Introduction
Ethics refers to the “conscious reflection on our moral beliefs and attitudes through the use of normative ethical theories and principles” (Ferrell and Fraedrich, 2011, p. 11). Ethical principles describe the generally accepted human obligations and the normative ethical systems. In the context of business, ethics refers to the accepted code of conduct that guides the behavior of all stakeholders of a firm.
Thus, the behavior of all stakeholders in a business is expected to conform to the accepted ethical standards. Adhering to the ethical standards enables businesses to avoid breaking laws. Thus, businesses that uphold high ethical standards are able to avoid the costs associated with breaking the law. Additionally, a business is likely to be more competitive if it upholds high ethical standards.
Engaging in ethical activities or behavior enables businesses to protect the interest of their customers and employees, and this improves their competitiveness. This paper focuses on business ethics by analyzing two articles. The ethical issues in the articles will be highlighted and discussed. Additionally, recommendations on how the ethical issues can be addressed will be suggested.
Article 1
Title: Anger at Goldman Still Simmers
Media: New York Times (magazine)
Date: Published on March 25th 2012
Overview of the Article
Following the 2008/2009 financial crisis, Copper River made unexpected losses and collapsed. Copper River was a successful hedge fund with assets worth over $1.5 billion before the crisis.
The owners of Copper River argued that the collapse of their firm was mainly caused by the actions of Goldman Sachs, rather than the financial crisis. Goldman Sachs was the main brokerage firm that conducted Copper River’s trades.
Copper River relied on Goldman Sachs to conduct its short sales as required by the law. According to securities trade regulations, shares must be borrowed before a short sale can be conducted. Consequently, Copper River paid Goldman nearly one hundred million for the purpose of borrowing shares.
Copper River was likely to make heavy losses if the shares were not borrowed while Goldman Sachs was likely to be investigated by the regulators. According to Copper River’s owners, Goldman Sachs did not borrow the shares as required. Overstock.com which is an internet-based retailer also accused Goldman Sachs of failing to borrow shares to facilitate short sale.
Attempts by the owners of Copper River to save their company failed when Goldman Sachs refused to allow Copper River’s short positions to be transferred to BNP Paribas bank. Goldman Sachs also thwarted the decision to have Copper River’s positions taken over by Farallon Capital.
The failure by Goldman Sachs to borrow shares to facilitate short sales eventually caused the losses that led to the closure of Copper River. After the collapse of Copper River, another firm, S.C.E also accused Goldman of willfully failing to pre-borrow shares before making a short sale.
A former employee of Goldman Sachs also complained that the firm pursued its interests at the expense of its clients. For instance, Goldman Sachs established a mortgage firm, Abacus, which was financially weak. However, the firm sold Abacus to its clients without disclosing its financial position.
Ethical Issues
The ethical issues that can be identified in this article include the following. First, failing to borrow shares on behalf of a client in order to facilitate a short sale is an unethical behavior. According to the regulations governing securities trade “failing to borrow shares on behalf of customers is illegal because of concerns about market manipulation”.
The customers are also likely to be exposed to rising prices if the shares are not borrowed. Hence, the cost of trading in the shares would be very high. Second, Goldman did not disclose the financial position of Abacas before selling it. Instead, Goldman took advantage of its clients’ ignorance and sold a company that was already in financial distress.
This is unethical since Goldman Sachs intended to make a profit illegitimately and at the expense of its clients. Third, the decision by Goldman Sachs to stop the transfer of Copper River’s short positions was unethical.
Goldman Sachs prevented the transfer of the shares so that it could avoid being questioned by the regulator for failing to pre-borrow shares. However, preventing the transfer denied the owners of Copper River the opportunity to save their company.
Discussion of the Ethical Issues
According to the theory of utilitarian ethics, the outcomes of behavior should be based on the principles of “achieving the greatest good for the greatest number” (Jones and Parker, 2005, p. 76) for both the firm, as well as, its clients. This implies that the behavior or actions taken by a business must benefit the business and its clients. Additionally, such actions must result into the greatest benefit for both parties.
