Ethical problems of organizations (part 2) Geoffrey G. Bell, PhD, CA University of Minnesota Duluth November, 2003

Conflicts of Enron Enron top management Fastow’s creation of partnerships placed him in conflict (he won only if Enron lost). Ken Lay told people to buy Enron stock while he was selling. Changed plan administrators for employee 401(k) plan, locking employees’ holdings in during last month when top management was bailing. Arthur Andersen Garnered large consulting fees, so couldn’t jeopardize them with negative audit results. Audit review partner answerable to local partner in charge of audit; not CEO of AA. Wall Street financiers Because Enron brought large investment banking fees, didn’t want to issue negative analysts’ opinions. Gained fees by developing instruments that helped Enron remove debt from books (& then sold same products to other firms). Law firms Firms advising Enron on legality of partnerships profited by developing them with the bankers & AA.

Costs of Enron debacle Text estimates costs of Enron failure at $35 billion. Arthur Andersen went out of business, leaving only 4 major accounting firms in US.

Other conflicts of interest on Wall Street Problems with IPO market. See video “don.con” for examples. Basically, firms went IPO too soon, before they were ready. Made them more risky than normal. Investment bankers purposely under priced IPO issues, leading to a big “pop” and increasing attractiveness of IPOs, but costing new IPO valuable start-up funds. Allocation of IPOs based on favors by investment banks, not on equal availability to all. Clear conflict, as market is not equal, but bankers can use IPO allocations to develop relationships. Clear conflict, as market is not equal, but bankers can use IPO allocations to develop relationships.

Employees and ethics Employees should be able to expect: Privacy Not to be fired without just cause A safe workplace Due process and fair treatment Freedom of speech A work environment free of bias.

Employee safety Employees can expect to work without death or injury on the job. OSHA was created both to protect workers from possible harm, and to inform them of possible risks.

Employee layoffs By their nature, layoffs involve misery. Employers must hire and fire responsibly. That means they shouldn’t hire knowing the demand is only temporary. That means they shouldn’t hire knowing the demand is only temporary. What are ethical alternatives to downsizing? Can they be good business too?

Ethics and shareholders The text argues that organizations and managers have an ethical obligation to the owners of the business. Managers must serve the interests of owners. Shareholders have a residual interest in the firm, and often their long term interests are served by meeting the needs of other stakeholders. Question – why should shareholders have a residual interest in the firm? Why should their needs supercede those of other stakeholders, or do they?