should investors who make a lot of money (1% per month while markets are falling) say “Thank you very much”, or should they query the unusually large rate of return they are receiving? The SEC guidance recommends that when individuals consider their next investment opportunity, they should start with these five questions: • Is the seller licensed? • Is the investment registered? • How do the risks compare with the potential rewards? • Do I understand the investment? • Where can I turn for help? Also, the SEC explains in its guidance to be aware of red flags such as: “High investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity. “Overly consistent returns. Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.” 13. Should investors who made money from “investing” with Madoff be forced to give up their gains to compensate those who lost monies? US bankruptcy laws authorize a trustee to recover money that was distributed as part of a fraud and share it among the victims. The purpose of these provisions is to balance the losses among the various investors, but how that balance is supposed to be struck is not clear. Under New York State law, which can be invoked for Madoff recoveries, a trustee can seek redemptions going back six years. In practice, it will be very difficult to force investors to return any money made from their investments with Madoff. Investors may wind up suing each other, as well as the hedge funds and banks that brought them into Mr. Madoff’s funds and the auditors who worked for those hedge funds. 14. Is this simply a case of “buyer beware”? This is a case involving a massive fraud and negligence of various government agencies in charge of investor protection. It is not just a case of “buyer beware” it should be a clear call for reforms targeted to avoid similar cases. Several people lost their life savings and some even lost their lives in connection with this fraud. A man that invested his savings with Madoff, mentioned by Judge Denny Chin, died of a heart attack two weeks after the fraud was uncovered. Thierry de la Villehuchet, CEO of Access International Advisors, a money-management operation who placed investors' funds in Madoff’s investments, stabbed himself to death with a box cutter after taking sleeping pills after losing $1.4 billion in the scheme. Mark Madoff, Bernie Madoff's eldest son and defendant in a number of lawsuits launched by the trustees of his father’s investors, hanged himself two years after the fraud by a dog leash on a metal ceiling beam in his Manhattan loft apartment. References Berenson, Alex. 2008. “Even Winners May Lose With Madoff,” The New York Times (December 19).http://www.nytimes.com/2008/12/19/business/19ponzi.html Cou, Andy and Sharman, Keith. 2009. “The Man Who Figured Out Madoff's Scheme,” CBS News (March 1) http://www.cbsnews.com/stories/2009/02/27/60minutes/main4833667.shtml?tag=contentMain;c ontentBody Kolker, Carlyn, Kary, Carlyn and Kishan, Saijel. 2008. “Madoff Victims May Have to Return Profits, Principal” Bloomberg News (December 23) http://www.bloomberg.com/apps/news?pid=newsarchive&sid=awmAWSxKpXRM&refer=home Moyer, Liz. 2008. “The Madoff Ponzi. Why the SEC Missed Madoff,” Forbes Magazine (December 17) http://www.forbes.com/2008/12/17/madoff-sec-cox-business-wallstcx_em_bw_1217ponzi.html U.S. Securities and Exchange Commission. 2011. Ponzi Schemes – Frequently Asked Questions. http://www.sec.gov/answers/ponzi.htm U.S. Securities and Exchange Commission. Office of Investigations. 2009. “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme.” http://www.sec.gov/news/studies/2009/oig-509.pdf Weiser, Benjamin. 2011. “Judge Explains 150-Year Sentence for Madoff,” The New York Times (June 28). http://www.nytimes.com/2011/06/29/nyregion/judge-denny-chin-recounts-histhoughts-in-bernard-madoff-sentencing.html?pagewanted=2&_r=1&ref=nyregion 5. Wal-Mart Bribery in Mexico What this case has to offer This case describes how a company that wanted to improve its reputation for integrity was sabotaged by self-interested executives who were erroneously supported at the head office by misguided executives and an unaware board of directors. Teaching suggestions Start this case by asking students what a Ponzi scheme is. According to the SEC: “A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.” Discussion of ethical issues 1. Where were Wal-Mart’s questionable payments made, and where did this result in serious damage to the company and its executives? Why? The payments were made in Mexico, but caused serious damage to the company in the U.S. because the actions violated the Foreign Corrupt Practices Act. 2. The “gestores” payments were made to third parties, who then bribed local officials. How would a company ensure that its third party vendors are operating within the law? It is always challenging for a firm to ensure that 3rd parties are acting legally, particularly when they are hired for their expertise in getting things done locally, the firm usually knowing exactly what may be required. If it values its reputation, then the company must make sure the 3rd party is in compliance, advising him or her that no laws are to be broken. 3. Some of Wal-Mart’s senior executives knew about the bribes, but did not take any effective actions to curtail this activity. What steps should the board of directors take to ensure that systems and internal controls are in place so that they are involved about questionable managerial activities and actions? A board of directors should be independent of management, and not involved in financial dealings with executives of the firm. Internal controls and systems should be created, monitored and adjusted as experiences dictate. But too often, the Board of Directors knows only what the executives tell it. 4. Wal-Mart Mexico seemed to have a culture of the goal justifying the means. How can the board of directors ensure that the operational activities of the company do not subvert proper governance objectives? Above all, the directors need to be independent. They must also be kept informed of the activities of executives, and to hold executives accountable. Of course, they should refrain from illegal conduct themselves. They must review financial statements themselves, not relying on management’s description of their meaning. And they should set strategic policy for the organization, making it clear that illegal and unethical conduct are prohibited. 