Desjardins5e ppt ch7

AN INTRODUCTION TO BUSINESS ETHICS

CHAPTER SEVEN: EMPLOYEE RESPONSIBILITIES

Copyright © 2014 by McGraw-Hill Education. All rights reserved.

THIS CHAPTER SEEKS TO

Examine the nature and range of employee responsibilities Explain the agency view of employee responsibilities Examine the role of business professionals as gatekeepers Examine managerial responsibilities Explain and examine the concept of conflicts of interests Analyze the responsibilities of trust and loyalty in the workplace Analyze responsibilities for honesty in business Examine the ethical responsibilities concerning whistleblowing and

insider trading

7-2Copyright © 2014 by McGraw-Hill Education. All rights reserved.

DISCUSSION CASE: CONFLICTS OF INTEREST IN SUBPRIME MORTGAGES AND AT GOLDMAN SACHS AND ENRON

Goldman Sachs is hired by clients to manage their investment portfolios

Thus, financial professionals at Goldman Sachs should make decisions in the clients’ best interests

Yet these finance professionals are also employees of Goldman Sachs, a firm that has its own financial interests at stake

Keeping these interests aligned, serving the firm’s interests by serving clients interests, was the corporate culture so appreciated by Greg Smith


DISCUSSION CASE: CONFLICTS OF INTEREST IN SUBPRIME MORTGAGES AND AT GOLDMAN SACHS AND ENRON (CONT.) However, Goldman culture systematically and

intentionally shifted away from this alignment

Instead of being served by the agents they hired, clients were disparaged as “muppets” to be manipulated for the financial gain of Goldman Sachs

Employees received promotions and huge bonuses based not on how well they served clients, but on how much money they made off of these clients


DISCUSSION CASE: CONFLICTS OF INTEREST IN SUBPRIME MORTGAGES AND AT GOLDMAN SACHS AND ENRON (CONT.)

Created in July 1985, Enron evolved from a gas and energy supplier to an energy-trading company

To minimize risks in the highly volatile energy industry, traders commonly ”hedged” their positions, effectively entering into futures contracts that balanced current risks

Senior management at Enron balanced risks by entering into agreements with companies that its own executives created for that very purpose

Enron’s relationships with these “special purpose entities”(SPEs) was at the heart of the company’s corruption and collapse



Accounting regulations: Allowed anyone with a minimum of 3 percent equity share

to be identified as an SPE’s owner Held that as long as Enron owned less than 50 percent of

an SPE’s voting stock, its debts did not have to be accounted for on Enron’s books

Enabled SPEs to technically be separate business entities The entire process allowed Enron to record a lowering of its

liabilities (as its debts were paid off) without also recording the corresponding increased liability (which had been shifted to the SPEs


DISCUSSION CASE: CONFLICTS OF INTEREST IN SUBPRIME MORTGAGES AND AT GOLDMAN SACHS AND ENRON (CONT.) Aspects of these relationships that were

particularly egregious:

1. Enron’s SPEs had little use other than to shift debt and risk off balance sheets, and the entire financial stability of Enron was supported only by its ability to shift debt onto SPEs



Aspects of these relationships that were particularly egregious: (cont.)

2. The person managing these SPEs was Enron’s CFO

3. Enron was supported through all of this by its accounting firm: Arthur Andersen, which provided allegedly unbiased and accurate financial reports



Enron began collapsing in early 2001

Enron Vice President Sherron Watkins warned the CEO and other Enron executives about serious accounting improprieties

Enron’s senior executives were selling Enron stock at a furious rate

Arthur Andersen realized its mistake and acted to cover up its actions



October 16, 2001: Enron announced a $618 million quarterly loss

November 8, 2001: Enron acknowledged that widespread accounting errors in four previous years had overinflated its’ stock by $600 million

December 2, 2001: Enron filed for bankruptcy


WHAT DO I OWE OTHER PEOPLE?

It depends

Workers are employees and the employment relationship establishes a variety of responsibilities that employees owe to their employers

Managers, while employees, are agents of the corporation and have specific responsibilities to the stockholders and to others


EMPLOYEES AS AGENTS

Agent-principal concept An agent is a person who act on behalf of another

person

Not all agents are employees

Common law in the U.S. historically has treated all employees as agents of employers, establishing a fiduciary responsibility

Agency relationships variety in the latitude of decision making


EMPLOYEES AS AGENTS

Managerial employees have greater discretion and responsibility than other employees

Managerial employees are free from close oversight

The law holds that employee-agents owe legal duties of loyalty, trust, obedience and confidentiality to the employer-principal

These duties override employee personal interests


EMPLOYEES AS AGENTS

Is this narrow view ethically defensible?

Why would anyone believe this view?


