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Ethics(Business) and

Corporate Governance

Unethical Behavior
Unethical behavior in business is not just a recent
phenomenon
In the sixth century, B.C., the philosopher Anacharsis

once said, The market is a place set apart where men


may deceive one another.
Two centuries later, Diogenes was spotted carrying

around a lighted lamp, up and down the city streets, in


the middle of the day. When asked what he was doing,
he replied, that he was looking for an honest man.

Ethics: the study and assessment of morals. The word

"ethics" is derived from the Greek word, ethos (character or


custom). Greek word for custom or habit, the characteristic
conduct of an individual human life.
Ethics is studying and talking about what is right and wrong,
good and bad. It is also studying what makes something
good or bad. This helps decide whether other things are
good or bad.

Values: guiding constructs or ideas, representing deeply

held generalized behaviors, which are considered by the


holder, to be of great significance.
Without commonly shared and widely entrenched moral
values and obligations, neither the law, nor government, nor
even the market economy will function properly. Core
values drive behaviors, and behaviors tell the world who and
what it is being stand for

What are the core values that are fundamental to the


success of any individual or organization?

Honesty
Respect
Responsibility
Fairness
Compassion
Perseverance
Courage

Morals: a system or set of beliefs or principles, based on

values, which constitute an individual or groups perception


of human duty, which act as an influence or control over their
behavior. The word morals is derived from the Latin mores
(character, custom or habit)
The most important human endeavor is the striving for
morality in our actions. Our inner balance and even our very
existence depend on it. Only morality in our actions can give
beauty and dignity to life.

According to Ethical
Principles or Standards

or

Moral,

Values,

Whose Values?
Personal
Family
Peers
Religious
Company
Community, Regional, National, International

According to Ethical or Moral,


Principles or Standards
Learned Where?
Home
School
Church (or other place of worship)
Life Experience
Work Experience
Books
News Media
Entertainment Media

Values,

Business Ethics
Business Ethics is about:
Decision-Making
By People in Business
According to Moral Principles or Standards
Ethics is the study of our web relationships with others.
Companies do not operate in a vacuum; in a universe of
relationships with multiple stakeholders.
Business Ethics means conducting all aspects of
business and dealing with all stakeholders in an ethical
manner.

Business Ethics ...

Law

Legal Standard

Ethics

Social Standard

Free
Choice

Personal Standard

Why is Business Ethics Important?


Companies experience social blowback when stakeholders
perceive that they have breached their deal with society
Good business ethics is a prerequisite for good strategic
management
Ethics enhance lives and relationships both inside and
outside of the organization.
Understanding ethics can help people decide what to do
when they have choices.

Why ethics for


organizations?
A basis for values and visions
To motivate employees
Perhaps demanded by customers
For good relationships to stakeholders
An overall check on plans
To avoid various exposures and risks
Part of governance
Sustainability

Work Ethics:
A group of moral principles, standards of behavior, or set of
values regarding proper conduct in the workplace.
Relationships at Work
Management/owner toward client/customer
Management/owner toward employees
Employee toward Employer, Co-workers, Customers

ETHICS IS A PERSONAL
RESPONSIBILITY
The responsibility rests first and foremost with us as
individuals.
Ethics is a personal matter and we cannot pass the
buck to others.
The individual must consciously focus on ethical
concerns.
He or she must go beyond the rules, thinking about
why the rules are necessary and written as they are
in other words, the substance behind the form.

Business Abuse
Illegal
Unethical
irresponsible Act done against an Employer

Results of Business Abuse


Higher prices
Business Failure
Fewer Jobs
Unpleasant Working Conditions

Examples of Business Abuse


Stealing
Merchandise
Money
* Shoplift
* Kickback
* Conflict of Interest
* Unauthorized Discounts
Time

Examples of Business Abuse


Vandalism
Falsify Records
Break Confidentiality
Ignore Safety Rules
Misrepresent Merchandise
Poor Client Service

Examples of Business Abuse


Irresponsible Behavior
Addictions
* drugs
* alcohol
* tobacco
Gossip
* Causes poor work environment (morale)
* Lowers Productivity

Examples of Business Abuse


Harassment of Co-workers or Clients
* Unwelcome sexual advances
* Compliance as condition of employment
* Interferes w/ wk performance through intimidation

Rationalization on Business Abuses


Everybody does it
The co. wont miss it
The co. overcharges
Im not paid enough
The co. doesnt deserve my loyalty

How Employers Respond to Business Abuse


Increase Security
* loss prevention mgmt.
* surveillance
* Networks/Helplines
* threats of prosecution
Increase Employee Loyalty
* fair wages & benefits
* fair/consistent treatment
* recognition for good work
* foster family climate

As Employees, What Are Our Choices?


