18. Betaseron (A) (Chapter 1, pages 59-60)
On August 20, 1993, Berlex announced its distribution and price plan for Betaseron® and sent a
letter to all U.S. neurologists detailing its pricing and distribution.
•
Persons who have either commercial medical insurance or an annual family income of
more than $50,000 would pay $1000 per month. However, to encourage strict
compliance to the treatment regimen, Berlex would give patients two months of the
drug free of charge after ten consecutive months of compliance. Therefore, anyone who
adheres to the prescribed treatment regimen would pay $10,000 (annually), the highest
price to be paid for the drug.
•
Persons with an annual family income between $20,000 and $50,000, without medical
insurance, would be provided financial assistance by the company to help support the
annual costs of the medication.
•
Persons with an annual family income below $20,000, who have no medical insurance,
would be provided the medication free of charge.
To minimize out-of-pocket expenses, Berlex developed the Betaseron® Card which would
identify patients to pre-chosen pharmacies and provide information about their payment
program and price. Qualified patients would receive interest-free deferred payment for up to 55
days. This was intended to enable most patients to pay their bills after they received
reimbursement. The card was provided through a financial institution and financed by Berlex.
After 55 days, a finance charge of 12% would be applied to any unpaid balance. Berlex would
not receive any portion of the interest payments and would not profit from the card.
Distribution was set to begin in October 1993, with distribution handled by PCS Health Systems,
Inc., a nationwide network of affiliated pharmacies. This managed pharmacy network served
two purposes. First, it enabled Berlex to cut costs by minimizing handling charges; Berlex
estimated that patients would save about $2000 per year. It also enabled Berlex to provide the
drug only to specifically identified patients and insure that, once therapy has begun, the supply
of the drug would be continuous.
Initial access to the drug was determined by a lottery, designed to provide equal access to the
initially limited supply. Physicians who wished to obtain Betaseron® for their patients enrolled
them in the program during an open registration period from August 23 to September 15, 1993.
At the conclusion of the registration period, patients were assigned a randomly generated
number. Patients who registered for the drug after the close of registration were put at the end
of the list on a first-come, first-served basis. Those with numbers under 1000 were slated to
begin receiving the drug immediately. Those with numbers under 12,000 would have the drug
by year's end. Those with numbers between 12,001 and 40,000 were expected to have access to
the drug by mid to late 1994 and those with numbers over 40,000 would probably not be
supplied Betaseron® until late 1994 or early 1995. Berlex placed no restrictions on which MS
patients physicians could enroll, in spite of the FDA indication for ambulatory relapsing,
remitting MS.
Patients with MS and their advocates were left with a host of questions. Was the lottery system
a fair way to resolve the distribution dilemma? How fair was the pricing structure? Did Berlex do
everything possible to guarantee equitable access to the drug? Who were the winners and who
were the losers? Lastly, what problems were likely to result from this solution?
1. Selling Only Sugary Drinks (Chapter 1, page 33)
Discussion of ethical issues
1. Why do you think that the doughnut chain continued to sell only sugary soft drinks even though it
was under pressure to sell diet soft drinks as well?
The profit margin on sugary drinks increases with the size of the beverage, because drinks are
made by adding water to syrup. The marginal cost of a larger sugary drink is small, so the profit
is greater for the larger drink, and the business’s owners and/or shareholders need profitability.
The profit margin on diet drinks may be smaller if, for example, they are sold as units, rather
than on tap. Or, the chain may have made a deal with one drinks supplier over another whose
offerings include predominantly sugary beverages.
Given this particular doughnut chain’s customers’ reluctance to shop at more than one place
when time is limited, the strategy might have been a profitable one in the short term,
particularly if the chain had little competition. In the long term, however, especially if product
substitution is possible, customers can vote with their feet if they feel their needs are not being
met by the doughnut chain.
2. Was selling only sugary soft drinks ethical?
Consider the questions of self-interest (the doughnut chain’s) versus the common interest (its
consumers’ health; health problems and societal costs associated with excessive sugar
consumption) and consumer feedback (desire for other beverages). It seems that the chain
doesn’t demonstrate the hypernorm values of compassion or fairness, and lacks responsibility,
so its decisions appear to be unethical.
In the short term, ignoring changing consumer tastes and preferences could be a viable strategy,
particularly if consumers have no substitute offerings if the chain has no competition, but over
the long term, particularly as more health effects of sugar are exposed, consumer trust in the
chain is eroded when it is clear that company interest is greater than consumer interest. Turning
its back on a major stakeholder as a long-term strategy will very likely backfire on the company.
As noted in Chapter 1: “Without the support of key or primary stakeholders such as customers
and employees the sustained profitability is not possible. A corporation’s reputation is based on
the elements that such stakeholders find relevant to their support, including: credibility,
reliability, trustworthiness and the taking of responsibility.” Not taking their interests into
account shows a lack of respect for its customers. And where product substitution is possible,
consumers can walk away.
