An Introduction to Business Ethics - Essay Example

?Business Ethics Issues Involved in Insider Trading Dow Jones analyst Jack Hough, “it is a crime to trade based on information that can influence returns (“material”) that isn’t available to ordinary investors.” Hough said that this is “insider trading.” Hough said that the term “insiders” is a term for “company executive, board members and key stakeholders.” Hough emphasized however that these people “are permitted to buy and sell shares so long as they report their transactions.” However, the illegal form of “insider trading needn’t be committed by insiders.” Hough said that insider trading takes place “when they are based on privileged information” and the act is illegal under the laws of the United States. According to Hough, insider trading is highly prevalent in the United States because trade data support the said interpretation on insider trading prevalence in the country. For example, according to Hough, “back in 1974, a paper published in the Journal of Financial Economics showed shares of the average takeover target beat by 14% over seven months prior to the announcement” but last May 2011, “a study published in the Journal of Multinational Financial management found abnormal returns of nearly 7% during the 50 trading days before deal announcements.” The situations identified by Hough are only possible if there insiders in the company leaking information to outsiders on the deals and handshakes taking place inside the firm and with the firm and parties outside the firm. If insider trading is prevalent, why must we consider the ethical aspects of insider trading? According to Joseph Des Jardins, “unlike some business disciplines, there is no single answers in ethics, no single body of information, nor even a single framework for thinking about ethics” (9). For Des Jardins, business ethics “is truly a multidisciplinary field , incorporating from a variety of disciplines including philosophy, management, economics, law, marketing, and public policy” (9). In my opinion, defining or conceiving ethics in the way of Joseph Des Jardins only obscures the role of ethics in business. Des Jardins’ definition of ethics will transform business ethics into a discipline detached from the operation of business. It will make business ethics beyond definition thereby depriving businessmen of a tool with which to marshal their companies along line that will promote profitability and business sustainability. Businessmen are neither philosophers nor academics although they have to study philosophy and the academic sides of a business. They are not individuals who muse by the hour and become contented and fulfilled with their musings. They are not philosophers who simply reflect on life and derive satisfaction the longer the hours they spend on reflection. Businessmen are not academics out to grasp theories and advance knowledge: businessmen thirst for knowledge just like academics but they are principally users of knowledge. Businessmen may advance knowledge as they advance their business in the same way that computer, internet, and information technologies have advanced as a result of business activity. However, advancing knowledge is not the businessman’s objective but making a profit. Of course, businessmen derive satisfaction as his or her business grows, take a leading role in the industry, employ an increasing number of employees, become recognized in society, and becomes a power or at least influential in society as his or her business shape society’s lifestyle, and outlook in the same way that the businesses of Bill Gates transformed the lives of people in the 21st century. Businessmen are individuals out to make profit and survive in the competition of business. Therefore, the appropriate or relevant perspective on ethics is that one that should enable them to make profit, survive in the competition, survive in society, and if possible be ahead of the competition if not society as a whole. On the other hand consumers are becoming critical of business. Business is power but consumers as a bloc also constitute a power that business has to recognize in order to survive if not lead in the competition. Mess the consumers and the consumers will in turn mess your business. Consumers have values. They do not buy a product because they need it. Many consumers would find out if the product is green or not green, if the employer is an equal opportunity employer or male chauvinists, if there are child workers in the business, if employees are getting their “right” or acceptable shares in the business, if the company is making is involved in the exploitation of workers in a third world country, if the company is involved in the overthrow of governments abroad, if the company is destroying the environment or not, and if the company is doing things that may be considered unethical from the perspective of law or norms that society wishes them to live by. Business is a power but consumer is also a power that business has to recognize: consumers have a parity of power with business. Businessmen can influence the lifestyle and values of consumers but consumers can also do the same on business: mess with the consumers and consumers will in turn mess your business. At the same time, ethics has a function in an organization. In the process of doing business, a business man has to lead an organization. Organizations are composed of individuals with multiple values and each may have their own ethics as individuals and as members of several organizations. Individuals also have their own values that influence them in their assessment of what is right from what is wrong. This being the case, an organization can be pulled into multiple direction if the businessman is not keen in developing a set of ethics that are both acceptable to consumers and in turn will provide him or her a tool with which to marshal his business organization towards a single direction. Ignore this and the businessman loses a steering wheel with which he can veer his organization towards a direction that will provide him profitability, business sustainability, survival if not leadership in the competition, and continuing patronage from consumers. Thus, business ethics is indispensable not only because business must project itself as worthy of the consumers’ trust and patronage but also because businessmen must have a tool with which to marshal his or her organization. One may define ethics as the body of