Ethical Considerations in Business Decisions and Operations - Essay Example

Ethical Considerations in Business Decisions and Operations: The WorldCom Case Ethical Considerations When a Company Loans Its Executives to Cover Margin Calls on Their Purchase of Shares A margin call occurs when the balance of one’s trading account falls below the required margin for active trading necessitating that more money be added to the account to keep it active. A unique case of this is when an executive who owns stocks in the company he is working for borrows a loan from the same company to cover his margin call for the same stocks. An example of such a scenario happened in WordCom where senior executives borrowed against their stocks. Besides the catastrophic business consequences that may accompany such actions in case the share value of the stocks declines, ethical questions also arise in such situations most importantly regarding conflict of interest. There is also a concern about the rates at which such loans are given out to the executives; they are usually lower than what is offered in the market. Such interest rates are of no substantial returns to the company and are only beneficial to the executive in question hence are usually referred to as “sweetheart deals” and are considered unethical (Moberg and Romar, 2003; Gaughan, 2010). Growth-through-acquisition Strategy: Pitfalls and Ethics Growth-through-acquisition has been applied by several companies on an expansionary policy with considerable success in many instances when conceived well and properly executed. WordCom had achieved near market leadership in the telecommunication industry through a run of 65 successful acquisitions within six years. The acquisitions were accompanied by significant rise in share value each time. There were however basic underlying problems resulting from the acquisitions. To begin with, WordCom was especially good at acquisition but poor at harmonizing operations hence managerial problems followed. Besides this, the senior executives relaxed the accounting rules and disregarded the Generally Accepted Accounting Practices (GAAP). This was done to showcase a scenario of continued growth in the company’s share value and profitability through twisting financial records and gross misrepresentation of acquisition details. This was only sustainable through continued acquisitions hence when the government denied WordCom the permission to acquire Sprint in 2000 the management had to focus on raising value of the previous acquisitions which would be accompanied by fall in share value. In 2002, WordCom filed for bankruptcy admitting to financial adjustments of operating expenses as capital expenses to a tune of $9 billion in three years (Moberg and Romar, 2003). The situation at WordCom reveals a need to protect shareholders from bearing losses since they are the ultimate losers in the scenario where a company files for bankruptcy. The suggested protection needs only transparency and accountability in acquisition alongside ensuring that the GAAPs are strictly adhered to. This can be achieved through undertaking proper audits of acquisition processes since wholesome shelving of acquisition is waste of an opportunity for growth. Ethical Considerations when Banking Firms offer Special Clients Privilege in “Hot” IPO Auctions Liberation of financial services sector in the USA in the late 1990s translated to the freedom of financial institutions to offer a wide range of financial services to clients. Banks are allowed by the Securities and Exchange Commission to offer securities as they deem okay to their clients where it is the major financial players who usually benefit. The advantages of such a scenario is that it is good for the banks which are businesses just like any other hence interested in maximizing income. Banks also argue that distributing securities to established investors as opposed to small ones is a sure way of raising the much needed publicity for small firms launching in an IPO. This happened between WordCom’s Mr. Ebbers and Salomon Barney through Mr. Grubman - an underwriter who enabled Mr. Ebbers to make $11 million in four years from IPOs (Romar, 2006). Ethical concerns however arise in cases involving very close relationships of financial institutions, analysts and investors. A case in point is the close relationship between Mr. Ebbers and Mr. Grubman which resulted in high rankings for WordCom even when its stocks were actually falling. In the end, there was misrepresentation of information to shareholders that kept them in the dark about changing fortunes (WordCom’s stocks had fallen by nearly 90% by the time Mr. Grubman came clean) finally leading to losses when WordCom went bankrupt (Gini and Marcoux, 2008). The ethical questions that come up center on conflict of interest as can be seen in Mr. Grubman and the integrity of the information given to investors. Lying for Public Profile: Unethical or a form of Marketing? In the midst of inquiries into Mr. Grubman’s case, it was revealed that he had apparently lied about his personal background. He claimed to have obtained his degree from MIT but was actually a Boston University graduate. He also presented himself as being brought up in the classy South Boston while he was actually from the comparatively humble neighborhood of Oxford Circle (Moberg and Romar, 2003). While his intentions for such blatant lying are only known to himself, it is in bad taste when an individual in his position misrepresents even negligible pieces of information. Not to excuse lying in any other career, the implications for a market and share value analyst raise quite serious questions among investors and such concerns appear verified in his failure in the integrity test. Hence, Mr. Grubman’s lying cannot be written off as mere self marketing. In Cynthia Cooper’s Shoes Cooper and her audit team are the ones who realized that WordCom was headed for disaster and that the investors were being misinformed. Revealing such information was placing her and the team in direct collision with her boss Scott Sullivan and there were fears that such revelations could damage the company. Sullivan had asked her to delay reporting the financial errors and distortion for a quarter but Cynthia and her team were not sure whether this would save WordCom from bankruptcy (Pulliam and Solomon, 2002). Had I been in Cooper’s team, I would have gone ahead and revealed the scandal since it would be unethical for me not to do so considering the investor interests in the company. Besides, one has to question the commitment of the management to better things when they have allowed such wanton financial misconduct and benefitted from it. Such a scenario proves that there are no chances that things can be mended from within. I would also have considered that being in knowledge of what was happening and failing to report would also amount to criminal conduct besides the obviously ethical misconduct hence revealing would have been the only plausible option. References Belson, K. (2005). WorldCom's audacious failure and its toll on an industry. The New York Times, 18 January 2005, C 1. Retrieved 5 October 2011 from http://www.nytimes.com/2005/01/18/business/18ebbers.html Gaughan, P. A. (2010). Mergers, acquisitions, and corporate restructurings. New York, John Wiley and Sons. Gini, A., & Marcoux, A. M. (2008). Case studies in business ethics. USA: Pearson Prentice Hall. Moberg, D., & Romar, E. (2010). WorldCom. Markkula Center for Applied Ethics. Retrieved 5 October 2011 from http://www.scu.edu/ethics/dialogue/candc/cases/worldcom.html#fortythree Pulliam, S., & Deborah, S., (2002). "How three unlikely sleuths exposed fraud at Worldcom." The Wall Street Journal: Section A;1. Retrieved 5 October 2011 from http://www.happinessonline.org/MoralCode/LiveWithTruth/p23.htm Romar, E. J. (2006). WorldCom case study update 2006. Markkula Center for Applied Ethics. Retrieved 5 October 2011 from http://www.scu.edu/ethics/dialogue/candc/cases/worldcom-update.html Read More