6. LIBOR Manipulations What this case has to offer This case reviews the huge impacts on those banks and their executives whose employees were found to have manipulated the information on which the LIBOR benchmark rate was based. It is an example of a systemic, industry-wide breach of ethics. Teaching Suggestions Discussion of ethical issues 1. Which groups were most at fault for the LIBOR manipulations: brokers, traders, bank executives, bank boards of directors, or regulators? Why? Each group bears responsibility for the LIBOR manipulations. Brokers and traders manipulated the rates for their own personal benefit, bank executives either knew and permitted it, or should have had oversight measures in place to learn of it. When the 2008 financial crisis came, they requested manipulation of the LIBOR numbers to make the banks look more financially healthy than they were. Boards of directors have a fiduciary duty to the entities, but failed to exercise it. Regulators should have been aware of what was happening, or were aware, and were slow to act. 2. What should the regulatory bodies do with the finds paid by these banks? Reduce tax rates for the general public? Use the funds to re-educate investment bankers? This question should produce a lively discussion among students. 3. Robert Diamond continues to receive his £2 million pension annually. Should he suffer financially by having to forfeit this pension because the LIBOR scandal occurred while he was CEO of Barclays? This question, too, will produce a lively discussion. To attribute blame (and punishment) to Diamond, some would require a showing that he knew and permitted the conduct, or that his leadership was so lax that it occurred because of his failure. During this discussion, it will be helpful to keep in mind that this was a systemic, industry-wide failure. Diamond was very much like the other CEOs. 4. Both Barclays and UBS reduced the bonuses of current employees to help pay part of the fines that occurred because of the actions of former employees. Is this fair? Another question for lively discussion. These provoke thinking about how we assign blame, and how we hold (or don’t hold) people accountable. 5. The rate manipulations seemed to be systemic to the industry because so many banks were involved. What can be done to curtail such widespread unethical practices within an industry? Government regulation must address these shortcomings, and provide adequate oversight to make sure they are compliant. But in a financial environment where the industry is more powerful than the government, this may be problematic. 6. Why weren’t the directors of the banks that had caused the scandal fined or jailed? Should they have been? This question again confronts the issue of how we assign blame, or don’t, and who we hold accountable for such failures. 7. Why should members of the public trust the banks that were involved in manipulating the LIBOR rate? If the “Occupy Wall Street” protests are indicative, the public does not trust the banks involved, or any banks. After the collapse of financial markets in 2008, public distrust of banks and financial institutions were at an all time high. Chapter 3 – Ethical Behavior - Philosophers’ Contributions Chapter Questions and Case Solutions Chapter Questions 1. How would you respond when someone makes a decision that adversely affects you while saying, “it’s nothing personal, it’s just business”? Is business impersonal? Business is a social activity, conducted by humans, not by autonomous agents. We live in society, we like to be with other humans, we like to work with other humans, and we like to conduct business with other humans. Business is extremely personal. Because it is personal it is also emotional. However, when two people are in an emotionally charged situation, such as a boss firing a subordinate, in order to artificially insulate oneself from the emotional aspects of the situation, the boss might say “It’s nothing personal. It’s just business.” Often this means it is extremely personal, but the boss is too emotionally immature to handle the emotional content of the situation. So, the boss tries to deny its existence by saying “It’s nothing personal.” 2. Is someone who makes an ethical decision based on enlightened self-interest worthy of more or less praise than someone who makes a similar decision based solely on economic considerations? Enlightened self-interest implies that a decision-maker understands that furthering the interest of others might also further the decision-maker’s interests. This attitude takes a long-term perspective. The decision-maker realizes that forgoing a short-term benefit or enduring a passing inconvenience may result in a long-term gain that the decision-maker will enjoy. Enlightened self-interest also recognizes that if everyone adheres to ethical principles then everyone, including the decision-maker, will be better off. 3. Since happiness is extremely subjective, how do you objectively measure and assess happiness? Do you agree with J. S. Mill that arithmetic can be used to calculate happiness? Is money a good proxy for happiness? The measurement problem is one of the weaknesses of the utilitarian theory. Happiness, enjoyment, and pleasure have both qualitative and quantitative aspects. The quantitative aspects can be measured, albeit, not precisely. For some, money is a good proxy for these quantitative aspects. However, it is the qualitative aspects of personal happiness or utility that are very difficult to measure because they are extremely subjective. Also, for many, the qualitative aspects often exceed or dominate the quantitative aspects – hence the expression that money (a quantitative factor) cannot buy happiness (a qualitative factor). 4. Is there any categorical imperative that you can think of that would have universal application? Isn’t there an exception to every rule? For Kant there are two categorical imperatives that apply to everyone in all situations: (a) treat people as ends and not as means; and (b) the decision-maker cannot be exempt from the categorical imperative. If a decision-maker is willing to make exceptions, then there can be no categorical imperative. 