Ethical Challenges in Business Processes - Essay Example

? The problem to be investigated is ethical challenges and grey areas within business processes that are exploited by businesses for financial gain. Answer 1 List of actions and practices that belong to grey area 1. Layered investment strategy 2. Laddering 3. CDO or collateralized debt obligations 4. Huddles and unequal distribution of information amongst investors Answer 2 Layered investment strategy Goldman Sachs has used the layering strategy to expand its business and exponentially increase its profit by deceit. The layering strategy mainly refers to the business process whereby a firm floats a new company and buys 90% of its share from secondary market in order to inflate its market value. Once the prices escalate, the shares are sold to make profits from the gullible public. Goldman has been using this strategy to make quick money. It is ethically wrong. Business ethics are mainly principles and values that guide business strategies and decision-making processes to promote responsible behavior. Kantian ethical theory is implicit in its universalism and proposes that one must act in a manner that one would expect others to act towards oneself (Johnson, 2008). Goldman Sachs had used underhand techniques to deliberately increase the price of shares and then float the same share into the market to profit. Hence, Goldman was highly unethical and exploited the trust of the public to gain profits. Laddering It is an agreement between the client and the firm whereby the client or buyer promises to buy the shares of IPO at a higher price above the initial one so that its market shares are guaranteed to increase. This is a scam between the underwriter for the IPO and the favored client to make money at the cost of general public. Goldman Sachs has been responsible for committing this crime with the deliberate intention of fraud. Not only has the company violated the trust and confidentiality of other clients but also its irresponsible and fraudulent behavior has resulted in the bankruptcy of the new firm whose IPO was floated. A prime example is eToys, which had gone bankrupt. Hosmer (1994) asserts that business decisions need to be constructed on the basis of economic considerations, ethical values and moral obligations to its various stakeholders. Goldman’s sole purpose was to make profit and benefit few clients thereby harming the interests of its other clients and public in general. Hence, its conduct and business practice was hugely unethical. CDO or collateralized debt obligations Collateralized debt obligations are financial instruments that are mortgage backed and, therefore, attractive to clients. The short sale and maintaining short subprime position considerably benefits the firm. In 2008, Goldman became a bank holding company. Though the company was brought under the regulation of Federal Reserve Bank, it also obtained easy access to funds from Federal Reserve at zero percent interest and no time limit. It started recommending CDO to its clients. The mortgage pools of CDOs were not good and were purposely chosen for their low value by the finance director, Paulson. The deal was structured by a trusted company that continued to question the validity of the mortgage pool. Goldman insured the CDOs for $11 million with AIG. The company has created false demands by buying it and then selling it in open market to make short position. When Goldman pulled out, the clients were left with $40 million of securities which had no worth. Goldman sold its insurance profits to hedge funds. Goldman’s culture was based on maximizing profit and money for themselves and their select few clients. Promising to make a person rich by forty was the critical philosophy that encouraged them to evolve innovative ways to manipulate market and cheat general public. The general culture of dishonesty and non-accountability towards their various stakeholders was an important ingredient of their work environment. Thus, values and ethics played no part in their decision-making processes. They only conformed to the legal parameters to the extent that they could get away with the fraud with ease. They violated all norms and limits of ethical and moral consideration to make large amount of financial gains for themselves and few of their clients. Huddles and unequal distribution of information amongst investors These are interesting creative inputs for conning their clients and people in general. Huddles are teams` brainstorming for higher productivity. Goldman’s trading huddles comprised senior management and traders who would confer and determine the short- and long-term investments in specific shares. The information would be shared with select few clients and Goldman’s traders, who would then gain with the artificial escalation of shares in the market. Since the practice is based on deceit, it is not ethical. Answer 3 List of people affected by Goldman’s actions Henry Paulson, Goldman alum Robert Rubin, Goldman alum Jon Corzine, Former New Jersey Governor Jim Cramer, MSCBC Analyst John Thain, Former CEO Merrill Robert Steel, Former CEO Wachovia Gregory Craig, Former White House Counsel Lloyd Blankfein, CEO Goldman Fabrice Tourre, Goldman employee ACA Management Jon Winkelreid, Co Chief operating officer (large shareholder) Gregory K Palm, General Counsel (large shareholder) Answer 4 Organizational culture is a vital indicator of the value system of a firm. Goldman Sachs was motivated by financial gain and greed for money was the prime objective of its people. As a brokerage firm and investment bank, it was able to promise its clients to make them wealthy beyond