Corporate Ethical Failure and Where the Blame Might Be Assigned - Essay Example

? Number: Examination of a corporate ethical failure and where the blame might be assigned In the past few decades, scandals have engulfed extensive groups of people ranging from company executives, employees, regulators, auditors, politicians and regulators. The capacity to acknowledge and deal with intricate business ethics issues has become a noteworthy priority in the modern companies. In the recent years, a number of well exposed scandals have resulted in public outcry on the need for superior business ethics and better corporate accountability. Company senior managers heading public companies prepared deceptive statements to blow up the prices of the company stock, apparently undermining the trust of the public in the integrity of financial market and regulators. The corporate scandals are usually perpetrated by several people who understand the organization’s every single detail, with most collaborating parties being people with high standing in the society. Most executives in failed corporations admit receiving enormous bonuses and backdated stock options to warrant that they will make wealth from investing in their company; not considering whether their performance made the share price increase or go down. Other unethical behaviors have resulted in the downfall of corporations, poor performance and negative publicity. As a result, the aspect of ethics in organizations has increasingly gained prominence due to distrust on organizational leaders (Loe, Ferrell & Mansfield, 2000) This study seeks to examine some of the corporate failures, reasons behind their fall, as well as a close examination as to where blame may be assigned. Of specific importance, Enron downfall and Satyam scandals will be useful in examining ethics behind corporations’ failure. The paper will also look at the theories that expound on the subject of ethical governance in organizations. Ethics is a significant pillar in the modern corporate arena and corporate governance. Organizations have learnt useful lessons from the above cases on the danger that unethical decisions can bring in any organizations. As David Thoreau once said, “it is truthfully sufficiently said that a firm has no conscience; but a company of conscientious men is a corporation with ethics”. This statement carries a lot of meaning with it as to the significance of upholding ethics in organizations. The subject of what constitutes ethical behavior in organizations remains a debatable subject due to the wide ranging opinions of what constitutes ethics, and what ethics is not. Nevertheless, many organizations have embraced ethical codes stating their leading philosophical guidelines and organizational values. Ethical codes that are successful highlight the obligations of organizations to shareholders, the behavior anticipated of employees, and ethical parameters of the organization. Ethical codes are intended to impact on employee behavior, and are also referred to as corporate ethics statements. Business ethics field deals with questions as to whether a particular business practices are acceptable. Controversial business ethics issues arise on a daily basis in every organization, and this calls for organizational members to exercise their conscience as Thoreau said. For illustration, an accountant may face an ethical dilemma in his/her course of duty that may compromise her decision. For instance, if an accountant discovers inaccuracies in a client’s auditing report, he/she may opt to report the inaccuracy. On the other hand, reporting such an inadequacy may result in the auditing company fired by the client for disclosing the inadequacies. This confusion leaves the accountant at crossroads as to what practice is acceptable. Business ethics require that organizational members to conform to sound moral principles. Special consideration has to be put into perspective when applying the concept of ethics in business. One is that businesses are formed with the aim of making a profit, and therefore, businesses must strive to earn it. This calls for high standards of ethics in the struggle for profits since profits earned in unethical ways shorten the life of the organization. Secondly, businesses have to balance their desires for profits against the needs of and desires of the society. Maintenance of such equilibrium calls for trade-offs and compromises. Business ethics, however, comprises of principles, standards and values that direct the world of business. Principles refer to particular boundaries of behavior that are complete and universal which form the source of rules. Values are used in developing norms that are socially enforced. Examples of values include accountability, integrity and trust. The collapse of Enron is superficially seen by many as resulting from fraud and imaginative accounting. Off balance sheet financing and unethical directors behaviors are not a conclusive explanation as to why Enron collapsed. Mandal (p 261) assert that Enron did not collapse as a result of creative bookkeeping, but Enron adopted imaginative bookkeeping because it was failing. Mandal further notes that Enron failed for slighter reasons that are hard to detect and less praiseworthy as largely portrayed. Enron failed as a result of wrong financial measures and goals for which