5. Assume that Firm A is a publicly-traded company that puts its financial statements on the web. This information can be accessed and read by anyone, even those who do not own shares of Firm A. This a free-rider situation, where an investor can use Firm A as a means to making an investment decisions about another company. Is this ethical? Does free-riding treat another as a means and not also as an end? Free riding means that one party is receiving a benefit without paying a fair price for that benefit. Investors use the information produced by one firm to make decisions about another firm. This is a benefit to society as a whole because increased information makes for better investment decisions and resource allocations. However, the firm that produces the information may not receive a commensurate benefit. This means that society free rides at the expense of the information producing firm. As such, the information producing firm may want to provide less information to the marketplace. Regulation is therefore needed to ensure that firms provide the information necessary for the marketplace to function properly. Because of regulation, the system as a whole is fair, even though the proportionate cost of providing information may not be fairly distributed among firms. The cost of information may be less for some firms than for other firms. 6. How does a business executive demonstrate virtue when dealing with a disgruntled shareholder at the annual meeting? Virtue is demonstrated by exhibiting patience, understanding and sympathy. Attempting to understand the complaint of the disgruntled shareholder, as seen from the shareholder’s point of view, is a sign of a virtuous CEO. Allowing the shareholder to speak, and not cutting off the individual, shows respect for the views and opinions of the shareholder. Accepting constructive criticism without cowering or rashly dismissing the complaint of a disgruntled shareholder, who has money at stake, is a sign of courage. 7. Commuters who have more than one passenger in the car are permitted to drive in a special lane on some highways while all the other motorists have to contend with stop-and-go traffic. Does this have anything to do with ethics? If so, then assess this situation using each of the following ethical theories: utilitarianism, deontology, justice, fairness and virtue ethics. We have limited natural resources, and it is not fair that some over consume these resources. Gas, oil and the costs of road repairs are limited resources. If some people over consume by driving single passenger cars, then this is not fair to those who have multiple passengers in their cars. From the point of view of society as a whole, in order to make the system fairer, those who save resources should pay less than those who consume resources. The way society makes the over-consumers pay is by preventing them from traveling in a car pool lane on the highway. Case Solutions 1. Dealing with Disappointed Apple iPhone Customers What this case has to offer This case is an illustrative application of the problem Apple Corporation encountered when it suddenly and dramatically decreased the price of its iPhone within months of introducing the product. The customers who bought the iPhone at the earlier and higher price were not pleased. Teaching suggestions First, ask if anyof the students purchased an iPhone at the regular price of $599, before it was reduced by $200.Ask also if any of them wrote to or contacted Apple about the price drop. Discussion of ethical issues The analysis of the case which appears in the text at page 152 will provide many avenues of discussion. Not only does it provide an analysis of the decision under different ethical theories (utilitarianism, deontology, justice & fairness, virtue ethics, and moral imagination), but it demonstrates that using different ethical schools of thought can lead to differing results. 2. Gender Discrimination at IKEA What this case has to offer This case describes the ethical problems that IKEA encountered when it deleted all the photographs of women and children from the furniture catalogue that was distributed in Saudi Arabia. It demonstrates the impact of conflicting values - in this case, IKEA’s sensitivity to local culture versus its company values. Teaching suggestions Ask students what motivated IKEA to act in this way – sensitivity to local culture, or a desire to maximize profits. Which best represents IKEA’s past conduct? Ask which is more important – company values, or sensitivity to local culture. Answers will vary. Ask why IKEA removed women from its catalogue in Saudi Arabia only recently, when it had previously included women and children in its catalogues for many years prior to that. What changed? Discussion of ethical issues 1. Discuss the pros and cons of altering the catalogue using: (a) Deontology,(b) Utilitarianism, and(c ) Virtue ethics. a. Deontology is concerned with the motivation of the actor. In this case, if IKEA’s motive was to be sensitive to local culture, one may conclude that it acted ethically. Using a deontological framework, It is not necessary that the decision produce more good than evil, so the decision would be ethical. On the other hand, if IKEA’s motivation was to maximize profits, then its motive would not be based on good will, and its action would therefore be unethical. This demonstrates one of the weaknesses of Deontology as a guide to ethical decision-making. It is often hard to know the motive of an actor. b. Utilitarianism is concerned with the non-ethical consequence of actions, rather than with motive. Judged solely on the consequences of IKEA’s decision to remove women and children from the catalog, the outcome elicited complaints from many people, indicating a negative result. By that measure, the conduct was unethical. Did IKEA consider broadly who might be affected by its decision? Perhaps they were thinking of Saudi Arabia society only. But other stakeholders in this situation included the company and its stakeholders, including the public at large. Utilitarianism requires that the actor include a broadly defined base of stakeholders in making its decision. c. Virtue ethics focuses on the moral character of the decision maker rather than the consequences of the action or the motivation of the decision maker. Virtue ethics believes that conduct at either end of the scale are vices, while the middle ground is the virtue, for example, Aristotle believed that courage was the virtuous mean between the vices of cowardice and rashness. But not all virtues can be named, perhaps some they are situation specific, and often they conflict. Was IKEA facing such a conflict? On the one hand, it would be a virtue to be observant of another culture, but taken to its extreme, then there might be different catalogues for all different cultures – a vice, because not the middle ground. And why was there a sudden change in policy? The catalog had been the same for everyone until 2012. 