Business Ethics as a Moral Code of Conduct - Case Study Example

?Full Applications of Business Ethics Introduction Business ethics is generally defined as the application of a moral code of conduct to the strategic and operational management of a business (Ferrell et al., 2012. Moral code implies that there is a widely accepted rightness or wrongness in human behavior. However, the rightness or wrongness in behavior largely varies across the individuals and the cultural values in the world. Therefore, the businesses operating in a diverse cultural background face problems relating to the ethics. The current study examines five such empirical cases which were reported recently. Application of ethics into businesses has expanded the role of businesses in the economy. According to the classical economic theory however, the firms are driven by the primary objective to maximize profits while consumers are driven by the primary objective to maximize the self satisfaction which is known as utility. Hence the producers and consumers in the economy are motivated by profits and losses as measured in terms of dollars and cents rather than any moral value. Moreover, such profit maximizing production procedures may not be the ethical approach when the social and environmental concerns are addressed. Therefore, a theoretical ambiguity appears in what is the ethical conduct in business. When a company rigidly adheres to a marketing policy which focuses only on short run benefits it can suffer severe economic losses in the long run (Ferrell et al., 2012). Example, marginal declining of value of housing assets in the USA market ended up resulting in bankruptcy of Lehman Brothers in the USA and BNP Paribas in France. Laiki Bank in Cyprus also ended up in bankruptcy as a result of unethical business strategies. In other words attempting profit out of thin year caused the recent financial market failure. Moreover, negligence of duty can result in lives lost to the society as well as losses to the companies (Guerra, 2013). An ethical dilemma is created when an individual company, a community or consumers are not in control of all the factors that influence their choices example, when the government interventions in open market operations lead certain companies into bankruptcy. Government interventions in the markets are identified in terms of price subsidizing, taxing, and imposing trade barriers which are aimed at achieving specific developmental goals, national food security and self sufficiency, reducing poverty, reducing market power and protecting the public goods. However, there are noneconomic, political motivations for interfering in the markets by the government example, for financing a war. Moral Issues in Financial Market Failures Banking failure is defined as a situation in which banks are closed from operation because of the financial difficulties (Gunsel, 2007). There can be a number of bad monetary policies which may cause banking failure. A number of moral issues also arise relevant to bank failures. For example, banks operate according to the policies which are set by the government i.e. policies are defined in the bank’s external environment. Even though an individual firm may foresee its bankruptcy it can have little to no control over the tragic destiny lying ahead. Government intervening in markets is identified as a market failure in neo-classical economics theory because it can disrupt the optimal resource allocation and create deadweight loss to the social welfare. Free market structure is identified as the most efficient economy. The three case studies described in the following chapter bare evidences as to how bad fiscal and monetary policies can result in bankruptcy of the firms. Not only the external policy environment but unethical firm level policies can also lead companies into bankruptcy. The recent Subprime Mortgage Crisis Friedman, 2009, describes the cause of global financial crisis which occurred during the past decade in terms of following government interventions in the USA housing market; 1) increasing the government-insured subprime and nonprime lending and securitization, 2) imposing regulations on rating firms, loose-money policies of the central banks (not just in the United States) and 3) laws entitling mortgagors to suffer little consequence if they defaulted. According to the above author these policies have hidden impacts such as financing the Iraqi war without an apparent increase in the rate of inflation. The government may also obtain power in productive economic resources when bailing out companies during their difficult financial periods. Moral issues of such government policies are aggravated at the international market because the impacts of such policies are not restricted to the domestic markets. Economic theory states that macroeconomic policies practiced in large countries can destabilize the equilibrium in world markets leading countries into crisis situation. In such occasions the individual investment banks and the small countries have no control over the economic forces. The ambiguous monetary policies practiced in the USA triggered the subprime mortgage crisis in the European financial market during the recent history. 