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2.1 Misgoverning Corporations: An Overview

Learning Objectives

  1. Define business ethics and explain what it means to act ethically in business.
  2. Explain how you can recognize an ethical organization.

The WorldCom situation is not an isolated incident. The boom years of the 1990s were followed by revelations of massive corporate corruption, including criminal schemes at companies such as Enron, Adelphia, and Tyco. In fall 2001, executives at Enron, an energy supplier, admitted to accounting practices concocted to overstate the company’s income over a period of four years. In the wake of the company’s collapse, stock prices plummeted from $90 to $1 a share, inflicting massive financial losses on the investment community. Thousands of employees lost not only their jobs but their retirement funds, as well.Daniel Kadlec, “Enron: Who’s Accountable?” Time, January 21, 2002, 31. Before the Enron story was off the front pages, officials at Adelphia, the nation’s sixth-largest cable company, disclosed that founder and CEO John Rigas had treated the publicly owned firm as a personal piggy bank, siphoning off billions of dollars to support his family’s extravagant lifestyle and bankrupting the company in the process.David Lieberman, “Prosecutors Wrap Up $3.2B Adelphia Case,” USA Today, June 25, 2004, (accessed April 24, 2006). Likewise, CEO Dennis Koslowzki of conglomerate Tyco International was apparently confused about what was his and what belonged to the company. Besides treating himself to a $30 million estate in Florida and a $7 million Park Avenue apartment, Koslowzki indulged in a taste for expensive office accessories—such as a $15,000 umbrella stand, a $17,000 traveling toilette box, and a $2,200 wastebasket—that eventually drained $600 million from company coffers.“Tyco Wants Its Money Back,” CNNMoney, September 17, 2002, (accessed April 24, 2006). More recently, Bernie Madoff, founder of Bernard L. Madoff Investment Securities and former chairman of the NASDAQ stock exchange, is alleged to have run a giant Ponzi scheme that cheated investors of up to $50 billion.Fred Langan, “The $50-billion BMIS Debacle: How a Ponzi Scheme Works,” CBSNews, December 15, 2008, (accessed January 26, 2009). According to the SEC charges, Madoff convinced investors to give him large sums of money. In return, he gave them an impressive 8 percent to 12 percent return a year. But Madoff never really invested their money. Instead, he kept it for himself. He got funds to pay the first investors their return (or their money back if they asked for it) by bringing in new investors. Everything was going smoothly until the fall of 2008, when the stock market plummeted and many of his investors asked for their money back. As he no longer had their money, the game was over and he had to admit that the whole thing was just one big lie.

Are these cases merely aberrations? A Time/CNN poll conducted in the midst of all these revelations found that 72 percent of those surveyed don’t think so. They believe that breach of investor and employee trust represents an ongoing, long-standing pattern of deceptive behavior by officials at a large number of companies.Nancy Gibbs et al., “Summer of Mistrust,” Time, July 22, 2002, 20. If they’re right, then a lot of questions need to be answered. Why do such incidents happen (and with such apparent regularity)? Who are the usual suspects? How long until the next corporate bankruptcy record is set? What action can be taken—by individuals, organizations, and the government—to discourage such behavior?

The Idea of Business Ethics

Believe it or not, it’s in the best interest of a company to operate ethically. Trustworthy companies are better at attracting and keeping customers, talented employees, and capital. Those tainted by questionable ethics suffer from dwindling customer bases, employee turnover, and investor mistrust.

Let’s begin this section by addressing one of the questions that we posed previously: What can individuals, organizations, and government agencies do to foster an environment of ethical and socially responsible behavior in business? First, of course, we need to define two terms: business ethics and social responsibility. They’re often used interchangeably, but they don’t mean the same thing.

What Is Ethics?

You probably already know what it means to be ethicalAbility and willingness to distinguish right from wrong and when you’re practicing one or the other.: to know right from wrong and to know when you’re practicing one instead of the other. At the risk of oversimplifying, then, we can say that business ethicsApplication of ethical behavior in a business context. is the application of ethical behavior in a business context. Acting ethically in business means more than simply obeying applicable laws and regulations: It also means being honest, doing no harm to others, competing fairly, and declining to put your own interests above those of your company, its owners, and its workers. If you’re in business you obviously need a strong sense of what’s right and what’s wrong (not always an easy task). You need the personal conviction to do what’s right, even if it means doing something that’s difficult or personally disadvantageous.

What Is Social Responsibility?

Corporate social responsibilityApproach that an organization takes in balancing its responsibilities toward different stakeholders when making legal, economic, ethical, and social decisions. deals with actions that affect a variety of parties in a company’s environment. A socially responsible company shows concern for its stakeholdersParties who are interested in the activities of a business because they’re affected by them.—anyone who, like owners, employees, customers, and the communities in which it does business, has a “stake” or interest in it. We’ll discuss corporate responsibility later in the chapter. At this point, we’ll focus on ethics.

