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Business

Ethical Wrongdoing

Extent of the Challenge

Recent research reveals that conduct widely deemed to be unethical is prevalent in the business workplace. In his book Essentials of Business Ethics, Denis Collins cites the following statistics to suggest the scope of ethical misconduct, from upper management to rank-and-file employees:

  • 67% of CFOs have been pressured to misrepresent corporate results.
  • 1 in 4 middle managers has written a false internal report.
  • 75% of employees have stolen from their employer at least once.
  • 1 in 3 employees who calls in sick is actually tending to personal business or feels entitled to a day off.

Collins also reports that 56% of MBA candidates (who are presumably future business leaders) admitted to cheating on a class assignment during the prior academic year.1

Corporate Misconduct

There have been a series of scandals over the past several decades that have brought greater scrutiny of ethical practices in the corporate world.

Union Carbide

Unethical Behavior

Allegedly, Union Carbide’s Bhopal plant in India was not attentive to worker safety. While Chairman and Chief Executive Officer Warren Anderson and the company claim that a leak of methyl isocyanate was caused by sabotage, others claim that inadequate attention to plant process safety produced a gas discharge on December 2-3, 1984, which killed 2,259 people and caused 250,000 injuries.

Resolution of the Scandal

In 1989, a $470 million settlement payment by Union Carbide resolved the civil suits filed in the U.S. and India on behalf of those who died or were injured in Bhopal. In June 2010, eight Union Carbide executives were convicted of negligence in the Bhopal disaster and each sentenced to two years in prison in India and a $2,000 fine.

WorldCom

Unethical Behavior

Ranked the second-largest long-distance company and top Internet services provider in 1999, World Com executive officers, specifically CEO Bernard Ebbers and Chief Financial Officer Scott Sullivan, misrepresented the assets of the company in financial statements. The purpose of the misrepresentation was to prop up the price of WorldCom’s stock with illusory earnings.

Resolution of the Scandal

In 2002, when WorldCom revealed that it had improperly accounted for more than $3.8 billion of expenses, the company had to file for bankruptcy protection, and its stock, trading at $60 at the height of the dot-com bubble, was worth pennies. In March 2005, Ebbers was found guilty of fraud and filing false financial statements with regulators and sentenced to 25 years in prison. Sullivan, who had testified against Ebbers in the trial, received a lighter sentence.

Tyco International

Unethical Behavior

In September 2002, U.S. District attorney Robert Morgenthau charged Tyco CEO L. Dennis Koslowski with corruption, alleging that Kozlowski stole $170 million and obtained another $430 million through the fraudulent sale of company shares. Kozlowski sold the stock in 2001 when it was trading near $60 and before he announced his plan to separate Tyco into four separately traded companies.

Resolution of the Scandal

When the case was finally heard in 2005, a jury found Kozlowski guilty of stealing some $150 million from Tyco, and he was sentenced to 25 years in prison and a $70 million fine. Kozlowski’s Chief Financial Officer Mark Swartz was charged with the same crime and sentenced to 25 years and a $35 million fine.

Enron

Unethical Behavior

CEO Kenneth Lay, Chief Financial Officer Andrew Fastow, and President Jeffrey Skilling were involved in questionable accounting practices that were authorized by the firm’s auditor, Arthur Andersen. These accounting practices did not accurately depict Enron’s complex operations and finances to shareholders and stock analysts. They included reporting inflated trading revenue, the use of “mark-to-market accounting,” which created exorbitant income estimates on long-term contracts, and the use of shell firms (special purpose entities), in which liabilities were understated and equity was overstated.

Resolution of the Scandal

When the accounting irregularities were exposed, Enron was forced to file for bankruptcy. Arthur Andersen was hurt by the scandal and was charged with destroying Enron company documents prior to a federal investigation. In May 2006, Lay was convicted of 10 of 11 counts of fraud and related charges but died in a skiing accident before his sentencing hearing in October 2006. Fastow was sentenced to six years in prison. Skilling won an appeal of his 2008 conviction on appeal to the U.S. Supreme Court. Arthur Andersen was determined to be guilty of destroying documents relating to Enron, but this ruling was later overturned by the Supreme Court.

Bernard Madoff Investments

Unethical Behavior

Bernard Madoff, founder of Bernard Madoff Investment Securities LLC, took investor money but did not invest it in U.S. securities as promised. Madoff created a giant Ponzi scheme* where early investors were paid returns with the cash of new investors. Madoff’s firm misled U.S. Securities and Exchange Commission staff into believing that real investments were generating the returns he paid to some investors. Some of those defrauded included charities and foundations.