In this context, businesses must consider their customers an end in themselves rather than a means to an end (Jones and Parker, 2005, p. 77). However, the failure by Goldman Sachs to pre-borrow shares did not benefit the clients. While Goldman Sachs made profits by trading in its clients’ shares without pre-borrowing the shares, the clients incurred heavy losses.
Goldman Sachs’ actions were not right since they did not result into as much good as complying with the law. This is explained by the fact that the accusations labeled against Goldman Sachs had a negative impact on its image. Copper Rivers and other clients considered Goldman Sachs a racketeering firm that does not care about the effects of its actions.
Additionally, Goldman Sachs was placed under regulatory scrutiny, and was also forced to compensate some of its clients due to its fraudulent actions. The firm could have avoided all these risks and expenses if it had chosen to comply with the law. The principle of consequences requires businesses to assess their actions based on the expected positive and negative outcomes (Crane and Malten, 2007, p. 91).
Goldman Sachs seems to have focused only on how its actions would benefit it. According to the harm principle, businesses or industries must be regulated so that their actions do not harm the clients and the society in general. Hence, Goldman Sachs had to be put under regulatory scrutiny.
According to the theory of contract ethics, businesses must behave in accordance to the contracts that govern their relationships with the customers (Crane and Malten, 2007, p. 95). Hence, Goldman Sachs, as a brokerage firm, was expected to honor the contractual agreements with its clients.
However, Goldman Sachs did not honor the contracts due to the following reasons. First, Goldman Sachs infringed its customers’ right to information when selling Abacus. The principle of justice asserts that clients have a right to information in order to make informed decisions (Crane and Malten, 2007, p. 97).
Second, Goldman Sachs obtained illegitimate advantage overt its competitors by failing to pre-borrow shares and preventing the transfer of Copper River’s short positions. For instance, both BNP Paribas Bank and Farallon capital could not benefit from Copper River’s short position since the transfers had been stopped. Additionally, the owners of Copper River missed the opportunity to strengthen their business.
Hence, Goldman Sachs’ decision to block the transfer of Copper River’s positions contradicted the principle of opportunity. According to the principle of opportunity, competing businesses must have equal access to existing opportunities (Crane and Malten, 2007, p. 98). Thus, illegal business practices should not be used to overcome competition or to make profits.
Goldman Sachs denied all accusations of fraud by highlighting the weaknesses of the arguments of its clients. In the case of Abacus, Goldman was forced by the regulators to pay $550 million as compensation to the clients. In the case of S.E.C, Goldman Sachs agreed to pay $450,000 but refused to admit or deny the accusation of failing to pre-borrow shares.
These actions contradict the principle of openness which requires businesses to be open to opposing views. Goldman Sachs refused to accept the view that its actions were wrong. Consequently, it continued to defraud other firms after the collapse of Copper River.
Recommendations
The dispute between Copper River and Goldman Sachs remained unresolved. Mr. Cohodes who was one of the main shareholders at Copper River did not sue Goldman Sachs for damages. Additionally, Mr. Cohodes abandoned the securities business. Copper River’s owners should have sued Goldman Sachs due to the following reasons.
First, Copper River could have been compensated for the losses it incurred as a result of Goldman Sach’s failure to pre-borrow shares on its behalf. The compensations could have enabled the firm to continue in business or to refund the investors’ capital at the time of the firm’s closure.
Second, Copper River’s owners were not under any obligation to accept losses resulting from the actions of their agent, Goldman Sachs. The principle of “rationality asserts that legitimate actions must be supported by generally accepted reasons” (Crane and Malten, 2007, p. 98). However, the decision by owners of Copper River to accept losses that they were not responsible for seems to be irrational.
The fraudulent actions of firms such as Goldman Sachs can also be prevented through effective regulation of the securities market. The rules or regulations governing trade in securities should not have loopholes that can be used by firms to engage in unethical behavior.
The rules should be based on the principle of impartiality so that all parties to a dispute can have equal access to justice. Reasonable penalties such as fines and compensations should also be used against firms that engage in unethical behavior. For instance, a fine could have discouraged Goldman Sachs from consistently failing to pre-borrow shares on behalf of its customers prior to making a short sale.