1. Bankruptcy of Lehman Brothers Lehman Brothers Holdings Inc. was the fourth largest investment bank in the USA. It largely profited from investing in housing market through the leverage process which involves funding investments through burrowing. The leverage ratio of the bank during the peak period increased from approximately 24:1 in 2003 to 44:1 by 2007. As a result the risk of bankruptcy of Lehman Brothers Holdings Inc. also increased. Towards its bankruptcy in 2008 only 3-4 percentage proportion declining in the housing asset value would entirely collapse the equity value of Lehman Brothers. Large investment banks such as Lehman were not subject to the same regulations applied to depository banks and to restrict the leverage ratio in the USA. In August 2007, Lehman closed its subprime lender, BNC Mortgage, eliminating 1,200 employments in 23 locations. In addition to the ethical issues which lead this bank into bankruptcy more consideration were left unattended relating to the loss of employments and declining living standards of the general public. 2. Bankruptcy of BNP Paribas Followed by the subprime mortgage crisis in the USA, BNP Paribas SA which is the largest bank in France froze three investment funds of approximately 1.6 billion Euros worth in August 2007. This decision was taken by the bank as the U.S. subprime mortgage losses roiled the credit markets (Boyd, 2007). The resulting shock affected the European stock market index indicating 1.9 percentage proportion decline and the first sign of a financial crisis appeared in the EU zone (Friedman, 2009). Moral issue here is not only how impacts of the bad government policies were transferred into the world financial market but also how an individual bank became vulnerable to bankruptcy. Not only in the USA but also in the Europe unethical business strategies were practiced, increasing the risk of bankruptcy. The risk associated with the credit market dramatically increased as the cost of burrowing decreased. As a result the demand for credit increased with little incentives to repay the Example, if the bank is operating below the minimum of 8 percentage proportion of the capital to risk weighted assets ratio, such capital can lose value by slight changes in the interest rate. High leverage can affect the profitability of any business venture in the long run (). As an individual investing bank BNP Paribas SA had no control over the environment which it was operating in and hence settled to freezing the problematic investment funds. 3. Bankruptcy of Laiki Bank Similarly if the burrowers are relying mainly on bank loans for financing the businesses they may experience sever financial losses due to slight rises in the interest rate (Huang ve Vajid, 2002). Bad loans or the wrong investments can lead banks into bankruptcy in time. Laiki bank was the second largest bank in Cyprus. It was engaged in lending largely to the Greek companies out of which a large proportion turned out to be bad loans. The bank collapsed in June 2012 and the Cyprus government requested a rescue package from IMF. Moral issues here are not only restricted the bank level business strategies but also national level strategies which followed. Negotiations regarding the terms of the rescue package proceeded until March 2013 between the Euro-group and the Cypriot government. Eventually agreed to; downsizing of the financial sector (with the domestic banking sector reaching the EU average by 2018), strategic fiscal consolidation, structural reforms and privatization in the banking sector. In order to achieve the above, Laiki Bank of Cyprus was closed, rate of tax on withholding capital income and the statutory corporate income was increased, Bank of Cyprus was re-capitalized through a deposit/equity conversion of uninsured deposits with full contribution of equity shareholders & bond holders. Upon agreeing to the above structural changes in the financial market Cyprus government received 10-billion Euros bailout from the International Monetary Fund (Cyprus MoU, 2013). Further, Bank depositors of above 100,000 Euros had to contribute to the recapitalizing of the bank. Closure of Laiki bank resulted in its staff losing employments, depositors losing money as well as concerns regarding what were the motives behind the new structural changes. For example, critiques argue that IMF rescue package for Cyprus is not aimed at reforming the country’s banking sector. It has been formulated based on the common interests of the EU countries. Nevertheless the financial sector comprises a significant proportion of country’s GDP and employments. Therefore closing large banks and discouraging large depositors will negatively impact the country’s economy. Implications of the Banking System Failures The State banking laws which were practiced during 1930s in the world restricted the activities of the commercial banks to specific geographic locations (). During that time the banks also utilized Federal deposit insurance and Federal Reserve funding heavily to protect the system against banking risk. This system was considerably stable and fairly profitable. Towards the late 1960s depositors and investors felt the profitability of the above financial system as inadequate and shifted into “shadow banking system.” It incorporates securitization and derivative instruments in place of real