3. Should the university campus officials have forced the doughnut chain to carry diet soft drinks?
Yes, if they want to take an ethical stance and protect their students. However, the university’s
power to force the doughnut chain to change its product offerings may be limited unless the
contract with the chain permits it, or is up for renewal. However, if the university really wants
to follow some elementary schools, hospitals and other establishments in developing a healthy
food product policy, campus officials may want to try to persuade the chain to offer non-sugar
sweetened drinks. Consumers/students may also provide powerful support by boycotting the
chain or, at least, drawing attention to the unhealthy offerings and the chain’s denial to offer
healthier choices?
Merck and River Blindness (Chapter 5, pages 298-299)
What this case has to offer
This case concerns a company that follows its values and provides a life-enhancing drug for free
to those who cannot afford the drug.
Discussion of ethical issues
1. Pharmaceutical companies have to spend millions of dollars and years of research to find just
one successful drug. Merck spent time and money developing and then distributing Mectizan
for free. Is it possible for Merck to justify, to its shareholders, making a sizable investment in
a product and incurring ongoing costs in the distribution of that product when the product
generates no revenue for the company?
The donation generates reputational good will for the corporation and the price of that
good will, it could be argued, is probably much less than the marketing campaign for
other drugs of the company. (Hanson 2015) The company shows ethical leadership, as
well as a strategic acknowledgement of stakeholders other than shareholders in keeping
with the company’s values and George Merck’s 1950 comment that “Medicine is for the
people...profits follow.” (Merck & Co., Inc. [USA] [n.d.])
Because of the program, the company has “greatly benefited from being seen as a 'good
corporate citizen’” and has seen “enhanced employee satisfaction” and, in addition, “The
U.S. tax benefits that Merck has received on account of the Mectizan Donation Program
have substantially reduced the net financial cost of the program to the company.” (Coyne
and Berk [2002], 16)
In Merck’s case, the donation keeps on giving…back to Merck as continued publicity
over the program... From Merck (2016): In 1994, then-President Jimmy Carter and
former Merck Chairman Dr. Roy Vagelos announced a new World Bank grant program
to expand the Mectizan program; in 1995, Merck unveiled a bronze statue of a boy
leading a blind old man that symbolizes the fight against river blindness, and the World
Bank announced a new 12-year program to fight river blindness using Mectizan; in 1999,
Merck and the Gates Foundation each gave $56.5M and joined with Botswana to form
the African Comprehensive HIV/AIDS Partnerships (ACHAP); in 2012, the Mectizan
Donation Program was 25 years old; and as the case states, in 2015, Dr. William
Campbell was awarded the Nobel Prize in Medicine for his work in discovering
ivermectins while working for Merck & Co.
In case anyone is cynical about the Mectizan donation program, it has “…become a
paradigm for successful public-private partnership in the international health arena.”
(Coyne and Berk [2002], 26)
And, to prevent unwanted or substandard donations, the World Health Organization,
together with pharmaceutical companies, and non-governmental developmental
organisations (NGDOs), developed core principles of donation that require that product
donations (Coyne and Berk [2002]):
• are of maximum benefit to the recipient
• respect the wishes and authority of the recipient
• strictly avoid any double standards in quality
• are based on effective communication between the donor and the recipient.”
Even so, there have been criticisms of the program, for example (Coyne and Berk [2002],
20):
• whether the US government should have allowed the tax deductions given to
Merck
• whether Merck or other drug companies would be pressured to provide similar
donations (although this is considered to have a net positive benefit)
• whether drug companies would reduce R&D on tropical drugs if they might
expect no revenue from them. Limited R&D may be true, but other sources of
funding (e.g., the Gates Foundation) may stimulate more.
2. Did Merck have an ethical obligation to develop and distribute Mectizan for free?
While it may have had no legal obligation to distribute the drug for free, the program was
in keeping with Merck’s values, and George Merck’s 1950 comment that “Medicine is
for the people...profits follow.” (Merck & Co., Inc. [USA] [n.d.]). If shareholders and
other stakeholders (such as employees) at the time also believed in those values, then
Merck may not have felt resistance from those stakeholders; indeed, good acts may have
been expected. Because of its value statements, Merck would have a self-imposed ethical
obligation to provide medicine, although with the strategical intention that profits (not
necessarily from that program) would follow. With tax breaks offsetting the cost of the
program and Merck just providing the drug, but not the costs or logistics of administering
it, doing good became very good for the company.
3. Do you think that Roy Vagelos, Merck’s CEO and chairman, demonstrated ethical leadership?
What value did it have/create?
Yes! Ethical leadership was demonstrated and showed that the company’s stated values
were not just words people wanted to hear, but truly had intention and impact. Even if the
company never intended the program to last as long as it has, benefits were likely realized
at its start. As stated in the answer to Question #1, the company “greatly benefited from
being seen as a 'good corporate citizen’” and has seen “enhanced employee satisfaction”
and, in addition, “The U.S. tax benefits that Merck has received on account of the
Mectizan Donation Program have substantially reduced the net financial cost of the
program to the company.” (Coyne and Berk [2002], 16)
4. Based on the river blindness example, how would you describe the organizational culture of
Merck in the 1980s?