2.Should a company alter its marketing campaigns to reflect biases that might be prevalent in various countries in which the company does business? What some see as biases, others see as cultural traits, to be acknowledged and observed. But in truth, each culture sees the world through its own lens, its own biases, if you will. As indicated above, if a company were to modify its marketing campaigns to accommodate each separate culture, the variation of catalogues needed would be endless, and impractical. But if the company stays true to its core values, and most agree that IKEA has solid values, then the kind of discrimination which the altered catalogue represented would not have been committed. 3. Deciding Who Receives the Swine Flu Vaccine What this case has to offer This is an interesting case because it highlights potential tradeoffs inherent in deciding what is ethical and the different approaches to decide on what is a fair distribution of a scarce resource. There is no straight forward solution to the problem of allocating a potentially life-saving vaccine when the supply of the vaccine is not enough to inoculate everybody. Teaching suggestions I start this case by asking students if it is possible to objectively decide who is important for society. Following, I ask students whether or not that should be the most important criteria in distributing the vaccine. This is a very good case to discuss the merits and limitations of utilitarianism and justice as fairness approaches to ethical decision making. Utilitarianism seems to be more objective, but decision making under utilitarianism may be perceived as unfairly benefiting some stakeholder groups at the expense of other stakeholder groups. On the contrary, the justice as fairness approach seems to recognize that individual needs have different weights, but decision making under justice as fairness involves a high degree of judgment and subjective evaluation. Discussion of ethical issues 1. From a utilitarian point of view, who do you think should be in the priority group? From a justice as fairness perspective, who should be in the priority group? • From a utilitarian point of view, the decision maker must take a broad perceptive concerning who, in society, might be affected by the decision. As stated by the text, the key aspects to utilitarianism are, first, that ethicality is assessed on the basis of the consequences of the decision, and that these involve social consequences not economic consequences. Next, ethical decisions should be oriented towards making society as a whole better off. This is often measured in terms of increasing happiness and/or reducing pain, where happiness and pain can be either physical or psychological. Furthermore, happiness and pain relate to all of society and not just to the personal happiness or pain of the decision maker. Finally, the ethical decision maker must be impartial and not give extra weight to personal feelings when calculating the overall net probable consequences of a decision. Under this approach to ethics, the people that contribute the most to society’s well-being should be saved. The student must clearly explain why the group that the student has selected – for example, scientists, politicians in high government charges, businesspeople – contribute more to society than any other group. The contribution must not be economic, but rather explained in terms of how society as a whole better is off for because of their contributions. • From a justice or fairness point of view, people should be assessed differently based on relevant criteria. Overall, the distribution of the vaccine should be perceived as “fair”. Under distributive justice there are three main criteria for determining the just distribution: need, arithmetic equality, and merit. Under the need criteria, people that may fall ill and suffer the worst consequences of the disease should receive the vaccine. This group should include, for example, young children, pregnant women, and elderly people. Under the arithmetic equality criteria, all high-risk people should have the same probability to receive the vaccine. Similarly, there should be a chance to low-risk people to also have access to the vaccine. There could be a lottery system and not necessarily a first-come firstserve approach to distribute the vaccine. Under the justice as fairness principle, equals should be treated equally, and unequals should be treated unequal in proportion to their inequalities. The default position is that all are equal by virtue of their humanity. This means that the decision-maker must clearly explain why one group is not equal to all the other groups. Why should, for example, scientists, politicians in high government charges and businesspeople be put in a group that is separate from all other people? Why should that group receive the vaccine while all the other groups do not? Why is the former group unequal with the other groups? Why does one group merit the vaccine while the other groups do not? 2. Should people who make society flourish through their economic productivity, such as the employees of Goldman Sachs, be put into the priority group? Should people who contribute to making life enjoyable, such as entertainers and athletes, be put into the priority group? Under both the utilitarian view and the justice view, it seems fair to allocate some of the vaccine’s doses to people that contribute to society; however, deciding which individuals contribute to society is not easy. This often depends upon your social perceptive of value. • From a utilitarian point of view, it is the group that makes society better off. But, the student has to clearly explain how this group makes society better off, and not in economic terms. • For a justice perspective, the student has to explain why one group, for example, those who contribute to economic productivity has a higher priority level than athletes or entertainers. This requires a clear explanation of the student’s perception of social value. 