Ignore Business Abuse
Rationalize it away
Speak Up
Discuss to Clarify Issues
Blow the Whistle

If Youre Unsure - Before You Act -- ASK:


Is this legal?
Is it against co. policy?
Could the action cause loss or harm to anyone?
If everyone I knew saw me, would I feel
uncomfortable?

Four Ways to Earn Respect at Your First Job


1. You Dont Know What You Dont Know
Dont assume that you know how things should be done
2. A Sincere Thank You Goes a Long Way
Your manager is a human being who likes to feel
appreciated
3. Few Go Above and Beyond
Take on additional assignments or put in extra time once
in a while
4. Listening Is Highly Underrated
Dont speak without listening first.

First impression follows all the way!

Some
business
practices
always
considered unethical and often illegal
Misleading advertising
Misleading labeling
Poor product or service safety
Harming the environment
Insider trading
Padding expense accounts
Dumping flawed products on foreign markets

Globalization, Business Ethics &


Competitive Advantage
Globalization has brought about greater
involvement with ethical considerations and
most
importantly
achieving
competitive
advantage through business ethics.
Globalization and business ethics are linked as
they affect a companys ability to commit to its
shareholders, in particular to external investors,
and preserve the trust needed for further
investment and growth.

Ethics of Scandal Versus


Ethics of Strategy
It is important for companies to deal with ethics
as a corporate strategy that, if uniquely
implemented,
could
achieve
competitive
advantage for the company rather than waiting
to react to possible ethical issues of importance
to the targeted stakeholders.
It is the necessity of being ethically proactive
company rather than being ethically reactive
company.

Business
Ethics
as
Competitive
Advantage
to sustain distinctive global competitive
advantages a need to protect, exploit and
enhance the unique intangible assets, particularly
integrity (building firms of integrity is the hidden
logic of business ethics).
behavior that is trusting, trustworthy, and
cooperative, not opportunistic, is a competitive
advantage.
Having a value-creating strategy which other
companies are unable to imitate will sustain
competitive advantage globally.

Business
Ethics
as
Competitive
Advantage
Business ethics as competitive advantage involves
effective building of relationships with a companys
stakeholders based on its integrity that maintains
such relationships.
Integrity approach to business facilitates the
delivery of quality products in an honest, reliable
way and can enhance work life by making the
workplace more fun and challenging.
It can
improve relationships with stakeholders and can
instill a more positive mindset that fosters creativity
and innovations among the stakeholders.

ETHICAL
CHOICES
WITHIN ORGANIZATIONS
START AND END AT THE
TOP
The tone at the top

Corporate Governance
The way in which organizations are directed and
controlled
The process by which corporations are made
responsive to the rights and wishes of
stakeholders

Who is responsible for Ethics /


Governance Issues
Board of Directors Roles & Responsibilities

Control & oversight over management


Adherence to legal prescriptions
Consideration of stakeholder interests
Advancement of stockholder rights
Is being ethical good for business?
Is it possible to be both profitable and
responsible?

Directors Roles & Responsibilities


Principles of Good Governance

No more than 2 directors are current or former company


executives
No directors do business with the company
Each director owns a large equity stake in the company
At least one outside director with extensive experience
Each director attends at least 75% of all meetings
Board is frugal on executive pay, diligent in CEO succession,
and prompt to act when trouble arises
CEO is not also the chairperson of the board
Shareholders have considerable power and information to
choose & replace directors

Corporate Governance
Directors can be out of touch with a company's business
and can fall prey to the temptation to simply be polite to a
chief executive. A code of silence develops in the
boardroom. By the time someone is willing to speak up,
the company is in deep trouble.

Directors must ensure that they remain the true stewards


of corporate accountability without undue interference
from the CEO or other members of management.
The law mandates directors must act in the best interests
of the corporation and its shareholders

Corporate Governance
Problems in Corporate Governance
Chairman often same person as CEO

In the UK, the role of chairman of the board and


CEO are generally held by different people, unlike
the U.S., where it is estimated that in 70-80% of
companies, one person wears the hats of both
CEO and chairman.
Companies in which the chairman and CEO
positions are held by two different people perform
no better than companies in which the roles are
combined. In other words, its no guarantee against
future scandals.

The Board of Directors of Worldcom reportedly


allowed CEO Bernie Ebbers to rule practically
unchecked, generally rubber-stamping his
decisions.
Their audits rarely scratched below the surface
and they approved multibillion dollar mergers and
acquisitions with little discussion.