The organizational culture would seem to have been values-based and someone had
responsibility for meeting with the World Bank to at least discuss philanthropy and,
perhaps, with U.S. federal tax officials to discuss the possibility of tax breaks. Notably,
Merck donated Mectizan, rather than just supplying it at a reduced rate. It was this act
that made the program exceptionally successful from the point of view of NGDOs who
might otherwise have been unable to afford the drug or have been able to distribute it as
broadly.
“A number of organizational and health-related arrangements, made to suit or reassure
Merck…also contributed importantly to the success of the program.” For example, the
choice of who would receive the drug deliveries and distribution were not its
responsibilities. In addition, “…a system of monitoring adverse effects served to preserve
Merck's reputation and limit its risks.” (Coyne and Berk [2002], 22)
Finally, “… market and financial features of the program…served to prevent any loss of
business for Merck and to minimize or even offset entirely its net expenditures for the
program. The human drug distribution did not interfere with Merck's existing or future
markets for the well-established veterinary form of the drug. There was also little
prospect of a future commercial market for the human form of the drug, as Merck had
already discovered at the beginning...Finally, whatever Merck's real manufacturing,
administration, and shipping costs were and are, it has taken advantage of U.S. tax
deductions to minimize its net costs.” (Coyne and Berk [2002], 22)
So the corporate culture of Merck in the 1980s was such that someone realized that some
benefits could come from a drug that otherwise had little commercial value on the
African continent, since those who needed it there could not afford it. Rather than shelve
the drug, Merck entered into a partnership that limited its risk and financial expenditure
while benefitting millions of people and creating a template for private/public
partnerships in delivering healthcare.
12. Kardell Paper (Chapter 4, pages 237-239)
What this case has to offer
The Kardell Paper Co. Case involves decisions around the necessity to introduce a very
expensive "closed-loop" pollution control system in a pulp mill.
Discussion of ethical issues
1. Who are the stakeholders involved and what are their interests?
Stakeholders are usually groups who have interests on the corporate decision. The
discussion of stakeholders and their interests produces the expected list except that
usually neither Jack, the technician who discovered the potential problem and who is
most concerned with the impact of sonox, and the unborn, are mentioned.
Stakeholders might also have different interests from the same corporate decision. For
example, mothers can adequately represent the unborn or not, but remember that mothers
may suffer from conflicts of interest in regard to the perceived short-term need for jobs
for their families, etc.
2. Which stakeholders and interests are the most important? Why?
The ranking of stakeholders interests can be done after or in conjunction with the
identification of the major decisions to be taken. Provided sonox is considered a health
risk, the usual ordering of concerns by the public would be: life, health, quality of life,
financial. I usually find that there is quite a debate in class over the primacy of
shareholders concerns (financial) vs. those related to life and health. In the end, it usually
boils down to how serious a health risk the student thinks that sonox is. This is an issue
that is unresolved in the case due to lack of information (the same as in real life - dioxins
are very harmful to monkeys, but science has not been able to make the same case for
humans yet).
The class should realize that there are a number of variants which should be investigated,
time permitting, with the ultimate decision depending on more information. For instance:
• Is sonox really a problem?
•
Are we polluting in sufficient quantities to cause a problem?
•
Are there alternative and less costly process modifications which would reduce,
but not eliminate, our sonox discharge?
•
The closed-loop shut down and costs appear high: are their less disruptive/costly
approaches?
• What are the costs of delay?
An alternate decision would be to defer the closed-loop decision and seek more info on
one or more of the above. In the interim, several decisions arise:
• Should the community be informed of the possible health risks? When?
•
Should bottled water be brought in? When?
• Should the other competitors be brought into the discussions?
3. What was wrong with the quality of the board of directors’ debate?
At this point, it is easy to see that the board was not sufficiently representative of the
stakeholders to meaningfully present and understand the important issues facing the
company. Moreover, there was no one with sufficient technical expertise to appreciate
the significance of the health issues or the biological impact on the environment. The
lawyer may have felt a conflict of interest, in that he was both a director and a paid
counsel. In any event, his view was limited to current and past legal precedent, not to the
future, or to non-legal perspectives. This is functional fixation which can mislead a
corporation into short-range thinking. The result of this analysis should be the realization
that to properly govern a company, the board should have effective representation from
all important stakeholder groups, and/or effective access to and information from
representative groups or ethics experts. This analysis will highlight the value in
appointing "outside" directors (who don't rely on the organization for their livelihood)
and also women directors to insure that all aspects of an issue will be understood and
argued effectively.
4. What is the downside if the right decision is not made? Consider economic factors and also
what Jack might do.
Jack might blow the whistle if he thinks that the wrong decision is made or if the process
is suppressed or if too much delay is involved. This would (did) involve regulatory
sanction including fines, shut down, loss of market, loss of profit, and ultimately loss of
control to creditors. If Jack doesn't blow the whistle, costs of ultimate clean-up and new
process installation could rise.