Finally, the clients should have exercised their right to information while dealing with Goldman Sachs. Upon suspecting that Goldman Sachs was not borrowing shares as required; the owners of Copper River should have demanded for information about their securities that were sold by Goldman Sachs.
Consequently, Copper River could have identified the irregularities and taken timely action. Additionally, the clients who bought Abacus could have avoided losses if they obtained all information about the firm’s financial position.
Stakeholders
The affected stakeholders include Goldman Sachs and its clients such as Copper River and S.E.C. Ltd. Additionally the customers who invested in the companies that were defrauded by Goldman Sachs were affected. Each of these stakeholders was affected in the following ways.
The immediate effect on Goldman Sachs was the compensations it was forced to pay to its customers. In particular, the compensations required a lot of financial resources. Hence, paying out the compensations had a negative effect on Goldman Sachs’ revenues.
The accusations also had a negative effect on the image or reputation of Goldman Sachs in the market. In the future, clients are not likely to use Goldman Sachs as their stock broker. This is because Goldman Sachs is associated with fraud and unethical behavior. Hence, Goldman Sachs’ revenue and profits are likely to reduce in future.
The immediate effect on the clients was the loss of revenue as a result of Goldman Sachs failure to pre-borrow shares. In the case of Copper River, the investors lost their capital since the business collapsed. The losses are likely to prevent the clients from expanding their businesses due to insufficiency of financial resources.
The customers who invested in the companies that were defrauded by Goldman Sachs also incurred losses. This is because the funds managed by companies such as Copper River, essentially, belong to individual investors/customers. Thus, if the firm makes losses, its customers also share the losses.
Therefore, the affected customers are not likely to realize the expected returns on their investments in future. Additionally, the investors may have to look for alternative companies to invest in the future.
Conclusion
Goldman Sachs’ actions were unethical since they were meant to benefit the firm at the expense of its clients. In particular, Goldman Sachs failed to pre-borrow shares prior to conducting a short sale on behalf of its customers. Pre-borrowing shares is a requirement that is meant to cushion investors from the risks of market manipulation and stock price fluctuations.
The collapse of Copper River is partly attributed to the unethical behavior or actions of Goldman Sachs. Goldman Sachs was able to engage in unethical behavior due to the weaknesses of the regulatory framework of the securities market. Goldman Sachs was able to evade the rules that govern trading in securities. Even though Goldman Sachs benefited financially from its unethical behavior, it also lost its reputation in the market. Consequently, businesses should follow the utilitarian principles of ethics in order to remain competitive.
Article 2
Title: Ex-advisor Tells Court he gave Inside Tips
Media: New York Times (magazine)
Data: Published on March19th 2012
Overview of the Article
An investment adviser named Scott Allen was found guilty of providing classified business information to his friend. The information was about the sale of a drug company worth $ 2.6 million. Mr. Allen admitted that he illegally shared information about the acquisition of Massachusetts-based biotech firm referred to as Millennium Pharmaceuticals.
The pharmaceutical company was to be acquired in 2008 by a Japanese firm referred to as Takeda Pharmaceuticals. In 2009, Mr. Allen also illegally shared information about the acquisition of the American drug manufacturer, Sepracor. The American drug manufacturer was to be acquired by Dainippon Sumitomo Pharmaceutical Company which is based in Japan.
Mr. Allen told a “United States Court in Manhattan that he had” discussed with his personal friend the details of the companies which were to be sold. Consequently, his friend used the information to trade on the shares of the companies which were to be acquired.
Mr. Allen further admitted that he gave the information for financial gain, as well as, for the purpose of their friendship. Mr. Allen who worked for Mercer L.L.C was found guilty of securities fraud, as well as, conspiracy to engage in or commit securities fraud.
Mr. Allen also confirmed that he knew his actions were illegal and regretted his decision to disclose the classified information. The court freed Mr. Allen on a bond of $ 500,000 as he awaits his sentencing which is scheduled for August.