principles that define the right from wrong and the right versus the wrong behavior. In the context of making a business, the set of ethics that a business must adopt is a set of ethics that project the business as worthy of the consumers’ trust and patronage and that would allow the businessman to marshal his organization and personnel along the directions he or she has defined for his her business. Thus, adopting a set of business ethics is an important tool to lead the organization towards profitability, business sustainability, survival, and success. In my opinion, it is in this context that we must consider that ethical issues involved in insider trading. Perhaps, the most important aspect to consider in the ethical issues involved in insider trading is that insider trading is illegal in the United States of America. Or, at least, there are specific trading described as “insider trading” that is illegal in the US. In a 2000 presentation to the National Society of Compliance Professionals, Stephen Sapp pointed out that the fundamental ruling against “insider trading” is in Rule 10b-5 of Section 10(b) of the Exchange Act. In the presentation before the National Society of Compliance Professionals, Sapp said that the following are unlawful under the Exchange Act: “1. To employ any device, scheme, or artifice to defraud 2. To make untrue statement of a material fact or to omit to state a material fact in order to make the statements made, in light of circumstances under which they were made, not misleading, or 3. To engage in any act, practice, course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase sale of any security” Most important, Sapp said that “ while neither Section 10(b) nor Rule 10b-5 actually refer to insider trading, the Securities and Exchange Commission (“SEC”) and federal courts have developed substantial body of law interpreting such provisions to establish a basic prohibition against “insiders” engaged in buying and selling while in the possession of material non-public information” (1). In other words, there is a possibility that the many of the prohibition against “insider-trading” probably constituted an expanded if not wild interpretation of Rule 10b-5 of Section 10(b) of the Exchange Act. There may nothing essentially immoral in insider trading especially if the information obtained has been accidental. As pointed out by Hough, a janitor or secretary can have access to inside information or may interpret certain facts as indicative of company performance such as the constant and continuous ringing of phones in an office when the constant ringing of phones were not happening earlier. Nevertheless, it must be pointed out that according to Sapp, the United States laws against insider trading were the result of the United States response to “the stock market crash of 2009 and the ensuing Great Depression” (1). Sapp said that the two events “prompted Congress to pass extensive legislation to regulate the securities industry to prevent the recurrence of a national economic crisis” (1). Sapp elaborated that “specifically, Congress passed the Securities Exchange Act of 1934 (“Exchange Act”) with the goal of promoting fairness and integrity in the securities markets” (1). In particular, Sapp pointed out that, “with respect to insider trading, the primary concern is that the integrity of U.S. Securities markets will be impaired if there is a perception that certain persons trading in securities have unfair informational advantage over other persons” (1). Consequently, according to Siegel, “federal securities laws generally prohibit ‘insiders” from benefiting from information that is not available to the investing public” (1). According to Sapp, “federal securities laws do not mandate that participants in public markets have equal information; rather, such laws focus on the fact that certain persons may use their position to obtain an unfair informational advantage over others” (1). On the other hand, Siegel pointed out that several quarters have assessed that the federal securities laws against insider trading is basically unwinnable (353). Siegel said that “violations are difficult to detect, expensive to investigate, and extremely troublesome to prove” (353). Most important, the United States federal laws prohibiting insider trading are in conflict with the Swiss Bank Secrecy Law (Siegel 353). Hough also pointed out that insider trading are not illegal in many countries. Thus, what is wrong in insider trading? What is immoral? In my opinion, the proper appraisal on insider trading should be in connection with its actual contribution to economic crises, something which I believe scholars have not yet fully established. Of course, fairness and laws on fairness are important and on this matter the laws against insider trading plays a significant role. Yet, how is it that some countries do not have laws against insider trading? It is therefore possible that the United States laws may have overlooked something. Given the foregoing, I consider that the appropriate ethical consideration against insider trading is that it is against the law. Consumers want businesses not to be above the law and this is the most important consideration in assessing what is right and what is wrong with insider trading. At the moment, it is against the law and business survival, business profitability, and business sustainability will lie in following the law. References Des Jardins, Joseph. An Introduction to Business Ethics. Boston: MacGraw-Hill Higher Education, 2009. Deslandes, Ghislain. Wittgenstein and the Practical Turn in Business Ethics. Journal of Business Ethics and Organization Studies 16.1 (2011): 48-54. Hough, Jack. Insider Trading: Legalize It? Dow Jones & Company: SmartMoney, 2011. Web. 4 December 2011.< http://www.smartmoney.com/invest/stocks/insider-trading-legalize-it-1302039017266/> Sapp, Stephen. Insider Trading Under the Federal Securities Laws: Overview for a Diversified Financial Services Company Compliance Program. Presentation to the National Society of Compliance Program, 3 April 2000. Web. 4 December 2011. < http://locklord.com/files/News/ca528475-f18a-4f12-8222-8948c3681be5/Presentation/NewsAttachment/aa783fbf-8ae8-486a-a958-8d3f2154ec4c/Insider%20Trading%20Under%20The%20Federal%20Securities%20Laws.pdf> Siegel, Jane. United States Insider Trading Prohibition in Conflict with Swiss Bank Secrecy. Journal of Comparative Corporate Securities Regulation 4 (1983): 353-376. Read More