If the decision by the board is just to wait and see what happens, they will not be able to
argue that they took "due diligence" measures to keep abreast of the health risk unless
they initiate some research into the sonox problem, even if it is a periodic literature
search or a retainer arrangement with a researcher to keep them advised. Similarly, they
should continue to take readings in the river to monitor their discharge and try to identify
other polluters.
Tiger Woods: “Winning Takes Care of Everything” (Chapter 1, pages 36-37)
What this case has to offer
Can success – celebrity, wealth, profitability, and prowess – replace the hypernorm values of
responsibility, integrity, honesty are key discussion points in this case. Many students and
businesspeople have the view that they can ignore values because success is all that counts.
They often fail to realize that the ends justify the means approach often does not produce
medium or long-term success. Analyzing stakeholder impacts through this case can be very
helpful in exploring whether winning really takes care of everything. Companies, like Nike,
need to understand their stakeholders and their stakeholders’ values. If stakeholders value an
ethical corporate culture or strategy, support of an unethical brand or product undermines
stakeholder trust in the organization. The same is true for individuals.
Discussion of ethical issues
1. Does winning take care of everything? In golf? In life? In business?
No, it should not—but it often does cause blind eyes, particularly in the short run.
Consider a performance evaluation: it is based on many performance measures, not a
single one. Also, short term success can be undermined if values required for longer term
success are ignored, and/or performance or reputation wanes. As future managers,
accountants, leaders developing an ethical corporate culture, you will want desirable
behaviors throughout your organizations and you want employees to have an ethical
mindset no matter what they are doing. Just winning is not in keeping with these
objectives, and winning alone will not engender trust of stakeholders.
2. Does how you play the game or run your business ever matter?
If you learned that your investment banker lied and cheated on his wife and in your last
week’s tennis game, do you suppose that you would wonder how s/he conducts business?
Most of us would lose trust in that person and be inclined to seek another investment
banker. When we see people acting with integrity, responsibility, fairness, honesty and
compassion in one facet of their lives, we are naturally inclined to respect and trust that
person, believing that their behaviour is predictable and respectable, given the evidence
we have seen, in other aspects of their lives. A significant error of judgement in one
aspect of a person’s activity will raise questions about their ability to perform reliably and
in a trustworthy manner in others.
3. Is the reputational impact of unethical behavior different for a sports star than for a business,
or for yourself?
Tiger Woods, and many other sports stars, are phenomena: we are so in awe of their
feats—and don’t want to miss the thrill of their next appearance—that we are often
blinded to their weaknesses or failings. But when their bad behaviour becomes public, we
recognize that their high profile may not buffer their reputation. Often, such behavior
presents companies using stars for marketing with risks they want to avoid, and
marketing contracts are terminated using built-in “morals” clause provisions. Businesses
find that fallen stars are poor role models for adults or children, and many people realize
that their behaviour is not what they want others to emulate or endorse by buying.
In the business world, scrutiny of high-level people is less intense if they lack celebrity
appeal, but negative reaction can be as significant, and questions can be raised about
suitability for promotion or termination can result. While Tiger Wood’s celebrity may
protect him from fall-out from some misbehavior, it is unlikely that a business person or
professional would be similarly protected. For individuals wanting to work in positions
of trust – such as professional accountants – the negative fall-out could be career-ending.
It may be helpful to consider other instances where unethical behavior has been
negatively received. Many corporations have suffered significantly because the public
has realized that the enterprise has been doing something unethical. Examples would
include VW for cheating on emissions tests, or Wells Fargo for creating 2 million fake
accounts. Also instructive is the public reaction in October 2016 to what presidential
candidate billionaire Donald Trump dismissed as his “locker room talk”—a candid video
and tape of lewd, denigrating comments about women. First Lady Michelle Obama
eloquently described why his behavior and attitudes are unacceptable today, but also why
fear of retribution makes it difficult to speak against people in power. Without celebrity
stardom, many people might find that our stakeholders are quite unforgiving.
In the future, there will be increasing scrutiny of how we do something, or how business
earns a profit, not just of what we achieve. Focussing on the quality of how we do
something, and the values we observe, will protect lasting reputation much more than
spectacular short-run success.
6. LIBOR Manipulations Cause Widespread Impacts (Chapter 2, pages 138-140)
What this case has to offer
The LIBOR Manipulations Case, which describes an important scandal in easily understood
terms, exposes the problem of banks that rely upon public goodwill and trust to operate
successfully, abusing that trust to enhance the financial position or profits of the banks and/or
their employees at the expense of the public. In fact, the manipulated rates caused harm to bank
customers, and others who borrowed (i.e., house mortgages, etc.) or lent funds to the banks all
around the world because many contracts are based on these. It is not surprising that banks are
often mistrusted by the public.
In addition, it is surprising to see how long the manipulation went unchecked, and it is easy to
speculate that the top bankers and regulators knew of the practices, and let them continue.
Although some executives lost their jobs and their bonuses when their banks were charged, some
did not. The size of the fines levied is staggering. Going forward, gentle treatment is very
unlikely, so top executives and boards of directors need to be more vigilant with regard to such
practices.