3. If you were the CEO of the company that manufactured the swine flu vaccine, would you ensure that all your employees were inoculated first, or would you recommend that they too wait in line? There could be some reasons that will encourage the manufacturer to inoculate its employees: • The supply of the vaccine is so important to society that the company cannot afford its own employees falling sick; • The company would want to discourage its employees, with access to the manufacturing facilities, to steal any doses of the vaccine; and, • The people at the firm have contributed to the development of the vaccine and might have even been at risk being in contact with the virus. There could be some reasons that will discourage the manufacturer to inoculate its employees first: • The company might be perceived by the rest of society as selfish or unfair; and, • There could be people in high-risk groups who need the vaccine immediately. 4. Insurance and Genetically Inherited Diseases What this case has to offer This case is an example of an ethical dilemma resulting from allowing high-risk individuals, with genetic predisposition towards certain diseases, to purchase insurance at the same cost as other individuals with lower risk. The results of a genetic test can confirm or rule out a suspected genetic condition or help determine a person's chance of developing or passing on a genetic disorder. Arguably, individuals could be denied insurance coverage if a genetic predisposition is considered a pre-existing condition. Teaching suggestions An interesting way to start this case is by discussing the concepts of adverse selection and preexisting condition before discussing the ethical dilemma associated with genetic testing. Ideally, a health insurer would like each person to pay insurance premiums proportionally to the expected cost of treating all individuals in an insurance pool; and also, the health insurer should encourage all individuals in the pool to take care of their health in order to reduce the overall insurance cost for all individuals insured. In order to identify the expected cost of insurance, the insurer needs to calculate the probability of each individual of contracting a disease and the cost of treating the disease. If an individual is already diagnosed with a disease, a known pre-existing condition, the expected cost of medical bills would be much higher than the average and it will likely be incurred in a shorter period of time. Next, I ask students to what extent a genetic test can be used as evidence of a pre-existing condition, and what are the cost and benefits of genetic testing, including the potential costs at the individual level and to the whole society from allowing or denying health insurance to highrisk individuals. Discussion of ethical issues 1. Do you consider it to be unethical for insurance companies to charge high-risk people a higher premium than low-risk people? Health insurance is insurance against the risk of incurring medical expenses among individuals. By estimating the overall risk of health care expenses among a targeted group, an insurer can develop a finance structure, such as a monthly premiums or payroll tax, to ensure that money is available to pay for future health care benefits specified in the insurance agreement. The insurer considers the losses expected for the insurance pool and the potential for variation in order to charge premiums that, in total, will be sufficient to cover all of the projected claim payments for the insurance pool. The premium charged to each of the pool participants is that participant’s share of the total premium for the pool. Under this view, it does not seem unethical to charge higher premiums to individuals with higher risks; however, this does not consider (1) the possibility that the additional insurance cost may make it unaffordable to be insured, or (2) the possibility of being denied insurance if the insurer deems the risk to be too high. Under these circumstances, it is not entirely clear-cut whether or not society is better off by denying insurance coverage to some people. Is society better off when it discriminates people based on their risk profile? 2.Are insurance companies acting responsibly when they require customers to disclose medical information and/or submit to a medical examination? The answer to this question is related to the answer of the previous question. Asking customers to provide medical information and/or submit to a medical examination should prevent individuals with a pre-existing condition from benefiting from immediate coverage. Moreover, this information can be used by the insurer to determine the expected costs of future claims more accurately; nevertheless, this information could be potentially used to discriminate against certain individuals based on their clinical history or the results of the tests. 3. How would you argue in favor of Judy Wasylycia-Leis’ proposed legislation? This legislation should be passed for the following reasons: • Under the Distributive Justice principle and Rawl’s approach to justice, discrimination against otherwise-healthy individuals on the basis of a genotypic variation is unfair. People that were born to families with predisposition to genetic diseases did not have any control over their condition. • Before the existence of genetic testing, people with predisposition to genetic diseases were insured and the health insurance costs were affordable by all individuals, implying that risks were pooled or diversified to an acceptable level. • Having a predisposition to genetic diseases does not imply that an individual will not contribute to the insurance pool for a number of years before actually contracting the disease. Denying insurance to these people will cause them to not contribute to an insurance plan and later on, if they contract