Discussion
The process of acquiring a company involves the transfer of the shares of that company from one shareholder to the other. In the context of a publicly traded company, change of ownership is likely to affect the prices of the company’s shares in securities markets. Investors in securities markets usually make their decisions based on the available information.
The relevant information, in this case, should give insights on the firm’s future performance. In most cases, those involved in the management of the firm or the consultants involved in the sale of the firm have more information about the firm than the investors.
Consequently, the parties with more information about the company are prohibited by the law from using such information for their personal gains. Additionally, they are not allowed to share the information with a person who can use it for personal gain.
Disclosing the classified information is not allowed since it benefits those who have it at the expense of those who do not have it. Additionally, it can lead to manipulation of securities markets. It is against this backdrop that Mr. Allen’s actions are considered unethical and illegal.
The principle of double effect asserts that, “an act with intended and otherwise not reasonably attainable good effect and an unintended yet foreseen evil effect” (Jones and Parker, 2005, p. 88), is licit as long as there is a justified balance between the intended benefit/ good and the accepted evil.
However, an ethical dilemma arises when a person is obliged to avoid evil by abstaining from a good action (Jones and Parker, 2005, p. 89).
In this context, Mr. Allen was also in a dilemma since he had to choose between keeping the classified information and losing his friendship and the expected financial gain. Under such circumstances, the actions of the agent (Mr. Allen) should be guided by the following principles.
First, the object or essence of the act should not be contradictory to the agent’s fundamental commitment to his neighbor (Ferrell and Fraedrich, 2011, p. 57). This means that the action should conform to the regulations of the securities market.
However, Mr. Allen’s actions were intrinsically contradictory to his commitment to his employers and their clients. He knew that disclosing the information about the acquisition of the firms was illegal and had the potential of distorting share prices. Nonetheless, he failed to avoid evil by sharing the information.
Second, the direct intentions of the agent should aim at achieving beneficial effects, as well as, avoiding foreseen harmful effects.
This means that the agent should not willfully cause harm to others. Contrary to this principle, Mr. Allen’s intentions were meant to create harmful effects. Even though he could have benefited financially by sharing the information, other investors could have been negatively affected.
Third, the foreseen or expected beneficial effects should equal or exceed the expected or foreseen harmful effects. In Allen’s case, only two people were to benefit at the expense of all other investors. Thus, the foreseen benefits were less than the expected harmful effects.
Finally, the expected beneficial effects should not be attained “by the means of the foreseen harmful effects” (Ferrell and Fraedrich, 2011, p. 62). Thus, Mr. Allen and his friend were not expected to take advantage of other investors’ ignorance to trade on the shares of the companies that were to be acquired. This leads to the conclusion that Mr. Allen’s actions were unethical.
The theory of contract ethics asserts that the relationship between businesses should be based on mutuality and reciprocity (Ferrell and Fraedrich, 2011, p. 71). Mercer L.L.C had been entrusted with the task of handling the sale of the American companies.
Hence, it was expected to reciprocate by restricting access to information about the transactions. This was not achieved since Mercer’s employee, Mr. Allen, disclosed the information. According to the principle of opportunity, investors should have equal access to transaction information. Thus, non-public information should be inaccessible to all investors.
Recommendations
Mr. Allen’s unethical behavior or act can be avoided through the following measures. First, the management of Mercer L.L.C should focus on selecting the right employees. The human resources department should identify a set of attributes that must be exhibited by potential employees (Djurkovic and Maric, 2010, pp. 410-430).
For example, financial advisors should be able to keep classified information and uphold high ethical standards. The identified attributes should then be used to screen applicants during the selection process (Djurkovic and Maric, 2010, pp. 410-430). Hence, the company will be able to select and employ people of integrity or individuals who understand the importance of business ethics.
Second, the employees should be sensitized on the importance of engaging in ethical behaviors. This can be achieved through on-the-job training programs. The trainings should enable the employees to differentiate between ethical and unethical behavior (Djurkovic and Maric, 2010, pp. 410-430).
Additionally, the training program should enable the employees to understand the consequences of engaging in ethical or unethical behavior. In this context, the employees should learn the beneficial effects of ethical behavior and the harmful effects of unethical behavior.
