First National Federal Bank - Case Study Example

First National Federal Bank (A Case Study) Introduction Majority of business people would rather think business and ethics are incompatible. Nothing could be farther from the truth. Today's businesses require that managers and owners eschew (avoid) lying, fraud, theft or dishonest practices. Consumers and customers alike are now more activist and doing illegal things and immoral acts have dire consequences for a firm in the long run. Most actions which are contrary to moral norms are certainly bad for business (de George 7). Enlightened management practices require that firms treat their customers and other stakeholders right (employees, the local community, owners, etc.). In business today, the old adage about honesty is the best policy still holds true and it is more important than ever. Discussion Problem – this case deals with an ethical issue regarding the business practices of the First National Federal Bank located in the state of Wyoming. Loan officers are now required by the bank to adhere to changes implemented after the savings and loan debacle with regard in particular to ethical business practices. This emphasis on ethics is to avoid those problems that arose due to unsavory policies and procedures concerning the approval of bank loans. In this particular case, the issue at hand is whether to let a loan applicant pay for the cost of the officers' out of town trip purposely to inspect the hard collateral offered by client for his loan. It is a standard practice in the banking industry to require collaterals in exchange for a loan. A bank requires collateral as a guarantee for repayment because a loan client would rather not be in a position of abandoning his hard-earned collateral and lose it through foreclosure if a loan turns sour (bad). There is also ambiguity between what is legal and what is ethical (moral). Inputs - the issue that bothered Shelby Grant the most was the question of whether to let one of their potential loan clients (Mr. Doug Whitton) pay for their trip to a ranch he owns as part of the bank's due diligence process of conducting an on-site evaluation (appraisal) of the offered collateral. At this point, it may seem unethical to let a client shoulder the expenses since there is no assurance the loan would be granted. Besides the collateral, there are factors that may work against loan approval such as credit history and repayment capacity (source of income to pay back the loan). If the two loan officers, Shelby Grant and Ben Garrison, would allow or accept the client's offer to pay for their trip, it may appear a bit awkward for them. It is precisely the bank's objective to impose higher ethical rules so that loan officers would not be obliged to grant a loan that is otherwise not viable. In other words, there should be nothing that should influence the officers' decision on whether to approve the loan application or not. If they accept the bank client's offer, it would border on something inappropriate or improper. One other issue confronting all loan officers is the upcoming fund raiser picnic in that they need to solicit some funds for charity. As discussed in the case, most of the fund sources are the bank's existing loan clients. At any rate, the loan clients are to be asked to donate some prizes for the fund-raising event. This act of soliciting some prizes also raised the question of propriety because although they are not under any compulsion or obligation to give donations, there would inevitably prop up in their minds about whether to contribute or not since it is the loan officers who will be making the requests. The probable end result is to make these clients apprehensive on what happens next if they refuse. They will surely think that something bad will happen to their loan accounts if they refuse to give anything; the impression will be those who gave will get some form of preferential treatment from the bank. New savings and loans legislation was precisely put into place to regulate the banking industry and avoid these type of situations where some pressure is put on clients (Barth, Trimbath & Yago 33). Solutions – there are two possible solutions out of this moral and ethical dilemma. The first is to turn down the client's offer outright as the bank has an expense account precisely for making on-site evaluation visits and Mr. Whitton is under no obligation to shoulder the trip's cost although he might have made an offer voluntarily. This will put everything about the loan transaction entirely on an ethical and also professional level. The loan officers likewise can do or make an evaluation of his loan application entirely on its merits. Both Ben and Shelby can always ask for reimbursement from the bank using their allowable expense accounts although this might add to their costs somewhat. But it must be borne in mind that banks do not operate in a vacuum; by this, I mean there are also competitors who might be interested in Whitton. The second possible solution is to accept Mr. Whitton's offer graciously but impress it on him that his loan application will still undergo the same regular process of evaluation. The two officers must emphasize it to him that final loan approval depends on a lot of factors and not only on the collateral he offered as loan security. In short, approval is not assured. The first possible solution cited above will not put the loan officers in an embarrassing situation in the event the loan is turned down based on the bank's criteria for loan approvals. It will put everything on a professional basis and no debt of gratitude is ever incurred. Sticking to rules on ethics avoids the temptation for loan officers to accept bribes or some other forms of renumeration that might sway their judgment that can lead to fraud. Collusion and political connections led to massive fraud in the granting of loans in the S & L sector which in turn had created a moral hazard problem which caused its collapse (Calavita, Pontell & Tillman 126). A drawback to the second solution is Mr. Whitton might take his business elsewhere to another bank. The second solution is also not without some risks involved. In the event Mr. Whitton's loan application is not approved, he will not look kindly on the bank again and can even cause a public relations disaster if he spreads rumors about how its loan officers acted. Choices – I think the first solution which is to turn down Mr. Whitton's offer of paying for the trip to be the best possible solution under the circumstances. This will not unduly cost Ms. Shelby Grant any sleepless nights wrestling with ethical questions in her mind. She had recently graduated from business graduate school and one of the core areas discussed in MBA class is business ethics (it is one of the 12 common professional components or CPC). This is the main difference between Ben (10-year work experience) and Ms. Shelby who obtained an MBA degree and has a wider and more wholistic view of the entire ethics issue at hand. The new corporate social responsibility (CSR) in vogue today requires performance to be totally transparent to those who have a stake in the corporation (Crane & Matten 70). In the banking industry, all officers must act above board to avoid any suspicions. Operational Steps – I would recommend to the bank management to put into writing a corporate code of ethics that specifies in clear terms what types of expenses are reimbursable in the course of processing loan applications. In this regard, it can start by stating what are the out-of-pocket expenses that should be shouldered by the client and which expenses are borne by the bank. This will institutionalize the choice I made (first solution) and avoid the possible conflicts of interest and ethical dilemmas that may arise in the future. This includes the idea of soliciting gifts from loan clients whether on special occasions like Christmas holidays or not. The example given in the case was a fund-raising charitable event but it puts clients in a very awkward or uncomfortable position in case they turn down these prize solicitations. Conclusion It is possible to combine ethics and business; ethical decision-making can be put into corporate practice by drafting a code of ethics (Ferrell, Fraedrich & Ferrell 204) so that all a firm's employees can be properly guided on how to act. When faced with an ethical dilemma, it might help to utilize the Six Thinking Hats (STH) or thinking outside the box (Eisner 170). Works Cited Barth, J. R., Trimbath, S. & Yago, G. The Savings and Loan Crisis: Lessons from a Regulatory Failure. New York, NY, USA: Springer, 2004. Print. Calavita, K., Pontell, H. N. & Tillman, R. Big Money Crime: Fraud and Politics in the Savings and Loan Crisis. Berkeley, CA, USA: University of California Press, 1999. Print. Crane, A. & Matten, D. Business Ethics: Managing Corporate Citizenship and Sustainability in the Age of Globalization. Oxford, UK: Oxford University Press, 2007. Print. de George, R. T. “Moral Issues in Business.” Business Ethics: Methodological Issues. Ed. Alan R. Malachowski. London, UK: Taylor & Francis, 2001. Print. Eisner, H. Managing Complex Systems: Thinking Outside the Box. Hoboken, NJ, USA: John Wiley and Sons, 2005. Print. Ferrell, O. C., Fraedrich, J. & Ferrell, L. Business Ethics: Ethical Decision Making and Cases. Florence, KY, USA: Cengage Learning, 2006. Print. Read More