The emails quoted show the cultural acceptance of manipulation within the banks, and the fact
that prowess at such falsification was a source of personal pride. The same thing was evident
among the risk assessors at the rating agencies during prior to the financial scandal of 2008.
They knew they we acting unethically and/or illegally, but were doing so cheerfully, and without
concern.
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?
I would argue that the boards and the regulators were most at fault because theirs is the
residual responsibility for corporate performance. They owe a responsibility to society at
large, and to investors and other stakeholders for bad actions. It may have been that they
were not aware enough of the potential problems, or that their policies were not effective,
or that they were not well enforced. Those policies should have informed and kept
everyone else from engaging in unethical or illegal acts.
2. What should the regulatory bodies do with the fines paid by these banks? Reduce tax rates
for the general public? Use the funds to re-educate investment bankers?
Arguably both should be done, practicality is important, and further practical uses could
emerge as well.
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?
It is possible to argue this question either way. If, for example, he did not know of the
scandal, then loss of his job could be penalty enough. If he did know, and took no action,
then further personal loss could be argued. Other issues to consider would include: Did
he benefit directly? How much?
1. Enron’s Questionable Transactions (Chapter 2, pages 108-112)
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
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, and they instructed the
CFO, Andre Fastow, as an alternative oversight measure, endure that he kept the
company out of trouble. 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 whistleblower 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 bord 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
1997 - Board suspends code of conduct to deal with an SPE (JEDI/Chewco) emergency:
a. To retain sales and profits (i.e. non-consolidation treatment) on sales from Enron
to Chewco, Chewco must have:
i. Outside investor with 3% investment at risk
ii. Outside investor has control of decisions
b. But can’t find an outside investor in Chewco before the year-end, so must reverse
out sales from Enron to Chewco and profits recorded
c. Fastow (CFO) asks for Kopper, one of his staff, to be appointed to act as a 3%
outside investor in Chewco
d. Board approves, but no follow-up on alternative controls
e. Fastow easily manipulates sales, profits, and the generation of cash through offbalance sheet debt
f. Governance failure allows Fastow to control SPE transactions, including:
i. Sales of assets at inflated prices (False gains)
ii. False hedging of losses on Enron investments (Falsely keeps losses off
Enron Income Statement)
iii. Exorbitant payments to Fastow & helpers
iv. Hiding of SPE debt ultimately to be borne by Enron
v. Fastow to create more SPEs (LJMs…)
Manipulation of accounting disclosure
4. Why didn’t more whistle-blowers come forward and why did some not make a
significant difference? How could whistle-blowers have been encouraged?
See PPT (Enron’s Governance & Control Structure Was Short-circuited). 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 whistleblowers to come forward, such as measures to make the culture
ethical (see text discussion, and a protected whistleblower program. As a result of this apparent
flaw, SOX/SEC has subsequently mandated that all SEC registrant companies have a
whistleblower 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-interest situation can you identify in the following:
a. SPE activities
b. 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 auditor, did not identify the misuse of
SPEs carrier and make the board of directors ware of the dilemma?
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.
8. How would you characterize Enron’s corporate culture (e.g., ethical, or unethical)? How
did it contribute to the disaster?
Enron’s corporate culture was unethical. It was fraught with conflicts of interest, and unethical
and also illegal 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. They ignored their fiduciary duty to the
shareholders and other stakeholders. The Board members who are supposed to be
independent of management and not conflicted, were in the dark.
Gender Discrimination at IKEA (Chapter 3, pages 177-178)
What this case has to offer
This case raises the important topic of gender discrimination. Unlike many cases where
discrimination occurs in the hiring process, this case involves discrimination in a marketing
campaign, where women were intentionally air-brushed out of the IKEA furniture catalogues
that were distributed in Saudi Arabia.
Discussion of ethical issues
1. Discuss the pros and cons of altering the catalogue using: (a) deontology, (b) utilitarianism,
and (c) virtue ethics.
Deontology looks at the motivation of decision-making. In this case, altering the
catalogue was a violation of fundamental deontological principals.
• Deleting women from the catalogue treated women as means and not as an end.
IKEA was discriminating based on gender, which treats women as a means to an
end and not as ends in themselves.
• Equals were not being treated equally. Women and men are equal with respect to
using IKEA furniture. By deleting the women, IKEA was treating them unequally;
that men could be in the advertisements but women could not.
Utilitarianism assesses the ethicality based on the consequences of the decision. That is,
whether the consequences are good for society.
• Deleting women from the catalogue might increase sales in Saudi Arabia
(economic consequence) but is damaging to the image of women (social
consequence). Utilitarianism uses social rather than just economic criteria to
assess ethicality, and so, deleting women would be a violation of the fundamental
utilitarian principles of creating the best social consequences.
Virtue ethics focuses on the moral character of the decision maker.
• IKEA’s mission is “a better everyday life for people” but not for males. They
have also won awards because of their ethical treatment of women. Deleting
women from the catalogue is inconsistent with IKEA’s traditional attitude
towards women. Consequently, altering the catalogue would be a violation of
virtue ethics.