the disease, they will have to be covered by public health programs subsidized with tax payers’ money. • If insurers use the information from genetic tests against people, this could discourage people from taking a test which may be in their interest. It may stop them from having early diagnosis for treatable illnesses. • Even with the advances in genetic testing, it is not yet entirely possible to get large sample statistics on the accuracy of these tests. People may be denied coverage based on false positives. Furthermore, it is not clear whether or not the expected costs of treating certain genetically inherited diseases will decrease if new treatments become available. • Employers may deny hiring people with genetically inherited diseases if the cost of insuring these people is higher. This again will result in unfair disadvantage to these people. • Legislation that gives comprehensive protection against all forms of genetic discrimination is necessary to ensure that biomedical research continues to advance. Such legislation is necessary so that patients are comfortable availing themselves to genetic diagnostic tests. 4. How would you argue against Judy Wasylycia-Leis’ proposed legislation? This legislation should NOT be passed for the following reasons: • From the utilitarian perspective, the ethically correct action is the one that will produce the greatest net social benefit, often measured in terms of the amount of pleasure or the least amount of pain. In this case, subsidizing high-risk individuals may harm many other individuals or families also struggling to afford health insurance. • It is not unethical to charge a higher premium to high risk individuals. Other high-risk individuals, such as smokers, already pay higher premiums. 5. Terrorist Payments What this case has to offer This case allows the students to apply the ethical theories of utilitarianism, deontology and virtue ethics to a real situation, although the names have been altered so not as to bias any discussion in class. On March 14, 2007 Chiquita Brands International entered into a plea agreement with the U.S. Department of Justice. Chiquita agreed to pay a $25 million fine after it admitted that it made payments to a terrorist organization for protection of its operations in Columbia. Teaching suggestions I find that this case works well when each ethical theory is used separately to analyze the situation. I begin by asking the students to summarize the key utilitarian notions and then apply those concepts and principles to the case facts. After a thorough analysis, we then define deontology and apply it to the case facts. Finally, we do the same with virtue ethics. What the students find interesting is that they will often argue in favor of one position using one of the ethical theories and then argue for a diametrically opposed position when using a different ethical theory. This is a useful exercise for illustrating that ethical theories help in the analysis of problems, but that, because ethical theories approach problems differently, it makes sense that their recommendations will not always be the same. Discussion of the Ethical Issues 1. Economics The only argument in favor of making the terrorist payments, other than saving company employees from harassment, is economic. CMI paid $1.7 million over an eight-year period from 1997 to 2004, or $212,500 per year on annual revenues of $4.5 billion. The payments are immaterial. Also, the amounts are analogous to the premiums on an insurance policy. By making the payments, the company is ensuring that its operations are not disrupted and its employees are not harmed. From an economic perspective, the payments are cost-effective, and a necessary business expense, regardless of whether they are classified as ‘security payments’ or ‘extortion payments’. The arguments against making the payments are legal (counsel has advised CMI that the payment is illegal) and ethical (a variety of ethical theories can be used). 2. Utilitarianism Utilitarianism contends that the best option is the one that promotes the most happiness for humanity. In this case, not paying the terrorist would promote the most happiness. The National People’s Liberation Army is involved in murder, rape, torture and the cultivation and exportation of cocaine. These negative societal impacts far outweigh the positive of protecting the CMI workers in Columbia and the profits that accrue to the owners of the mine. So, a utilitarian would argue not to make the payments. Utilitarianism also argues that probable consequences have to be considered. This means that CMI cannot just sell its operations to another company and transfer the problem to the new owner. Presumably the terrorist would extort payments from the new owners, which does not promote the overall happiness of society. So, transferring the problem to another is not an acceptable ethical alternative. Are there any other options? Asking this question allows the students to use their moral imagination and come up with creative solutions to this dilemma. For example, rather than make the payments to the terrorist, CMI could invest in a defensive force to protect its employees. Although this would probably be much more expensive than the $1.7 million extortion payments, it would provide a greater social benefit than promoting terrorism. 3. Deontology Rather than focusing on consequences, deontology examines the motivation of the decisionmaker. Two useful rule-questions are: are you prepared to have your decision universalized, and are you treating people as ends or as means? If everyone was prepared to make payments to terrorists and other extortionists, it would contribute to the collapse of society. So, from a deontology perspective, making the payments is unacceptable. Also, it would be unacceptable to sell the mining operations to another, who would then be forced to make the extortion payments. Deontology would not accept the position that it is ethically correct to solve a dilemma by transferring it to another decision-maker. CMI has been operating in these countries for over a hundred years. CMI knows the political landscape. It chose, in the early years, to operate in countries in which it knew that extortion and bribes were commonplace. At that time, it made the decision to treat these payments as a means to furthering the financial results of the company. So, the ethicality relates not to the current payments but to all the previous payments the company has been making since the 1870’s. This line of reasoning forces the students to consider the motivation of the company from the beginning of its operations in these Latin American countries. (Instructor note: this is an opportunity to lead a slightly tangential discussion of the current business dilemma of opening branch operations in third world countries.) So, are there any other options? Once again, the students are forced into using their moral imagination. Perhaps CMI can work with the local governments to enhance the rule of law within these countries. However, this is presumably a very costly option. Are there any others that may be more cost effective? 