managers were paid for. Eventually, the internal systems and financial controls were at disasters. The board members were also responsible for the collapse of Enron Corporation, and this tends to be highly overlooked. The board put aggressive goals on management, which were extremely challenging. The aspect of organizational design is also part of the blame for Enron’s failure. The organization was designed to operate bonus schemes that rewarded managers to boost reported revenues, use of the market to market accounting procedures that was supported by the United States Securities and Exchange Commission. In addition, Enron CEO allowed the chief financial officer to make finance department a profit center. Managers became so desperate in their bid to meet the strict targets that they decided to commit the organization’s capital. The international energy decision presented a plan to the CEO Skilling to present a profit of US$ 100 million only with an asset base of seven billion US dollars. That performance would mean that the company incurred enormous losses, prompting the CEO to adopt illusory strategies to put off the day of computation. Therefore, the blame behind Enron’s failure goes beyond ethics and morality (Vasudev & Watson, 2012). Following the failure of Enron, one can therefore, conclude that managers were paid for aim at aggressive targets and the wrong financial measures. Lack of ethics in governance often results in severe harms such as defective organizational design, flawed business practices and obscure objectives. In a bid to keep up with the board’s expectations, managers became desperate and committed unethical acts through deceptive practices and the internal system of financial controls. Lehman brothers and Goldman Sachs are other corporations that have failed in a manner similar to Enron. Managers in those financial institutions were motivated and paid and paid to aim at exceptionally risky financial goals, tempting most of them to use unethical and deceiving business practices. In addition, poor or ineffective communication is to blame for the failure of Enron Corporation. For any business to be effective, good communication is a fundamental requirement. Communication plays an essential role in making ethics and ethical code work effectively, and organizational members have to be aware of the existence of ethical codes in their organization. Stevens (2009) noted that there is a direct relationship between organizational communication and ethical codes. Ethical codes are effective when they are communicated through the right channels. The way in which ethical codes are communicated to organizational members determines their success or failure. Further, codes are successful when they are pertinent, readable and expressed in an optimistic manner than in a negative way. When communication is dampened, it results in failure or death of an organization. Enron is a perfect illustration of a silenced organization, and which organizational members felt they could not freely speak of the wrongdoings that happening in the organization. Nonetheless, ineffective communication has also been attributed to code failure. Nevertheless, ethical codes communicated in the proper channels may at times fail to put off unethical conduct. Referring to Enron case, the organization had ethical codes, and the board of directors had suspended the code twice. Enron culture also discouraged free and open communication because elimination of the code warranted an organizational member to raise signals as to what is happening in the corporation. This concept is referred to as whistle blowing. Watkins Sherron is viewed as Enron’s whistle blower for disclosing the unethical practices at Enron. Watkins and other employees had seen how accounting practices went from being creative to aggressive. The corporation was heavily borrowing and went on disguising its debts as revenues. The debt to equity ratio had hit the 250% mark, yet auditors and financial institutions never noticed (Shriberg & Shriberg, 2011). Watkins waited for the corporation to be extremely over-leveraged to act. Organizational culture in Enron can also be blamed for the failure. Ethical codes succeed when they are entrenched and assimilated into an organization’s culture. Codes success is acknowledged with the board of directors setting the pace in organizations at the top. Codes successfully become assimilated into the organization’s culture when the leaders are effective in creating and managing ethical cultures. Moreover, ethical codes work when organizational members such as workers perceive organizational actions to be in line with the code. When Enron board of director suspended the code twice, that was a clear signal of ineffective leadership. Apparently, it was easy to perpetrate unethical behaviors since there were no proper guidelines in place to monitor and regulate behavior (Schwartz, 2004). Enron has been said as having a culture of arrogance that made people believe that the company could handle increasing risk without facing any peril. Enron’s whistleblower held that Enron’s silence message was to make numbers; if one got caught, they would request for another opportunity that would be granted. The company’s culture did little to foster ethical values like integrity and respect. Compensation program, decentralization