money. Development of the new “shadow banking system” decreased the importance of depositors to the commercial banks as a source of funding. Critiques view banking system in the world before its collapsing as a result of “attempting to make money out of thin air.” Demirguc-Kunt and Detragiache, 1998, showed that low GDP growth, high real interest rates and inflation increase the likelihood of systemic banking crises. Shadow banking system in the European countries such as Cyprus expanded largely resulting in its collapse towards the last decade. The estimated total cost of bankruptcy in 2000 along was 200 trillion TL which is 50 percentage proportion of the national GNP in the previous (Gunsel, 2007). Unintentional Fatal Injuries during Recreational Activities Drowning in swimming pools is recognized as a leading cause of unintentional fatal injuries occurring in the United States. Majority of the child deaths in the country are also caused by drowning (Saluja et. al., 2006). According to the International Swimming Pools and Spa Code hotel owners are not legally liable for every drowning incident. However, hoteliers are required to follow every measure possible to safeguard the lives of children during their stay at the hotel despite they were accompanied by parents or guardians. Persisting drowning incidents can severely affect the popularity of the hotel. The following section examines two such incidents. A child died after found unresponsive at the bottom of a swimming pool at Disney hotel in Orlando on 10th March 2013. Another 4 years old child suffered extensive brain damage after found nearly drowned on a Disney ship on 30 March 2013. Sever criticism were directed at global recreational industry giant, Disney, after these accidents. And it was revealed that company did not have permanent life guards during this time. Another drowning accident which reported from the public Graydon Pool at Ridgewood, New Jersey in 2008 took the life of a13-year old child. Nine lifeguards had been on duty around the pool when this accident happened however the child had not been pulled out from the water until it was 40 minutes late. Family sued alleging the negligent supervision of the pool and the jury verdict gave $10 million to the family who lost a child (Guerra, 2013). Moral issues of fatal accidents which occur in recreational industry are not limited to the lives lost. Estimating a monetary value for dead individuals, attempting to make someone responsible for the “accidents” and also losing company reputation after an accident has diverse moral concerns. Fatal accidents can be resulted from service providers as well as individual’s negligence. Conclusions Application of ethics into businesses increases the role of businesses in the economy. The new business dimension involves 1) economic aspects such as creating jobs to the labor force, contributing to the tax revenue of the government and supporting the wellbeing of the disadvantaged groups in the society 2) social aspects such as providing a safe working environment, health insurances, training and retirement benefits to the employees and prevent hiring child labor and 3) environmental aspects such as recycling wastage and preventing resource wastage. A deeper insight into business ethics also reveals that ethics help businesses to prosper in the long run and achieve their profit goals. It can be further described by using the benefits of moral conduct applied to businesses. Moral conduct can improve the relationships of the companies with their customers, employees and the governments. Therefore, such firms can operate in foreign markets rather conveniently and hire labors from different cultures. The above five case studies reveal that much of the legal conflicts can be also prevented by considering moral conduct in business management. Sometimes firms face with ethical dilemmas in which there is no obvious right or wrong decision, but rather a right or right answer. References Boyd, S. 2007. “BNP Paribas Freezes Funds as Loan Losses Roil Markets.” Bloomberg L.P.4. N.p. [online] [Accessed] 10 December 2013. Demirguc-Kunt, A. and Detragiache, E. 1998. “The Determinants of Banking Crises in Developing and Developed Counties.” IMF Staff Papers: 83. Ferrell O. C., Fraedrich, J. and Ferrell. ed. 2012. Business Ethics: Ethical Decision Making & Cases. Cengage Learning. Friedman, J. 2009. A Crisis of Politics, Not Economics: Complexity, Ignorance, and Policy Failure. Critical Review 21(2–3): 127–183. Guerra, J. “Swimming Pool Safety News.” J. Guerra Law Firm. J. Guerra Law Firm, Jones Building, 7551 Callaghan Rd. Suite 100, San Antonio, Texas. [online] [Accessed] 10 December 2013. Gunsel, N. 2007. “Financial Ratios and the Probabilistic Prediction of Bank Failure in North Cyprus.” European Journal of Scientific Research 18(2): 191-200. Huang, H. and Wajid, S. K. “Financial Stability in the World of Global Finance.” Finance & Development (2002): 13-16. Saluja, G., Brenner, R. A., Trumble, A. C. Smith, G. S., Schroeder, T., and Cox, C. 2006.“Swimming Pool Drownings Among US Residents Aged 5–24 Years: Understanding Racial/Ethnic Disparities.” American Journal of Public Health 96(4): 728–733. The Eurogroup Statement on Cyprus. 25 March 2013. [online] [Accessed] 10 December 2013. Read More