Enrons Board

Enron had an experienced, independent board


Lay, Skilling, and one retired executive were the only insiders among
17 directors
Median tenure was 7 years
Audit committee was headed by Stanford accounting professor

Ken Lay, Chairman and CEO


Big picture; optimistic; tended to avoid
controversy: cultivated image of wealth
and power
Ken gravitates toward good news
Career overview
Poor son of lay Baptist minister in southern Missouri
Worked hard in school; PhD in economics
Energy policy in Washington; strong advocate of deregulation
Went to work in pipeline business in FL then TX
Made CEO of HNG in 84; bought by much larger InterNorth
In 86 became CEO of HNG InterNorth, renamed Enron
Enron CEO for next 16 years

Jeffrey Skilling, President


Very smart: proponent of big ideas;
less interested in details
Skilling is a designer of ditches, not a
digger of ditches.
Career overview
Modest upbringing in Northeast and Midwest
Attended SMU on scholarship; Harvard MBA 79
McKinsey consultant; head of energy practice
Joined Enron in 90 to start gas trading operation
Formed Enron Capital and Trade Resources (ECT) in 91
Enron President in 1996; CEO in 01 (for 6 months)

Andrew Fastow, CFO


Ambitious; unwilling to let the rules get in
the way; fluent in language of high finance
I dont know that he ever had a moral
compass
Career overview
Grew up in NJ suburb of New York (big into Star Wars)
Excelled at Tufts; met Lea Weingarten, Houston heiress
Got their MBAs together at Northwestern
Learned securitization at Continental Bank in Chicago
Hired by Enron as a financial manager in 90
Became CFO in 98

Worst Corporate Accounting Scandals of All Time


Waste Management Scandal (1998)
Company: Houston-based publicly traded waste management company
What happened: Reported $1.7 billion in fake earnings.
Main players: Founder/CEO/Chairman Dean L. Buntrock and other top
executives; Arthur Andersen Company (auditors)
How they did it: The company allegedly falsely increased the depreciation time
length for their property, plant and equipment on the balance sheets.
How they got caught: A new CEO and management team went through the
books.
Penalties: Settled a shareholder class-action suit for $457 million. SEC fined
Arthur Andersen $7 million.
Fun fact: After the scandal, new CEO A. Maurice Meyers set up an anonymous
company hotline where employees could report dishonest or improper behavior.

Enron Scandal (2001)


Company: Houston-based commodities, energy and service corporation
What happened: Shareholders lost $74 billion, thousands of employees and
investors lost their retirement accounts, and many employees lost their jobs.
Main players: CEO Jeff Skilling and former CEO Ken Lay.
How they did it: Kept huge debts off balance sheets.
How they got caught: Turned in by internal whistleblower Sherron Watkins; high
stock prices fueled external suspicions.
Penalties: Lay died before serving time; Skilling got 24 years in prison. The
company filed for bankruptcy. Arthur Andersen was found guilty of fudging
Enron's accounts.
Fun fact: Fortune Magazine named Enron "America's Most Innovative
Company" 6 years in a row prior to the scandal.

WorldCom Scandal (2002)


Company: Telecommunications company; now MCI, Inc.
What happened: Inflated assets by as much as $11 billion, leading to 30,000
lost jobs and $180 billion in losses for investors.
Main player: CEO Bernie Ebbers
How he did it: Underreported line costs by capitalizing rather than expensing
and inflated revenues with fake accounting entries.
How he got caught: WorldCom's internal auditing department uncovered $3.8
billion of fraud.
Penalties: CFO was fired, controller resigned, and the company filed for
bankruptcy. Ebbers sentenced to 25 years for fraud, conspiracy and filing false
documents with regulators.
Fun fact: Within weeks of the scandal, Congress passed the Sarbanes-Oxley
Act, introducing the most sweeping set of new business regulations since the
1930s.

Tyco Scandal (2002)


Company: New Jersey-based blue-chip Swiss security systems.
What happened: CEO and CFO stole $150 million and inflated company income
by $500 million.
Main players: CEO Dennis Kozlowski and former CFO Mark Swartz.
How they did it: Siphoned money through unapproved loans and fraudulent
stock sales. Money was smuggled out of company disguised as executive
bonuses or benefits.
How they got caught: SEC and Manhattan D.A. investigations uncovered
questionable accounting practices, including large loans made to Kozlowski that
were then forgiven.
Penalties: Kozlowski and Swartz were sentenced to 8-25 years in prison. A
class-action lawsuit forced Tyco to pay $2.92 billion to investors.
Fun fact: At the height of the scandal Kozlowski threw a $2 million birthday party
for his wife on a Mediterranean island, complete with a Jimmy Buffet
performance.