2. Should a company alter its marketing campaign to reflect biases that might be prevalent in
various countries in which the company does business?
There are economic benefits to IKEA from having a standardized catalogue that is
distributed around the world. There are also ethical benefits. By being consistent with a
firm’s core values, the firm projects a positive ethical image which can enhance the
firm’s reputation. A violation of core values can have harmful repercussions, as was
evident when IKEA apologized for its error.
4. Deciding Who Receives the Swine Flu Vaccine (Chapter 3, page 178)
What this case has to offer
This is an interesting case because it highlights potential trade-offs inherent in deciding what is
ethical and the different approaches to decide on what is a fair distribution of a scarce resource.
It is also related to the current pandemic situation that we are facing today. 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.
Discussion of ethical issues
1. From a utilitarian point of view, who do you think 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.
2. From a justice as fairness perspective, who should be in the priority group?
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 first-serve 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?
3. Should people who make society flourish through their economic productivity, such as the
employees of Goldman Sachs, 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.
4. Should people who contribute to making life enjoyable, such as entertainers and athletes, be
put into the priority group?
• For a justice perspective, the student has to explain why those in one group, for
example, those who contribute to economic productivity, have a higher priority
level than athletes or entertainers. This requires a clear explanation of the
student’s perception of social value.
5. 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.
5. Concussions in the NFL? (Chapter 4, page 224)
What this case has to offer
Concussions are imperiling NFL players and the game of football as we know it. The ethicality
of the NFL’s actions has become the subject of a sensational movie and future analysis may
guide future resolution. This case explores how techniques of ethical analysis may help.
Discussion of ethical issues
1. Is the NFL’s stance on controlling the harm of concussions ethical?
That the NFL moved slowly on changes that can reduce concussions; that it had a culture
of denial and secrecy in order to preserve the big business of the NFL for its owners: no,
it is not ethical, because it lacks fairness, integrity, and transparency. Changes to the
game have occurred over time to reduce player injury—for example, the use of helmets
starting in 1943; improvement in helmet materials over time; research into force-reducing
“wearables”; changed rules about player contact; and new sideline concussion tests for
doctors and trainers to administer to impacted players. (Mangels 2012)
It is possible that these changes may stem from risk management, rather than altruism:
that is, if fewer players are sidelined, fewer medical bills and expenses are incurred,
player management is more cost effective, fans are happier, and ticket sales continue.
Undoubtedly, the changes do benefit players, but a more ethical approach would have
seen faster response time by the NFL and a more impartial, transparent approach to the
dangers of the game.
2. Should the NFL have moved earlier on the concussion problem? If so, when and how?
Yes, signals that concussions presented significant harm for players have been evident for
some time. In 1994, when the NFL first began studying the problem, a virtuous
organization would have told players—at a minimum--about any links being seen. By
2002 when Dr. Omalu identified a link between Chronic Traumatic Encephalopathy
(CTE) and football, the NFL should have reviewed the evidence with enlightened selfinterest, rather than denying connections and intimidating Omalu. Not until 2009 did the
NFL make any acknowledgement that concussions can have long-term effects. (Belson
2014)
What has the NFL risked by concealing information or denying links? Not only has it set
itself up for lawsuits by injured players, it has risked the wrath of other stakeholders—for
example, parents—who enroll their children in football and were unclear about its
dangers.
3. If the concussion problem had been analysed using virtue ethics, what would the analysis
have included and concluded?
“[V]irtue ethics is concerned with the motivating aspects of moral character demonstrated
by decision makers.” (Chapter 4)
The analysis would have included an examination of the decision maker—the NFL--and
virtues (see Chapter 4) we might expect from a virtuous organization, for example:
• Dutiful loyalty: The NFL was loyal to itself (shareholders and the corporation),
but not to players.
•
Integrity and transparency: The doctor co-chairs of the NFL’s concussion
committee from 2007 resigned in 2009 so that new members--“independent
sources of expertise and experience in the field of head injuries…”—could be
hired. Releasing the doctors implies a lack of independence, and that the NFL
acted in a selfish and non-transparent way in order to downplay the seriousness of
concussions and to continue play. The NFL did not demonstrate the virtues of
honesty, compassion, and fairness, because while hiding concussions is good for
the NFL owners and revenues in the short term, it is not fair to the players or their
families in the short- or long-term. Impartiality was not demonstrated at all until
the presumably non-independent committee chairs were released. Denying all
links between CTE and concussions suggests that NFL does not act with
enlightened self-interest, but with selfishness.
•
Sincerity and duplicity: When the NFL formed its “the Mild Traumatic Brain
Injury [MTBI] committee” in 1994, it appointed as chair a doctor with no brain
science experience (Ezell 2013), so the formation of the committee seems to lack
sincerity. Duplicity, rather than sincerity seemed to be behind the MTBI’s studies
published starting in 2003 (Ezell 2013) because the committee was not impartial,
was part of the NFL, and studies seemed to deny the harm from concussions
proposed by non-NFL studies.