EMPLOYEES AS AGENTS

First, managerial employees in particular play a particular role within the economic system

Second, managerial employees in particular must protect the property rights of owners and prevent economic harms they might suffer from other employees


EMPLOYEES AS AGENTS

Nonmanagerial employees have a responsibility to obey only when employer demands are reasonable, job-related and do not violate legal or ethical duties

We have to consider what nonmanagerial employees “owe” to their employers


EMPLOYEES AS AGENTS

The narrow view of employee responsibilities is more plausible when the employees hold positions of managerial authority

In general, managerial employees have an ethical responsibility to act in the best interests of their employers – to a limited degree


EMPLOYEES AS AGENTS

There are cases in which ethical responsibilities take second place to role-specific responsibilities, e.g. physicians and lawyers

But does the role of a manager, like the role of a physician and a lawyer, serve social ends important enough that people in those roles can sometimes be exempt from ethical responsibilities?


PROFESSIONAL ETHICS & GATEKEEPING

Our responsibilities are a function of the relationships that we have with others

Professionals have very specialized knowledge or expertise that serves the public good; certification by some public agency is usually involved



Within the business and economic context, some professions have evolved to serve important functions: attorneys, auditors, accountants and financial analysts

Many of these professionals are paid by the business that they are responsible for watching over



Real conflicts of interest exist between professional duties and a professional’s self-interest

But knowing what one’s duties are and fulfilling those duties are two separate issues



What does the word “reason” mean?

- In one sense, a reason refers to the legitimacy or justification for acting in a certain way

- In another sense, reason refers to a psychological state in which we act, like motivation



Acting on principle sometimes can require real courage – or discipline – or will-power

Our habits are developed over time and influenced by our surroundings

If we recognize that it can be difficult for individuals to fulfill their gatekeeping function, then society has a responsibility to make changes


MANAGERIAL RESPONSIBILITY & CONFLICTS OF INTEREST

Return to Enron…

- Who are the owners of Enron?

- How many different “desires” existed in Enron at the time of the scandal?

- What is the “cult of the shareholder? How did it become the biggest reason behind the accounting scandal at Enron?



Return to Enron…

- If the varied interests of various stakeholders are the interests that a business manager ought to serve, how does the manager prioritize these interests, and what interests might inappropriately conflict with these?

- What are the costs stakeholders endured as a result of managerial decisions?



A kickback is an illegal payment that occurs when a portion of some payment is paid back to the payer as an incentive to make the original payment.

Soft money occurs when financial advisors receive payments from a brokerage firm to pay for research and analysts services that should be used to benefit the clients of those advisors.


TRUST AND LOYALTY IN THE WORKPLACE

To trust someone is to be confident in and rely upon their judgment when one is vulnerable to their decisions.

Trustworthy managers develop and maintain professional competence and expertise



Loyalty, in business, is understood as a willingness to make personal sacrifices in the interest of the firm.

- To what degree do employees have a responsibility to make personal sacrifices for the firm?

- Ronald Duska argues employees have no responsibility



Claims for loyalty by the firm can often be little more than a disguised way to exploit employees’willingness to make sacrifices for the firm

However, until and unless the firm is willing to sacrifice for employees, those employees have little reason to demonstrate loyalty to the firm



Is the case different for managerial employees?

- Sherron Watkins

- Andrew Fastow

If loyalty means willing to sacrifice one’s own interests by going above and beyond ordinary responsibility, then we ought to be suspicious of calls for employee loyalty.


HONESTY, WHISTLEBLOWING & INSIDER TRADING

Honesty: Are there situations in which dishonesty is common and acceptable?



There are three reasons to explain the ethical responsibility to be honest:Dishonesty undermines the ability of people to

communicate

Honesty and trust create essential preconditions for all cooperative social activities

A dishonest person must have more than one identity, which undermines his integrity



A bluff can only work as a bluff if the person being bluffed believes that it is true (is being deceived).

While a dishonest act can have beneficial social consequences, routine dishonesty erodes the trust that seems essential to social cooperation.



A whistleblower is an employee or other insider who informs the public or a government agency of an illegal, harmful, or unethical activity done by their business or institution.

- Whistleblowing puts the employee at risk

- Whistleblowing pits responsibilities to third parties at odds with employees responsibilities to their employer



Richard DeGeorge argues three conditions must be met before whistleblowing is ethically permissible:

- There must be a real threat of harm that needs to be addressed

- The whistleblower should first seek to prevent the harm through channels

- The whistleblower, if possible, should exhaust all internal procedures for preventing the harm



Insider Trading generally refers to the practice of buying or selling securities on the basis of nonpublic information that one has obtained as an “insider”.



Three arguments are cited in ethical criticism of insider trading:

- Property rights

- Fiduciary duties

- Unfairness claims


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Desjardins5e ppt ch7