and employee appraisal programs were mainly used to weaken ethical values. The massive decentralization led to malpractices as very few people had an idea as to what was occurring in the corporation (Weiss, 2008, p 30) Definite issues arising in the field of business ethics are such as abusive conduct, harassment, accounting frauds, flawed products and conflicting interest have been often cited as proof of declining ethical standards. For illustration, Satyam computer services of India and collaborated with the majority of fortune five hundred companies. Satyam chairperson revealed that $ 1.04 billion was fictitious which was presented in financial statements as cash and assets. The chairperson further disclosed that the company’s assets and earnings were inflated for years. A close examination of the company’s books of account revealed several flaws. Some of them include nonexistent sales, cash manipulation, recording income ahead of time and manipulation of expenses. In this case, the regulatory bodies are to blame such as the company’s board of director, the auditors, the audit committee and the accounting standards in India in general. An analysis by the Noble group (UK based investment Bank) on firms operating in the Bombay stock exchange revealed serious flaws in the accounting practices. Identified accounting flaws included reducing depreciation charge to push expenses to a further period, and giving advances and loans to other companies in which their directors have an interest. The report points fingers at ethically delinquent corporations, but also points out what is ethically lacking in companies (Vasudev & Watson, 2012). A recent study on corporate reputation in the past decade in America reveals that reputation for corporations is terrible. AIG, Chrysler, ExxonMobil, Citigroup and General Motors were rated among the least admired. Google, Johnson & Johnson, Toyota Motor, Microsoft and coca cola were among the most admired. Insider trading remains a serious ethical issue in the contemporary business world. Inflating earnings in an endeavor to increase a company’s profitability in a manner which is contradictory to the industry practice does not seem to end even after increasing awareness following Enron’s downfall. Many companies strive to make short term gains to evade criticism by analysts and investors. This was the case with AIG when Pricewaterhouse Coopers was sued for participating with AIG to overstate their earnings. Incorrect accounting for reinsurance and other trade transactions resulted in restatement of earnings amounting to $ 3.9 billion (Ferrell, Fraedrich, & Ferrel, 2009). Theories and perspectives of corporate governance and ethics The concept of ethics is interchangeably used with social responsibility, corporate governance and corporate citizenship. Corporate citizenship denotes the extent into which businesses purposefully meet the ethical, philanthropic, legal and economic responsibilities endowed on them by stakeholders. Corporate governance has four related components: sustained financial performance, ethical actions beyond what law necessitates, voluntary contributions and meticulous compliance that progress stakeholder loyalty of the organization. Some entities embrace the view that maximizing shareholders’ value is the core obligation of the business. Other organizations hold that a business is a member and a citizen of society and hence ought to take on broad obligations including observing societal norms and anticipations. These two views form the basis of shareholder and stakeholder theories of corporate governance. Other theories include the agency theory, transactional economics and the political model. The agency theory identifies the relationship of a principal and agent. The directors are the agents, and owners are the principal. Thus, corporate directors must act for the best interest of the principal. Transaction economics theory views the organization as a governance structure. The model holds that a proper organizational structure can help in harmonizing the interests of directors and shareholders (Loe, Ferrell, & Mansfield, 2000). The political theory acknowledges that the distribution of corporate power and privileges involving owners, managers and other stakeholders is influenced by how governments favor their various communities. The aptitude of corporate stakeholders to influence the distribution among themselves at the micro level is subject to the national structure. Shareholder model of governance is founded in the economic principle, where the goal of the firm is viewed as purely to maximizing wealth for owners and investors. Public governance in public companies centers on developing and enhancing the official scheme for maintaining performance accountability between directors and shareholders. Therefore, all decisions are geared towards serving the best interest of shareholders. Underlying firms’ decision is the agency issue where ownership and control are separate (Shann, 1997). Conflicts of interest may arise since managers and investors are different parties with exclusive values and goals. For illustration, managers may make decisions that are beyond investor value such as a personal reward and market share while investors’ main objective is to increase the value of stock they own. As a result of these differences, corporate