HealthSouth Scandal (2003)


Company: Largest publicly traded health care company in the U.S.
What happened: Earnings numbers were allegedly inflated $1.4 billion to meet
stockholder expectations.
Main player: CEO Richard Scrushy.
How he did it: Allegedly told underlings to make up numbers and transactions
from 1996-2003.
How he got caught: Sold $75 million in stock a day before the company posted
a huge loss, triggering SEC suspicions.
Penalties: Scrushy was acquitted of all 36 counts of accounting fraud, but
convicted of bribing the governor of Alabama, leading to a 7-year prison
sentence.
Fun fact: Scrushy now works as a motivational speaker and maintains his
innocence.

Freddie Mac (2003)


Company: Federally backed mortgage-financing giant.
What happened: $5 billion in earnings were misstated.
Main players: President/COO David Glenn, Chairman/CEO Leland Brendsel,
ex-CFO Vaughn Clarke, former senior VPs Robert Dean and Nazir Dossani.
How they did it: Intentionally misstated and understated earnings on the
books.
How they got caught: A SEC investigation.
Penalties: $125 million in fines and the firing of Glenn, Clarke and Brendsel.
Fun fact: 1 year later, the other federally backed mortgage financing company,
Fannie Mae, was caught in an equally stunning accounting scandal.

American International Group (AIG) Scandal (2005)


Company: Multinational insurance corporation.
What happened: Massive accounting fraud to the tune of $3.9 billion was
alleged, along with bid-rigging and stock price manipulation.
Main player: CEO Hank Greenberg.
How he did it: Allegedly booked loans as revenue, steered clients to insurers
with whom AIG had payoff agreements, and told traders to inflate AIG stock
price.
How he got caught: SEC regulator investigations, possibly tipped off by a
whistleblower.
Penalties: Settled with the SEC for $10 million in 2003 and $1.64 billion in 2006,
with a Louisiana pension fund for $115 million, and with 3 Ohio pension funds for
$725 million. Greenberg was fired, but has faced no criminal charges.
Fun fact: After posting the largest quarterly corporate loss in history in 2008
($61.7 billion) and getting bailed out with taxpayer dollars, AIG execs rewarded
themselves with over $165 million in bonuses.

Lehman Brothers Scandal (2008)


Company: Global financial services firm.
What happened: Hid over $50 billion in loans disguised as sales.
Main players: Lehman executives and the company's auditors, Ernst & Young.
How they did it: Allegedly sold toxic assets to Cayman Island banks with the
understanding that they would be bought back eventually. Created the impression
Lehman had $50 billion more cash and $50 billion less in toxic assets than it really
did.
How they got caught: Went bankrupt.
Penalties: Forced into the largest bankruptcy in U.S. history. SEC didn't
prosecute due to lack of evidence.
Fun fact: In 2007 Lehman Brothers was ranked the #1 "Most Admired Securities
Firm" by Fortune Magazine.

Bernie Madoff Scandal (2008)


Company: Bernard L. Madoff Investment Securities LLC was a Wall Street
investment firm founded by Madoff.
What happened: Tricked investors out of $64.8 billion through the largest Ponzi
scheme in history.
Main players: Bernie Madoff, his accountant, David Friehling, and Frank
DiPascalli.
How they did it: Investors were paid returns out of their own money or that of
other investors rather than from profits.
How they got caught: Madoff told his sons about his scheme and they reported
him to the SEC. He was arrested the next day.
Penalties: 150 years in prison for Madoff + $170 billion restitution. Prison time
for Friehling and DiPascalli.
Fun fact: Madoff's fraud was revealed just months after the 2008 U.S. financial
collapse.

Satyam Scandal (2009)


Company: Indian IT services and back-office accounting firm.
What happened: Falsely boosted revenue by $1.5 billion.
Main player: Founder/Chairman Ramalinga Raju.
How he did it: Falsified revenues, margins and cash balances to the tune of 50
billion rupees.
How he got caught: Admitted the fraud in a letter to the company's board of
directors.
Penalties: Raju and his brother charged with breach of trust, conspiracy,
cheating and falsification of records. Released after the Central Bureau of
Investigation failed to file charges on time.
Fun fact: In 2011 Ramalinga Raju's wife published a book of his existentialist,
free-verse poetry.

Corporate Governance
More fully independent auditors
Prohibit access to government contracts if violate
law/ethics
Create legal duty to promote the public good

Congress passed Sarbanes-Oxley


302:
States that the CEO and CFO are directly
responsible for the accuracy, documentation and
submission of all financial reports as well as the internal
control structure to the SEC.
303: Relationship between auditors and companies
regulated-Improper Influence on the conduct of Audits.
404: Auditor attestation to management assessment of
internal controls)-mandates that all publicly-traded
companies must establish internal controls and procedures
for financial reporting and must document, test and maintain
those controls and procedures to ensure their effectiveness.

If you stand for nothing. You fall for


anything.

Its not doing things right, but doing


the right things.