•
Because, in a virtuous organization, virtue should be consistently demonstrated,
not just turned on like a light switch, an analysis of NFL suggests the organization
has not been virtuous and its probable cover up of the health effects of
concussions was not ethical.
4. Should the NFL continue to play football? Consider consequences, impacts on rights, and
virtue ethics in your answer.
Likely Consequences of Accepting the Long-Term Effects of Concussions: While
health-wise, perhaps the NFL should not continue, it will continue, because it is big
business with great demand and cultural status. But what will happen if the League loses
more lawsuits? More research money will be used for research into preventing
concussions (e.g., better helmets, better gear, new rules for the game), instead of into
denying their long-term effects.
Impacts on rights: To compensate for health risks, players’ salaries might go even
higher; survivor benefits might increase; and players’ contracts will likely contain clauses
about accepting the risks of the game while limiting NFL liability (read accountability).
However, the league will still find players. Those that will take the risk for short-term
glory will likely still exist. As in many high-risk sports (I.e. boxing), the economically
disadvantaged will likely form the greatest pool of potential players, because while all
parents might discourage their children from risking their futures for short-term gain,
well-off parents are more able to offer an alternative.
Virtue Ethics: The NFL, given the above paragraph, might say that it is demonstrating
the virtues of honesty (by admitting to the long-term effects of concussions), compassion
and fairness (by compensating —through contract—for the long-term effects of
concussions), and loyalty (now to the players in addition to itself and to the game as a
cultural icon) by developing a risk/reward strategy to secure the future of the game.
Are these actions ethical? The NFL and its audience and the players it recruits will justify
as ethical a system that assigns a limited value to life and health. The risks and rewards
will likely be accepted by many, but if success is limited in reducing the debilitating, lifethreatening effects of concussion, the number of recruits will likely be reduced over time,
because the dream of being a star will be offset by the nightmare of seeing stars and
jeopardizing future success. Although it seems far-fetched, without adequate help from
the NFL, the game may, over time, assume the same kind of status of sumo wrestling in
Japan, whose audiences today are over 50 years of age and whose recruiting success is
dismal, or chariot racing in ancient Rome.
10. Spying on HP Directors (Chapter 5, pages 307-310)
What this case has to offer
This is a good case to discuss the ethical implications from obtaining and using information from
the company’s employees in general. It also illustrates the perils of conducting secret
investigations of board members. In addition, the HP case highlights the importance of ethical
guidance for the board of directors and the need for limits to the power of the chairman of the
board. The board of directors exists to monitor management and it is appointed to act in the best
interest of the company’s shareholders. Nevertheless, there are few internal mechanisms that are
needed to ensure the proper functioning of the board.
On one side, it was the responsibility of the chair to investigate the origin of the leak of
confidential information and keep the investigation secret in order to discover the person who
was leaking the information; however, on the other side the investigation should have been
conducted within ethical and legal boundaries.
On September, 2006 the press revealed that the chairwoman of Hewlett-Packard (HP), Patricia
Dunn, had hired a team of independent electronic-security experts that later spied on HP board
members and several journalists, to determine the source of leak of confidential details regarding
HP's long-term strategy in January, 2006. The independent consultant obtained phone call
records of HP board members and nine journalists, including reporters for CNET, The New York
Times, and The Wall Street Journal using an unethical and possibly illegal practice known as
pretexting. Patricia Dunn claimed she did not know the methods the investigators used to
determine the source of the leak and resigned after the scandal. George Keyworth, the director
responsible for the leak, resigned from HP’s board after 21 years of service.
Discussion of ethical issues
1. Should the chair of the board of directors be allowed to initiate investigations into
weaknesses in a company’s internal control systems?
The investigation of internal control weaknesses is usually a management function;
however, as stated in the COSO integrated framework “Management is accountable to
the board of directors, which provides governance, guidance and oversight. A strong,
active board, particularly when coupled with effective upward communications channels
and capable financial, legal and internal audit functions, is often best able to identify and
correct such a problem.”
The provisions of SOX Section 302 require CEOs and CFOs to certify that they are
responsible for internal controls and have evaluated the company’s internal controls.
Nonetheless, in this case it seems that the chair had the responsibility to investigate the
leak of strategic information given that some of the suspects were members of the board
of directors.
Under the circumstances, it would have been prudent for Ms. Dunn to share her plan with
the Executive Committee of the board and get their guidance and blessing.
2. Is the strategy of pretexting an acceptable means in order to obtain critical information that
will strengthen a company’s internal control system?
The legal opinion given to HP on pretexting is a masterpiece of doubletalk, and of little
value. As it turned out, using pretexting is/was definitely not acceptable from several
different points of view:
• It involves misrepresentation designed to get information by deceit, which is quite
unethical as it is unfair and violates the rights of the subjects involved.