their dreams. Goldman was also able to deliver its promise and launched the future of many big players of business and political bigwigs. The workforce, traders and advisors were all enticed with large economic remunerations and incentives to create unique ideas and manipulate business processes – the activity that would help them attain their wider goals of making themselves and their clients rich. Business ethics is highly complex and driven by myriad compulsions. The ethical dilemmas and conflicts of interests often become major factors for transgression and reasons for committing scams. In an environment of deceit, scarce sense of responsibility to stakeholders, and ingrained tendency of avarice, the ethical considerations and moral obligations become secondary in comparison with the vested interests of the few. The political and economic gain at all cost had become the fundamental philosophy at Goldman. The company believed in creating and exploiting opportunities to make wealth. Indeed, the desire for more and more wealth was equal to the company’s manipulative creativity to evolve new ways to cheat vulnerable public. The code of ethics was, therefore, of little significance to the people at Goldman. The value-based conduct, especially at workplace, hugely contributes to the development of trust and credibility of the business. The guiding principles become vital elements in making right decisions for the wider welfare of people. In an ethical environment, the issues and decisions are evaluated in relation to their ethicality before final decisions are made (Carroll, 1991). Thus, rational approach becomes a hugely critical parameter for decision-makers. But in Goldman’s context, the rational approach was focused on creating wealth by hook or by crook. Hence, ethical considerations were not applicable as the company was interested mostly in the welfare of the few people and was motivated by its own vested interests. Answer 5 The CDO scam by Goldman was a very thought-out plan that was designed to benefit few clients at the cost of the rest of the clients and the public. It was not a calculated risk or bluff as one does in the game of poker. To a great extent, Carr is correct that sometimes business compulsions force people not to tell the truth. They can defer or even tell downright lie in order to save their skin or prevent possible loss to the business. In poker, the players know that others can lie to win, and, therefore, the lie itself becomes a part of the play and is not considered unethical. It is for these reasons that Carr compares business to the game where bluffing is taken for granted for wider ramifications of the business outcome. In the case of CDO market, when Blankfein refuted the claim of having disclosure responsibilities to those who were qualified investors, he was not simply bluffing – he had cards up his sleeve. He wanted to divert profit to only few of his favored investors. The demand for CDO market was artificially created by the ‘trading huddles’ of Goldman that comprised mainly Goldman executives, traders and advisors who had pre-determined the short- and long-term investments in specific shares. The information was shared with select investors and not distributed across the company’s other investors. It cannot be compared to the bluffing in poker mainly because, unlike in poker, the outcome of CDO market was manipulated. The main objective was to ensure hefty profit to the few investors with whom the information was shared. It is also important to note that if the information was disclosed to some of the investors, the company did not have a right to ignore and neglect its other investors, who had, by default, become eligible to receive the information per se. Therefore, despite investors being qualified and sophisticated, Goldman was duty-bound to disclose necessary information regarding the investment plan of CDOs to all its investors and traders. Answer 6 Howard Chen’s observations that Goldman Sachs has made no changes in management and that there has not been a long-term impact on the firm’s client franchise have been proved accurate, and the company recovered its losses fast. The observations were very distressing, especially when they were supposed to send wrong signals to the public. The erring executives were not penalized, barring Tourre, who was actually made a scapegoat. The whole management should have been held responsible for duping the investors, especially when they were heavily fined. But I believe that management was not changed because it had helped the executives and the workers become rich. The same applies to the firm’s client franchise as the investors also want to become rich. The ethical transgressions, therefore, hold little value with the investors in the long run if the objectives are fulfilled and dreams realized. Indeed, Goldman Sachs’s business practices have set a unique precedent in the investment sector, which thrives on creative manipulations, deceit, malpractices and collective greed. The basic purpose of business, apart from economic gain, is to be socially responsive and to promote an exemplary value system and guidelines of ethical behavior to ensure welfare of all its stakeholders and shareholders. But Goldman Sachs has shown that even with fractured credibility, the nefarious intentions of firms can be successfully implemented. References Carroll, A. (1991, July-August). The pyramid of corporate social responsibility. Business Horizon, 39-48. Hosmer, L. T. (1994). Strategic planning as if ethics mattered. Strategic Management Journal, 15, 17-34. Johnson, Robert. (2008). Kant’s Moral Philosophy. Retrieved from: Read More