4. Virtue Ethics Similar to deontology, virtue ethics examines the motivation of the decision-maker, rather than the consequences of the decision. Firms are to demonstrate courage, candor, and integrity. Standing up to the terrorists, maybe more foolhardy than courageous. However, the firm may choose to be candid, by disclosing that what is happening in Latin America and that it is making the payments not as ‘security payments’ but rather as ‘extortion payments’. This would allow all interested stakeholders, including the U.S. government, to know where CMI stands, and how it is conducting business abroad. Once again, CMI can demonstrate integrity by not making the payments and instead by developing a creative strategy that ensures the security and safety of its operations and personnel. A virtue ethics approach allows students to be imaginative, and not fall into thinking of the false dichotomy of either make the payments or quit Latin America. Additional Information In 1871, Henry Meiggs formed the United Fruit Company. In 1970 it changed its name to United Brands Company and in 1985 to Chiquita Brands International. Often, there have been allegations of questionable business activities. Since its early years of operations, the United Fruit Company was accused of bribing various government officials for preferential treatment. On November 12, 1928 a strike at a United Fruit plant in Columbia was put down with the support of government troops. United Fruit was implicated with the CIA in the overthrow of the democratically elected Guatemalan government of General Guzman in 1954. In 1998 the Cincinnati Enquirer launched a series of subsequently retracted articles on the misdeeds of Chiquita, including pollution, bribery, and complacency in importing cocaine into the United States. From 1997 to 2004, Chiquita admitted that it paid approximately $1.7 million to the United SelfDefense Forces of Columbia (AUC in Spanish), a right-wing paramilitary group. Through its subsidiary, Banadex, Chiquita made more than 100 monthly payments, often in cash, to the AUC, which were recorded as being for security services. As control of the banana-growing region shifted, Chiquita then made payments to two other terrorist groups, the National Liberation Army (ELN) and the Revolutionary Armed Forces of Columbia (FARC). Chiquita’s board of directors was aware of these payments, and had been advised by legal counsel, in 2003, to stop making the payments. The U.S. State Department had formally designated both the FARC, in 1997, and the AUC, in 2001, as terrorist organizations. In 2004, Chiquita sold its Columbia subsidiary, Banadex. In 2007, Chiquita pleaded guilty to doing business with a terrorist organization and agreed to pay a $25 million fine. Useful Videos, Films & Links “Chiquita Brands International” The New York Times Tuesday November 30, 2010. http://topics.nytimes.com/topics/news/business/companies/chiquita-brands-internationalinc/index.html McQuillen, William (2010) “Chiquita Faces New Claims Over Colombia Terrorism” Bloomberg Apr. 15 http://www.businessweek.com/news/2010-04-15/chiquita-faces-new-claims-by-familiesover-colombia-terrorism.html Leonning, Carol (2007) “In Terrorism-Law Case, Chiquita Points to U.S.” Washington Post Aug. 2 http://www.washingtonpost.com/wpdyn/content/article/2007/08/01/AR2007080102601.html 6. The Case of Cesar Correia What this case has to offer This is a true story of a young man who committed a crime, went to jail, served his time, began a career in computers and started a business with a colleague. He is now being penalized a second time. Is that fair? This case lends itself easily to analyses based on the theory of rights, justice as fairness, utilitarianism and virtue ethics. Teaching suggestions Rather than have the students read the case I give them the basic facts contained in the first paragraph, the setting up of Infolink Technologies and the lawsuit. I have them vote on whether or not George has a right to be told about Cesar’s background. I then ask them to vote whether or not Cesar has a right to not tell George. Any student that votes both ways needs to explain why. I tell them I will give them any additional information that they think would be relevant in supporting their initial position. The students ask the normal questions about the background, nature and causes of the crime, the judge’s opinion, and the pardon. In this way all the facts of the case are given to the students. It is interesting to watch the students change their opinions as new information is provided, and then have them explain why that new bit of information was important. Discussion of Ethical Issues 1. Ignoring any legal issues, was Cesar ethically obligated to inform his partner, George, of his criminal past? The theory of rights contends that individuals have certain entitlements, regardless of their economic condition, gender, age, and geography. Included among these rights are the right to privacy and the right to information. The right to privacy means that personal information need not be disclosed if the withholding of that information would not harm either the individual or anyone else. Examples include not disclosing information about one’s religion, sexual orientation, or political affiliations. A right to information means that an individual must be given all the relevant facts and information, including probable implications, so that they can make