governance and ethics are necessitated to align the interests of the management and that of investors. This model is criticized for having a singular view of the firm, yet a company has diverse stakeholders. Stakeholder theory of corporate governance focuses on the broader view of a corporation, and incorporates the needs of other stakeholder such as customers, workers, community, suppliers and other business partners. Firms have to establish which of their stakeholders are primary in order to apply governance mechanisms that foster the development of long term relationships (Mandal, 2010). Board of directors Boards of directors in publicly traded companies hold a decisive liability for the ethics of their acts, as well as for their firms’ accomplishment or failure. Board members take on the lawful duty over the company’s resources and decisions. They also appoint the company’s top management of the firm. Their fiduciary responsibility requires them to act in the best interest of those they serve as their position requires assurance and trust. Recent scandals in the 2000s have led to greater demands for accountability of the part of the board of directors. Their compensation has also proved to be a great ethical area since they may put their interests before that of shareholders whenever they are considering pay rise for executives. Boards of directors are primarily responsible for every decision made my top managers. This includes setting goals and objectives, ensuring oversight and accountability measures are in place (Mallin, 2012). As such, it would be wise to say that Enron board of directors is also to blame for what happened in the company. They set belligerent targets for the management, and since managers wanted to act right in accordance to agency theory, they ended up doing unethical practices to keep up with the targets. In addition, the board of directors suspended ethical code twice, thus creating a loophole for unethical behaviors. The executive compensation has also been in the limelight as an ethical issue like in the case of the American international group (AIG) and Enron where executives were highly compensated (Vasudev & Watson, 2012). This leaves the question as to whether executive compensation encourages managers to focus on short term profitability at the expense of long term growth. Conclusion The issue of ethics and corporation failure is a wide subject that touches on every business. Ethical situations arise on a daily basis, and how a person responds to them makes the difference. Numerous corporations have gone down as a result of unethical behavior perpetrated by those in authority. When a corporation fails, it may be obvious to point fingers at the management, rarely forgetting that an organization is a complex system with numerous divisions. Therefore, for every corporate collapse, it is wise to have a close examination of the corporation in order to ascertain the original cause of the problem and to identify the right people to bear the blame. From the above discussion, it is clear that corporate boards have a fundamental role in the success and failure of an organization. Their fiduciary duty requires them to make a strategic decision and monitor executives, who are the policy implementers. When they set unrealistic targets, executives get creative and unethically act to please the directors. The organization culture is also to blame for corporate failures, and this result from ineffective leadership by the board of directors. Enron’s board suspended ethical codes twice, thus creating unethical culture where a person was free to interfere with numbers. Organization culture also includes other practices like communication which form the fabric for organization’s success. Bibliography Shriberg, A., & Shriberg, D., 2011. Practicing Leadership Principles and Applications. NJ: John Wiley and Sons. Weiss, J.W., 2008. Business Ethics: A Stakeholders and Issues Management Approach with Cases. Connecticut: Cengage Learning. Shann, T., 1997. Corporate governance: its concepts and theories. Corporate governance: an international review, Blackwood, oxford, 5(4), 180-205. Mallin, C., 2012. Corporative Governance. Oxford: Oxford University Press. Vasudev, P. M. & Watson, S., 2012. Corporate Governance after the Financial Crisis. UK: Edward Elgar Publishing. Phillips, J.M., 1995. Corporate moral responsibility: when it might matter. Business ethics quarterly, 5(3), 555-576. Ferrell, O.C., Fraedrich, J., & Ferrel, L., 2009. Business Ethics: Ethical Decision Making and Cases: 2009 Update. Connecticut: Cengage Learning. Mandal, K.R., 2010. Ethics In Business & Corp Governance. Canada: Tata McGraw-Hill Education. Stevens, B., 2009. Corporate ethical codes as strategic documents: an analysis of success and failure. Electronic journal of business and ethics and organizational studies, 14(2), 1-20. “Ethics and corporate responsibility”, nd. Chapter 3 pg 53-71. Accessed on 26 April 2013 from: http://mhhe.com/irwin/m/pages/downloads/batemanM2e_sample_ch03_small.pdf. Schwartz, M., 2004. effective corporate codes of ethics: perceptions of code users. Journal of business ethics, 55(1), 323-343. Loe, T.W., Ferrell, L., & Mansfield, P., 2000. A Review of Empirical Studies Assessing Ethical Decision-Making in Business. Journal of Business Ethics 25(1), 185–204. Read More