The training programs should be reinforced with mentorship programs. The mentorship programs should involve the senior and junior employees so that ethics become part of the organization’s culture (Djurkovic and Maric, 2010, pp. 410-430). The mentorship programs will also enable the employees to identify with the ethics that guide their company.
Third, disciplinary action should be taken against employees who deliberately fail to respect and follow the company’s ethical standards (Vitell, Ramos, and Nishishara, 2010, pp. 467-483). Besides, employees who make an effort to follow the prescribed ethical standards should be rewarded.
Disciplinary action will discourage employees from engaging in unethical behavior. The rewards, on the other hand, will encourage employees to engage in ethical behavior (Vitell, Ramos, and Nishishara, 2010, pp. 467-483). Finally, access to classified information should be restricted.
Sensitive information should not be accessed by unauthorized employees. For example, passwords can be used to restrict access to files and databases that contain important information.
Stakeholders
The affected stakeholders include Mr. Allen and his friend, Mercer L.L.C and the investors who were interested in the shares of the companies which were to be purchased. Each of these stakeholders was affected in the following ways. Mr. Allen incurred high costs in terms of legal fees and the bond he had to pay in order to be freed as he awaits his sentencing.
These costs, possibly, had negative effects on Mr. Allen’s personal investments. In future, Mr. Allen is not likely to get a job as a financial advisor due to the following reasons. Currently, he is 45 years old and the offence he committed attracts a penalty of up to 20 years in jail.
Thus, by the time he completes his jail term he shall have also reached the retirement age of 65 years. He is also not likely to be employed due to his criminal record. Most American companies prefer to employ individuals with no criminal records.
Mr. Allen’s friend enjoyed the beneficial effects of the unethical behavior. In particular, he is likely to have gained financially, by using inside tips to trade on the shares of the companies that were to be acquired.
The immediate negative effects on Mercer include the loss of their employee, Mr. Allen, as well as, a bad reputation in the industry. Mercer had to incur the costs of employing a new advisor as Allen goes to jail. Additionally, the company is likely to be associated with unethical behavior.
Thus, investors are not likely to use Mercer L.L.C as their financial advisor in future. The resulting effect will be a reduction in profits and market share. The investors who held shares of the companies which were to be sold are likely to have incurred losses. This is because the information shared by Mr. Allen is likely to have negatively affected the share prices.
Conclusion
Mr. Allen was found guilty of committing securities fraud by illegally sharing with his friend inside tips concerning the sale of two companies. His behavior was unethical since it did not conform to ethical principles. In particular, his behavior was meant to benefit him and his friend at the expense of other investors.
His behavior also had negative effects on the reputation of his employer, Mercer L.L.C. Above all sharing inside tips with third parties for the purpose of financial gains is prohibited by the laws that govern trading in securities.
Mercer can avoid such unethical behaviors by verifying the integrity of its employees during the employee selection process. The company can also sensitize its employees on the importance of ethical behavior. In conclusion, unethical behaviors normally have adverse effects on the stakeholders of a firm. Thus, all businesses must encourage ethical behavior in order to remain competitive.
References
Bloomberg News., 2012. Ex-Advisor Tells Court He gave Inside Tips. New York Times, 19 March, pp. 21.
Crane, A., and Malten, D., 2007. Business Ethics. New York: Cengage Learning.
Djurkovic, J., and Maric, R., 2010. The Influence of Human Resource Management in Imporvement of Business Ethics. Perspectives of Innovation, Economics and Business,4(1), pp.410-430.
Ferrell, O., and Fraedrich, J., 2011. Business Ethics: Ethical Decision Making. New York: McGraw-Hill.
Jones, C., and Parker, M., 2005. For Business Ethics. New York: Routledge.
Morgenson, G., 2012. Anger at Goldman Still Simmers. New York Times, 25 March, pp. 45-48.
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Vitell, S., Ramos, E., and Nishishara, C., 2010. The Role of Ethics and Social Responsibilty in Organizational Success: A Spanish Perspective. Journal of Business Ethics, 90(4), pp.467-483