an informed decision. Examples include product warning labels, the risks associated with various investments, and hazardous work conditions. Students can make arguments both for and against disclosure using these two theories. This is an opportunity to illustrate that reasonable people can come to different ethical conclusions while using the same general philosophical theory. Do Not Disclose • Cesar has a right to privacy. He was pardoned. Therefore, for all intents and purposes the crime never occurred. So, there is nothing to confess or disclose. • The crime, fratricide, has nothing to do with providing information services. So, because there is no link between the two, there is no need to make the disclosure. Make the Disclosure • To be effective in business, partners need to be able to trust one another. George has right to know the background of his potential partner, so that he can decide whether or not this is the sort of person with whom he can rely. George has the right to information so that he can assess the risks of having Cesar as his business partner. 2.Did George have a right to know about Cesar’s criminal past? Rawls argues that each person has a right to liberty that is commensurate with the liberty of everyone else. Also, inequalities should be to everyone’s advantage. In this case, under the double-jeopardy rule, a person should not be convicted of the same crime twice. If Cesar discloses and he suffers as a result, then he is being punished for the same crime twice. This would not be fair. On the other hand, if George is not informed then he is not on an equal plane with Cesar. Cesar knows something that may be potentially harmful to the business; that they may lose clients because of Cesar’s conviction. This inequality in information is not to everyone’s advantage. So Cesar should make the disclosure. George may nevertheless accept Cesar as a legitimate business partner. He may view the crime as being justified, with a debt that has been repaid to society, and a crime that is not relevant to their business venture. Utilitarianism focuses on the consequences of actions. If you murder your father, these are some of the consequences: imprisonment, being shunned by many segments of society, carrying the stigma of being an ex-convict, and having business colleagues view you in a jaundice manner. Cesar may very well lose George as a potential business partner if he makes the disclosure, but that is one of the consequences of his crime. The ethical action is for Cesar to make the disclosure and live with the consequences. Virtue ethics takes a more holistic approach, looking at all the characteristics and traits of the individual. The murder of his father was a horrendous crime, and his reticence about disclosing this to his partner demonstrates a lack of candor and respect for George. On the positive side, however, he argued that the murder was based on compassion for his mother and brother. He demonstrated determination by completing his university while in prison. He was succeeding as a businessman, running a publicly traded company. His behavior was good enough to earn a pardon. So, like everyone else, Cesar has both good and bad aspects to his character. The students can then explain whether they put more weight on the positive or the negative aspects of his character. 7. Chris Neary’s Over commitment to His Business (online) What this case has to offer This is a case where an entrepreneur’s commitment to his business and desperation causes him to engage in an illegal activity. Teaching suggestions I ask students how far they would be willing to go to finance a business where they have already invested all their money and in which their reputation is at stake. Moreover, I ask students whether it is acceptable to break the law under any circumstances to keep a business going. Finally, I contrast their answers with the facts of this case. Discussion of ethical issues 1. Discuss why an entrepreneur might become overly committed to the entrepreneur’s business, to the point of intentionally engaging in an illegal activity. There could be a number of reasons: • The entrepreneur might perceive the failure of the business as a personal failure and believe that failure is not an option. As stated by Chris: “I was so hell bent on making my business the same kind of success I’ve had in the rest of my career, I just overlooked the ramifications of it” and also “I felt it was up to me to turn things around and I tried to do everything myself”. • The entrepreneur might believe that profits should be pursued at any cost. Profit is not the objective of business. Profit is the consequence of doing business well. Furthermore, business must adhere to the applicable laws and regulations as a bare minimum. • The entrepreneur might have an “end justify the means” narrow approach suggesting that engaging in an illegal activity, at least temporarily, could result in some good later on, for example keeping the company afloat and employ other people in the business. In ethics, the end never justifies the means. 2.What philosophical principles did Chris ignore when deciding to smuggle marijuana? • Chris seems to have a misguided understanding of business, an over-commitment to the company, and ethical immaturity. • As long as the business succeeds, the techniques (i.e., means) used are erroneously thought to be irrelevant. • Chris is ignoring applicable laws and regulations in doing business. • Chris is ignoring that his actions might harm other people, including his own family and employees. 3. Assume that after he serves his eight-month sentence, Chris Neary starts another advertising agency with a new partner. Is Chris under any ethical responsibility to reveal his drug-trafficking conviction to his new partner before they form their partnership? Not revealing this information could be considered unfair by a future business partner. In a business where reputation is important to acquire and maintain clients, dealing with a partner that is an ex-convict might negatively impact the business. The partner needs to be aware of this and then decide to enter or not into the partnership. Solution Manual for Business and Professional Ethics for Directors, Executives and Accountants Leonard J. Brooks, Paul Dunn 9781285182223