•
Patricia Dunn herself recognized in her resignation letter (Chapter 5, page 309 in
the case) that “The unauthorized disclosure of confidential information was a
serious violation of our code of conduct”;
•
HP settled a State lawsuit paying $14.5 million in fines and promising to improve
its corporate governance practices;
•
HP agreed to a financial settlement with The New York Times and three
BusinessWeek magazine journalists; and,
•
Pretexting invades privacy and is a questionable practice involving the
impersonation of somebody in order to trick phone companies into handing over
the calling records of that person’s personal phone accounts.
3. Should the reasons for resignations from a board of directors always be made public?
In general, a policy of transparency and full disclosure should be in the best interest of
the company’s shareholders. Without complete information it would not be possible for
shareholders to effectively monitor agency problems within the company.
Some people may disagree with this position and could argue that shareholders would be
worse off if information that impacts stock prices negatively is made public. In this case,
HP made Perkins resignation public without disclosing the reasons for his departure. HP
reported Perkins’ resignation to the SEC four days later, again giving no reason for his
resignation. In practice, most resignations are accompanied by boilerplate statements that
are uninformative to the public; however, in a full disclosure environment, the impact of
full disclosure on director’s reputation should be an incentive to act in the best interest of
the company’s shareholders.
Case 1: KPMG Partner Shares Confidential Information with a Friend (Chapter 6,
pages 454-455)
What this case has to offer
This case describes why a senior professional, thinking he was helping a friend in a small way,
ruined his own career, damaged his firm’s reputation, and caused his firm to resign from two
major audits. It offers the opportunity to explore/understand the following topics:
1. Insider information and tipping and why they are unethical and illegal.
2. Why seemingly small bits of information can result in very damaging consequences.
3. Why a leader, a senior professional accountant, can/would make such an error in
judgment.
4. Why a firm would have to resign an audit if its integrity/credibility was in doubt (i.e.
What is the role of the profession/firm?)
5. Why the insider argument that trading on insider information benefits other market
participants is flawed, and why insider trading is not a victimless crime.
6. How firms can guard against the sharing of confidential information and how
professional codes can help.
Discussion of ethical issues
The textbook covers information on inside information, tipping, insider trading, errors in
judgment, role of the professional and professional accountant, and professional codes.
Comments for the questions posed at the end of the case are as follows.
1. Should an accounting firm have to resign as the auditor of a company when the partner in charge of
the audit is convicted of releasing confidential information about that audit client?
Since the auditor’s role is to provide an objective assessment of corporate reporting in order to
make it credible to investors and other stakeholders, the apparent lack of integrity by the audit
leader undermines the desired impact of the firm’s audit as well as other audits done by the
firm. In order to restore the audit firm’s reputation for integrity, the firm must not only punish
the offending audit partner, but must show that it is taking the matter very seriously as a firm.
Resignation from major audits is one way to show this. It should be noted that KPMG may have
been asked to resign from Herbalife and Skechers, if they had not done so voluntarily, because
the partner had been in charge of them as well.
2. How can accounting firms ensure that their partners and staff do not release confidential info?
Training should be provided on the ethical codes and practices of the firm and the
profession, not only at the beginning of their careers, but also periodically and
consistently throughout their careers. The firm should canvas all its personnel to ensure
they have not violated important rules, and should require sign-offs annually. Firm
leaders should stress what is right, and what penalties will befall transgressors.
Biker Nightmare (Chapter 6, pages 464-465)
What this case has to offer
Most Professional Accountants (PAs) have found themselves in the position of discovering an
illegal act, and have wondered what to do about it. In this case, the company president has asked
for you to summarize a number of illegal transactions, and to sign the summary. If discovered or
reported to the authorities, it is likely that the $200,000 will have to be paid, as well as some
additional fines. The duties and fines may be considered to be contingent liabilities and will
have to be disclosed. If the president does not correct this situation after being informed, then
the issue should be reported to the auditor and Audit Committee of the board after informing the
president.
The request to sign the summary is interesting, in that it will indicate when the PA came to know
about the problem – a fact that will be important to assess how quickly and, therefore,
responsibly the PA has acted. If a PA doesn’t act, the president could demand future favors such
as improper accounting adjustments in return for not informing the Professional Accounting
body. A PA would need to be aware of this risk. Whether or not you have signed the summary
does not change your professional duty.
Discussion of ethical issues
1. What does our professional code say about this?
Most codes contain general, if not specific, provisions against acting in or covering up an
illegal transaction. Such actions would contravene expected standards of integrity,
behavior in the public interest, protection of the good reputation of the profession, and
fiduciary duty to the company’s board. Also, there is a specific provision in most codes
that a PA should not be involved in a misrepresentation, which would be the case if the
practice continues.
2. If this issue is uncovered by the government regulatory authorities, will I be implicated?
Potentially yes, depending on the statute or regulation, and the rigor of the professional
accounting body involved.
3. Should I quit my job and then go and report this situation to the regulatory authorities?
Not unless the president refuses to change the practice after you advise him or her of the
problems associated with it. Even then, you should advise the Audit Committee of the
board so that the practice cannot continue without their knowledge and consent. They are
relying on you for that advice. Ultimately, the PA has to decide whether to stay or resign
and when, but even if the PA leaves, the PA should advise the president and the Audit
Committee of the problem.