MT310 – Ethics and the Legal Environment Seminar Presentation UNIT 8 The Shareholder Stakeholder

Shareholder Stakeholder Owners of the corporation Not involved in management or direction Fiduciary relationship Interests often contrary to other stakeholders Knowledge of the securities laws required 2

The Securities Acts In response to the stock market crash of 1929 and the Great Depression, Congress enacted two acts: –Securities Act of 1933 –Securities Exchange Act of 1934 Apply to public companies To structure and oversee the offering, selling, and trading of securities in ways that would protect investors 3

Securities Act of 1933 Requires that investors receive information about securities offered for public sale Prohibits fraud in the sale of securities by requiring that securities be registered Registration includes information including –a description of properties and business, –a description of the security to be offered for sale, –information about management of the company, & –financial statements certified by independent accountants 4

Securities Exchange Act of 1934 Created the Securities and Exchange Commission (SEC) Power to register, regulate, and oversee brokerage firms, transfer agents, clearing agencies, and securities self-regulatory organizations To give the investor confidence and prevent another collapse in the system 5

Securities Regulation from a Manager’s Perspective Must be aware of all laws and regulations May need to be aware of periodic reporting requirements Must be aware of information handling requirements and prohibitions Must put protections in place to prevent illegal activity 6

Ethics Application Candice is in an office elevator when she overhears three employees of a different company discussing the not-yet-public sale of one of their subsidiaries. Candice recognizes that if she were to buy stock in the parent corporation, she could stand to gain a substantial return on her investment. Insider trading law does not typically cover individuals outside the company who innocently overhear of a “tip.” Candice decides to use the private information for her own gain. 7

Ethics Application Questions 1.Who are the stakeholders in this case? What are their needs? 2.Is the action of Candice legal? Is her action ethical based on your gut reaction? 3.How does the answer to the above question change if you apply a rights approach to the case? A justice approach? A categorical imperative approach? A utilitarian approach? 4.Where would you rank Candice in Kohlberg’s Levels of Moral Development? 8

Sarbanes-Oxley Act of 2002 In response to the Enron fall in 2001, Congress enacted the Sarbanes-Oxley Act of 2002 (SOX). –To protect investors by improving the accuracy and reliability of corporate disclosures, –To enhance corporate responsibility, –To end corporate and accounting fraud, and –To restore the image of stock purchases as investments worth the risk. Requires documented internal controls Requires CEO and CFO certifications 9

SOX from a Manager’s Perspective Must certify each annual or quarterly report on: –Accuracy of report –Disclosure provided to the auditors –Internal controls designed Must provide heightened disclosure on transactions with affiliates Must adopt a code of ethics for senior financial officers Must be aware of criminal implications for destruction or falsification of records 10

Ethics Application The Banker’s Association is a nonprofit corporation. However, each year, they do in fact make a substantial profit. Under nonprofit corporation law, the organization’s profit cannot be distributed to directors or officers. The law also states that nonprofits cannot have investors, so it is illegal to distribute profits to investors. However, each year, the directors vote in substantial increases in their own per diem pay rate and give money to other nonprofits whose work they support. When they seek outside financing from banks, they typically do not report the increases to the directors’ pay rates, nor do they disclose the “cash grants” to other nonprofits. The 2002 Sarbanes-Oxley law does not cover specifically the situation of a nonprofit corporation. 11

Ethics Application Questions 1.Who are the stakeholders in this case? What are their needs? 2.Is the action of the directors legal? Is their action ethical based on your gut reaction? 3.How does the answer to the above question change if you apply a rights approach to the case? A justice approach? A categorical imperative approach? A utilitarian approach? 4.Where would you rank the directors in Kohlberg’s Levels of Moral Development? 12

Role Play You are the shareholder bringing your questions and concerns to the meeting. The situation is based on the following scenario: Dickins Enterprises owns seven theme parks Annual revenue = $200 million; stock strong Stowe hired as CEO – 25 years experience Since joining, revenues have grown 20% per year Stowe changed benefits to include same-sex partners Board and employees approved of change in benefits 13

Role Play Cont. Televangelist called for boycott of Dickins based on new benefits policy Business at the parks dropped 15% Continued talk of issue on radio and television Stowe appeared on talk show to dispel talk, but additional boycott groups joined Stowe can undo benefit changes, but believes hype will die down Board is concerned about shareholders/reelection Stowe says he’ll resign if they force him to undo 14

Role Play Questions Should the stockholders be concerned about other stakeholders? Why, or why not? Should the stockholders vote to replace board members until they get a majority that will fire Dennis Stowe? What are the stockholders' options? What other issues must the stockholders be concerned about? Does profit outweigh all else? 15

Final Project Part II due by the end of Unit 7 (Last night!) Part III due by the end of Unit 9 –Write a recommendation for both the Energy Cooperative and the Clean Power Company. –Use at least 3 specific references to course material to support each recommendation. –Minimum of 3 pages (minimum 1 1/2 page for each case) in APA style format. 16

Questions & Reminders Questions on Unit 8 material? Next Seminar on Unit 9 (last seminar) Unit 7 Grades – Monday after Unit closes Remember to complete all Assignments – Discussion (See Discussion Board Posting Requirements) – Assignments – Activities – Web Field Trips – Debates Have a great week! 17