Ethical problems of
organizations (part 1)
Geoffrey G. Bell, PhD, CA
University of Minnesota Duluth
November, 2003
Recent ethical problems
Enron (phony accounting, phony business, unfair
treatment of employees, etc.)
WorldCom (phony accounting)
Waste Management (questionable accounting)
Arthur Andersen (facilitating accounting problems, ethics
partners answer to clients, not partnership)
Merrill Lynch (conflicts between investment banking and
analysis, compensating analysts based on investment
banking fees)
Citigroup (enabled Enron with questionable banking
products).
Stakeholder theory – an overview
Freeman (1988; 1994) developed a normative
“stakeholder theory of the firm” wherein all actors with
a stake in the firm have a voice in its decisions.
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“Normative” implies “ought” – this is the ways firms ought to
behave.
Many management scholars are interpreting this as a
descriptive theory instead.
Stakeholders are people and groups who affect, or
can be affected by, the firm’s decisions, policies, and
operations.
Includes both actors with direct stake in the
corporation (e.g., employees, customers) and those
affected by “public goods” nature of corporate
decisions (e.g., local community and air pollution).
Note that people who bear risk and people who benefit
are not necessarily the same.
Primary & Secondary Stakeholders
Primary Stakeholders
Actors who are critical to
firm’s existence and
activities.
Relationships occur in
conjunction with the
normal activities of the
business.
Secondary stakeholders
Actors who are affected,
directly or indirectly, by
the firm’s activities and
decisions.
Relationships occur as a
consequence of the
normal activities of the
business.
Who are “generally-accepted”
Stakeholders?
Employees
Suppliers
Customers
The community at large
Shareholders
Management’s role is to assess whose
interests should predominate on any
given issue.
Should we adopt
a stakeholder view?
The contrary position is advocated by neoconservative economists like Milton Friedman,
who state that:
The only duty of management is to maximize
shareholder wealth.
Anything else is a tax imposed by unelected
groups (consumer advocacy groups, women's’
rights groups, tree-huggers, etc).
If other ends are socially desirable, they should
be achieved via formal legislation, not response
to some unaccountable “stakeholder” group.
What are the benefits and pitfalls of
a stakeholder approach?
Benefits
Pitfalls
Consumer ethics
Consumer protection legislation is fairly recent.
In 1962 speech, President Kennedy outlined
consumer rights:
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Safety
Be heard
Choice
Be informed.
Products & services produced & delivered with
due care.
What does due care mean?
Design – products should meet all government
regulations & be safe under all foreseeable
circumstances, including consumer misuse.
Materials – should meet government regulations and
durable enough to withstand reasonable use.
Production – no defects.
Quality control – inspect for quality.
Packaging, labeling, and warnings – safe packaging;
clear, easily understood directions; clear description of
hazards.
Notification – for product recalls.
Conflicts of Interest @ Enron
Conflicts of Interest @ Enron
Enron top management
Fastow’s creation of partnerships placed him in conflict (he won only if Enron lost).
Ken Lay told people to buy Enron stock while he was selling.
Changed plan administrators for employee 401(k) plan, locking employees’ holdings
in during last month when top management was bailing.
Arthur Andersen
Garnered large consulting fees, so couldn’t jeopardize them with audit results.
Audit review partner answerable to local partner in charge of audit; not CEO of AA.
Wall Street financiers
Because Enron brought large investment banking fees, didn’t want to issue negative
analysts’ opinions.
Gained fees by developing instruments that helped Enron remove debt from books (&
then sold same products to other firms).
Law firms
Firms advising Enron on legality of partnerships profited by developing them with the
bankers & AA.
Costs of Enron debacle
Text estimates costs of Enron failure at
$35 billion.
Arthur Andersen went out of business,
leaving only 4 major accounting firms in
US.
Other conflicts of interest
on Wall Street
Problems with IPO market.
See video “don.con” for examples.
Basically, firms went IPO too soon, before they
were ready. Made them more risky than normal.
Investment bankers purposely under priced IPO
issues, leading to a big “pop” and increasing
attractiveness of IPOs, but costing new IPO
valuable start-up funds.
Allocation of IPOs based on favors by
investment banks, not on equal availability to all.
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Clear conflict, as market is not equal, but bankers can
use IPO allocations to develop relationships.