Significant Stress in the Financial System - Essay Example

BUSINESS ETHICS The financial crisis of 2008-09 created problems for millions of people around the world. It also placed significant stress on the financial system. But perhaps most importantly it changed the way people viewed business, in many ways for the negative. Just as with the collapse of Enron a few years earlier, when shareholders were wiped out by bad, unethical, and illegal business practices, a new era of distrust began. Public ire was focused on Wall Street, which was seen to have caused the crisis. The main subject of this fury was corporate bonuses. The public saw these bonuses as outrageous and unethical for several reasons. One reason was that it began to appear as though people on Wall Street were congratulating themselves for a job badly done, and, another was because some of the firms giving out large bonuses had received bailouts from taxpayers. The question we must ask ourselves as businesspeople is whether or not big corporate bonuses are ethical or not. But that is only part of the issue. A lot will hinge on questions of perception. This memo will discuss this issue. In business, perception can very easily become reality. That in part is what public relations companies do for businesses—they try to manage perceptions. But businesses can also do a lot to help themselves. If they appear unethical or overly greedy, it is very likely they will turn off many potential customer and lose long-time customers too. It is important to consider how your company is being portrayed in the press. This is especially vital to consider in times of economic downturn. The recent crisis created a new context in which many actions taken by management in large companies came under new scrutiny. Many people in the media, as well as ordinary people, blamed large firms on Wall Street such as banks and insurance companies for taking unreasonable and foolish risks (Wayland, 90). It is indeed true that many of these companies gambled big. They failed to properly understand the products that they invested in. That in itself may be an ethical issue, but the thing that really got peoples goat was what followed. The idea that large bonuses would be paid to upper management following the crisis was seen by many as infuriating and unethical. It rubbed people the wrong way. People became very cynical about business. There were three main reasons for this. The first reason was simple: bonuses are to paid when someone does a good job. When you do a bad job and your company loses lots of its value and would normally go bankrupt, you should not be rewarded, you should be fired. For many observers there was an ethical chasm between the cause and effect in this situation. They viewed the idea of paying bonuses for failure as part of a scheme. It suggested to them that these businesses were acting unethically and were even congratulating themselves for the destruction they caused. The second reason had to do with the size of the bonuses. Many bonuses involved millions of dollars. For ordinary people, these numbers were astronomical and completely out of proportion to what was happening in the real world. It seemed highly unethical for managers to be receiving bonuses of this magnitude when shareholders were wiped out. That dissonance struck people as indicative of a seriously unethical situation. They then became angry. The third reason was that following the crisis many major firms received taxpayers money as a form of bail-out. These companies would normally have gone bankrupt, but the government decided that this was too risky and would have terrible consequences for the entire economy if too many banks and insurance companies were to fail. Taxpayers were forced to bail out these companies with billions of dollars. To see their hard earned money spent on bonuses, drove ordinary citizens up the wall. AIG, a large recipient of bailout money, was the subject of numerous death threats. People strongly felt their money was being stolen and that these companies were seriously ethically compromised. Little could be done to alter this perception. What does all of this mean for our own company? There are a number of important lessons here that we must consider. To begin with, it is important to understand why these firms continued to pay large bonuses. Part of the problem was that they were contractually obliged to do so. They did not have enough control over their pay structure. Even if their company nearly went bankrupt they were still unable to rescind the bonuses to upper management. That indicates a serious lack of control. The truth is that peoples ethical alarm bells go off when there is no connection between pay and performance (Stiglitz, 152). It is important to offer bonuses to employees, but the company must have control over how and why they are being paid. If a bonus is contractually required no matter what the performance of the company is, then it is not really a bonus at all. A good way to avoid the ethical issues surrounding bonuses is for contracts to be clear about when bonuses are to be paid out and for much such bonuses will be. Another important consideration is perception. By paying large bonuses, it appears that a company is not living in the real world. There is a perception that the buck is being passed and no responsibility is being taken. Although BP was pilloried in the press during the recent oil spill, the were able to get some respect by owning up to the problem and taking actions to solve it. There are no real examples of any companies doing this during the financial crisis. If a bank or insurance company were to admit that they were part of the problem and take responsibility, people would support them. Paying bonuses shows that you dont care; it only shows that you are hypercompetitive and will do anything to win (Prins, 4). As a company, the next time there is a financial crisis, we need to step back and see what our role is in it and how we are being perceived by the public. Without customers and public support our company will fall apart. We have to be very careful not to alienate people through unethical practices. We need to constantly be vigilant and consider the consequences of our actions. Perception governs all. The argument that bonuses are ethical is a reasonable one. As this critic recently wrote of the issue: Paying the bonuses is, quite simply, a matter of meeting a contractual obligation—a mutual promise– between two parties bargaining in good faith. The federal government, in offering A.I.G. a financial bailout that it did not deserve, could have placed limitations on what the money could be used for, of course. That it didn’t do so when it had the upper hand (perhaps for excellent reasons, as it is usually necessary for a company to meet contractual obligations, however lavish, in order to keep its key personnel from moving elsewhere) means that the government is accountable to the public, and its officials’ protestations of outrage at the company for doing what it knew it would do are hypocritical at best and dishonest at worst (Marshall). This makes sense. It is reasonable. But businesses do not always have to deal with reason. Sometimes situations get out of hand and populism raises its ugly head. We need to be prepared to adapt quickly to a situation where the ethical standards have shifted even if it doesnt makes sense to us. The truth is when most people see dollar signs they stop thinking straight. There are many ethical issues that confront businesses today. One of the more serious is how much and whether to pay bonuses to managers within the context of the recent economic crisis. When considering this question it is very important to recall that perception is important. We should be prepared to get out ahead of any complaints and ensure we are accurately portrayed to the public. Work consulted Ambrogi, Stefano. “Cameron says big bank bonuses not "done deal"” Jan 17, 2011. http://uk.reuters.com/article/2011/01/17/uk-britain-banks-idUKTRE70G1U220110117 Clarke, Dave. “U.S. regulators make forceful attempt to curb bank bonuses.” Reuters. Feb. 7, 2011. http://www.msnbc.msn.com/id/41461231/ns/business-stocks_and_economy/ Marshall, Jack. “The A.I.G. Bonus Payments…Again.” Ethics Alarm. February 3, 2010. http://ethicsalarms.com/2010/02/03/the-a-i-g-bonus-payments-again/ Prins, Nomi. It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals. John Wiley and Sons, 2010 Stiglitz, Joseph E. Freefall: America, free markets, and the sinking of the world economy. W. W. Norton & Company, 2010. Wayland, Peter A. The AIG Debacle: Global Impact and the Need for Government Intervention. Nova Science Pub Inc, 2010. Read More