How Can You Recognize an Ethical Organization?

One goal of anyone engaged in business should be to foster ethical behavior in the organizational environment. How do we know when an organization is behaving ethically? Most lists of ethical organizational activities include the following criteria:

  • Treating employees, customers, investors, and the public fairly
  • Making fairness a top priority
  • Holding every member personally accountable for his or her action
  • Communicating core values and principles to all members
  • Demanding and rewarding integrity from all members in all situationsAlan Axelrod, My First Book of Business Ethics (Philadelphia: Quirk Books, 2004), 7.

Whether you work for a business or for a nonprofit organization, you probably have a sense of whether your employer is ethical or unethical. Employees at companies that consistently make Business Ethics magazine’s list of the “100 Best Corporate Citizens” regard the items on the above list as business as usual in the workplace. Companies that routinely win good-citizenship awards include Procter & Gamble, Intel, Avon Products, Herman Miller, Timberland, Cisco Systems, Southwest Airlines, AT&T, Starbucks Coffee, Merck, and Medtronic.“100 Best Corporate Citizens for 2004,” Business Ethics: Corporate Social Responsibility Report 18, no. 1 (Spring 2004): 812. (Interestingly, their employees not only see their own firms as ethical, but also tend to enjoy working for them.)

By contrast, employees with the following attitudes tend to suspect that their employers aren’t as ethical as they should be:

  • They consistently feel uneasy about the work they do.
  • They object to the way they’re treated.
  • They’re uncomfortable about the way coworkers are treated.
  • They question the appropriateness of management directives and policies.Alan Axelrod, My First Book of Business Ethics (Philadelphia: Quirk Books, 2004), 7.

Figure 2.2

In the early 1990s, many Sears automotive customers were surprised by hefty repair bills. Their complaints raised red flags with law-enforcement officials and forced Sears to refund $60 million.

In the early 1990s, many workers in Sears automotive service centers shared suspicions about certain policies, including the ways in which they were supposed to deal with customers. In particular, they felt uncomfortable with a new compensation plan that rewarded them for selling alignments, brake jobs, shock absorbers, and other parts and services. Those who met quotas got bonuses; those who didn’t were often fired. The results shouldn’t be surprising: In their zeal to meet quotas and keep their jobs, some employees misled customers into believing they needed parts and services when, in fact, they were not needed. Before long, Sears was flooded with complaints from customers—as were law-enforcement officials—in more than forty states. Sears denied any intent to deceive customers but was forced not only to eliminate sales commissions but also to pay out $60 million in refunds.

Why Study Ethics?

Ideally, prison terms, heavy fines, and civil suits should put a damper on corporate misconduct, but, unfortunately, many experts suspect that this assumption may be a bit optimistic. Whatever the condition of the ethical environment in the near future, one thing seems clear: The next generation entering business—which includes most of you—will find a world much different than the one that waited for the previous generation. Recent history tells us in no uncertain terms that today’s business students, many of whom are tomorrow’s business leaders, need a much sharper understanding of the difference between what is and isn’t ethically acceptable. As a business student, one of your key tasks is learning how to recognize and deal with the ethical challenges that will confront you.

Moreover, knowing right from wrong will make you more marketable as a job candidate. Asked what he looked for in a new hire, Warren Buffet, the world’s most successful investor, replied: “I look for three things. The first is personal integrity, the second is intelligence, and the third is a high energy level.” He paused and then added: “But if you don’t have the first, the second two don’t matter.”Quoted by Adrian Gostick and Dana Telford, The Integrity Advantage (Salt Lake City: Gibbs Smith, 2003), 3–4.

Key Takeaways

  • It’s in a company’s best interest to act ethically. Trustworthy companies are better able to attract and keep customers, talented employees, and capital.
  • Business ethics is the application of ethical behavior in a business context.
  • Acting ethically in business means more than just obeying laws and regulations. It also means being honest, doing no harm to others, competing fairly, and declining to put your own interests above those of your employer and coworkers.
  • To act ethically in business situations, you need a good idea of what’s right and wrong (not always an easy task).
  • You also need the personal conviction to do what’s right even if it means doing something that’s difficult or personally disadvantageous.
  • Ethical organizations treat employees, customers, investors, and the public fairly. They make fairness a top priority, communicate core values to those in the organization, and demand and reward integrity from all members while holding them accountable for their actions.


(AACSB) Analysis

Though the terms business ethics and corporate responsibility are often used interchangeably, they don’t mean the same thing. Define each term and explain how the following events could have happened: Fannie Mae, the largest buyer of U.S. home mortgages, was named one of the “100 Best Corporate Citizens” by Business Ethics magazine five years in a row, making it to the top spot in 2004. Shortly after the announcement of the award, news of a massive accounting scandal involving several Fannie Mae executives hit the news. Recently, the business judgment of its management has been questioned as their role in the subprime mortgage mess unfolds. How can a company be recognized as a good corporate citizen and still experience serious ethical failure?