Resolution of the Scandal

In December 2008, Mark and Andrew Madoff, sons and business partners of Bernard Madoff, allegedly uncovered the fraud and reported their father to the SEC. Federal charges were brought against Bernard Madoff. In March 2009, Madoff was convicted on 11 criminal charges and sentenced to a jail term of 150 years in prison and ordered to forfeit $171 billion in proceeds and property.

Countrywide Mortgage

Unethical Behavior

Countrywide Mortgage employees wrote subprime mortgages using fraudulent documents with the aim of making a bonus on the new mortgage business. Angelo Mozilo, the CEO of Countrywide Mortgage, knew about these fraudulent subprime loans as early as 2006 but did not alert shareholders.

Resolution of the Scandal

In October 2010, Mozilo settled litigation with the SEC, paying a fine of $22 million, and agreeing to a lifetime ban against serving as an officer for a publicly traded company.

Lehman Brothers

Unethical Behavior

In 2003 and 2004, the firm acquired its five subprime lending companies, including BNC Mortgage and Aurora Loan Services. By 2006, Lehman heavily commoditized subprime mortgages from its companies, creating $146 billion in mortgage-backed securities. Within two years, these subprime mortgages were in jeopardy of defaulting, and the value of the mortgage-backed securities had fallen precipitously.

Resolution of the Scandal

Lehman could not engineer a deal with a prospective buyer who could help its financial situation, nor could it convince the U.S. government to offer it financial assistance. In September 2008, Lehman declared bankruptcy. Its collapse triggered the Wall Street financial crisis, which led to what has been called the Great Recession.

Satyam Computers

Unethical Behavior

A manufacturer of business software and back-office services based in Hyderabad, India, Satyam Computers misrepresented its revenue in financial statements reviewed by PricewaterhouseCoopers.

Resolution of the Scandal

Chairman and company founder Ramalinga Raju resigned in January 2009 after announcing the fraud. In April 2011, the SEC charged Satyam Computers with fraudulently overstating company revenue by more than $1 billion over five years.

News Corp

Unethical Behavior

In 2005, England’s Prince William reported his suspicion that a fact in a story that appeared in the News of the World newspaper, owned by News Corp., was obtained by hacking his personal phone accounts. It was determined to have taken place, but the investigation concluded that it was a practice limited to one journalist and one investigator. In 2011, new allegations surfaced of widespread phone hacking by News Corp’s reporters and investigators. Former British Prime Minister Gordon Brown claimed that the reporters for News Corp. also tried to access his legal files and medical records.

Resolution of the Scandal

The journalist and investigator involved in Prince William’s phone hacking, Clive Goodman and Glenn Mulcaire, were sentenced to four and six months in prison, respectively, and News of the World editor Andy Coulson resigned. In July 2011, News of the World was closed by News Corp. Chairman Rupert Murdoch after he issued a public apology for “serious wrongdoing” by the newspaper.

Tesla

Unethical Behavior

In 2018, Tesla founder and CEO Elon Musk found himself in hot water with the Security and Exchange Commission (SEC) over a social media post in which Musk hinted at possibly taking the publicly traded company private.

Resolution of the Scandal

The SEC imposed a $20 million dollar fine on Musk and Tesla. Additionally, the SEC mandated that Tesla demonstrate greater oversight over all corporate communication, including, but not limited to, social media posts, investor calls, press releases, and the company’s website. The settlement highlights the importance of companies having a strong policy in place governing social media.

Trust in business

Not surprisingly, public trust in business in the U.S. has declined in recent years, according to Edelman’s Trust Barometer®, an annual survey that gauges attitudes about the state of trust in business, government, NGOs, and media across 23 countries.

The 2021 Edelman survey found that 71% of its sample of college-educated Americans responded affirmatively when asked, “How much do you trust business to do what is right?” as compared to 46% in the 2009 survey. (For context, only 53% expressed trust in the government and 51% in the media.)

You can find the results of the Edelman’s Trust Barometer at: www.edelman.com/trust

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Review Checkpoint

To test your understanding of the content presented

1. Which of the following scandals involved a Ponzi scheme?Choose only one answer below.

a. Countrywide Mortgage

b. Satyam Computers

c. Bernard Madoff Investments

Correct. The answer is C. Bernard Madoff ran a Ponzi scheme where he defrauded investors.

d. Enron

2. According to Denis Collins, what is the rate of employees who have falsely called in sick?Choose only one answer below.

a. 1 in 2 employees

b. 1 in 3 employees

Correct. The answer is B. According to Denis Collins, 1 in 3 employees has falsely called in sick.

c. 1 in 4 employees

d. 1 in 5 employees

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