As a product of society, the average human being is predisposed to act in manners consistent with the ethical dictates of the particular society. Often, this behavior is an intuitive manifestation of conformity to the established ethical standards. However, besides intuition, explicit approaches that allow for precise and systematic handling of ethical issues are paramount in the corporate sector. Failing in this respect may occasion severe repercussions for both the individual and company. In this paper, a case of the contemporary ethical issue of “insider trading” is subjected to analysis under the utilitarian and Kantian Deontology frameworks. Furthermore, the utilitarian emphasis on the tenet of “maximum overall happiness”, and the Kantian “in principle right or wrong” are advanced as the core consideration in making the right decision in ethical dilemmas.
In the past few decades, cases of insider trading have rocked several security markets across the globe. Levine et al. (2017) define insider trading as the selling or buying security by availing of nonpublic information about the same security, hence breaching a fiduciary duty or other obligation of confidence and trust. In 2003, the securities and exchange commission charged an American businesswoman and TV personality with several offenses, one being insider trading in the ImClone case (Ganti, 2021).
Stewart was accused of selling her 4,000 shares at ImClone Systems, a pharmaceutical company, after being tipped by a stockbroker, Peter Bacanovic. Peter leaked to Stewart that the company’s chief executive officer Samuel Waksal had dumped all of his shares, information that was not available to other shareholders. At this time, ImClone was waiting on the Food and Drug Administration (FDA) decision to approve or deny their cancer treatment. The FDA rejected ImClone’s request, and Stewart was saved from a loss of $45,700. Stewart was later sentenced to five months in federal prison.
The insider trading committed by Stewart is unethical on multiple levels. From the utilitarian perspective, an action’s consequences are the core of ethical evaluation and upon which actions are justified (Becker, 2020). In this respect, Martha Stewart suffers the consequences of this unethical practice by being sentenced to five months in prison. In addition, utilitarianism emphasizes the ethically best action being the one that maximizes the overall happiness of all affected by the move. In Martha’s case, several players have been involved: the legal system, other shareholders who are not privy to the tip, and Martha herself. Martha’s actions increase none of these people’s happiness, especially not herself, since she ends up in prison.
Secondly, from a Kantian perspective, the primary consideration is whether the action is right or wrong in principle. The universalizability dictates in the Kantian method question if the player would reasonably want everyone to adopt (Becker, 2020). Insider trading is, in principle unethical, it is cheating and theft, and it is not good or desirable. The second Kantian formula is the respect-for-persons-formula. Here, the query is on whether the action taken upholds the dignity of all involved persons as moral beings (Becker, 2020). By this action, Stewart robs herself of dignity as a moral agent. Furthermore, insider trading denies the economic dignity of the other shareholders who do not have the prior tip.
If faced with a similar scenario, my approach would differ from Stewart’s. While the prospect of economic benefit from the unfair advantage may be tempting, an individual is guided by their inherent and enduring values. Resisting such a temptation is in line with the claim of Aristotelian virtue ethics that asserts virtuous life is a good life (Ameriks & Clarke, 2000). The question of committing insider trading is purely a matter of fundamental moral principle.
I would not do it because it is wrong. I would instead not use the tip from Peter Bacanovic, even if it meant I would experience massive financial losses. In business, intuitive ethical principles should guide an individual, but explicit ethical decisions in choosing the right, good and desirable path are imperative.
In the past two decades, cases of massive corporate fraud have exposed the extent of unethical behavior companies are willing to engage in for profits. While some unethical practices might result from omission, others, such as accounting fraud, are deliberate acts of commission. In this section, one of the most historically significant accounting fraud cases will be analyzed under the lenses of the Kantian respect-for-persons’ formula method and virtue ethics. In addition, a clear, ethical alternative course of action for the same situation will be provided.
Accounting fraud is broadly defined as the intentional manipulation of financial statements to create an illusion about a company’s financial performance (Tutino, & Merlo, 2019). In 2001, American energy, services, and commodities company Enron Corporation, in what would become the most controversial accounting scandal in history, was accused of massive accounting fraud (Oppel & Sorkin, 2021). Investigations by the Securities Exchange Commission established that the company was hiding bad debt running into billions of dollars while simultaneously inflating the company’s revenue.
As a result of this scandal, the company’s shareholders lost over $74 billion as Enron’s share price plummeted from 90 dollars to $1 within a year. Both the company’s chief executive officer (CEO) Jeff Skillings and the former CEO had intentionally hidden the company’s debt from the balance. Furthermore, they would threaten concerned auditing firms into ignoring the glaring transparency concerns. By the end of it all, the two CEOs were convicted, the company went bankrupt and the auditing firm involved dissolved.
Accounting fraud is an unethical behavior right from the most fundamental level. The practice involves intentional cheating and falsification of documents to portray non-existent financial health. It is an act of commission that cheats the public shareholders and regulatory bodies. In this case, the movers of such an action, the company’s CEO and former CEO profess questionable moral standing at the most basic level; virtue.
As a normative ethical theory, virtue ethics is primarily concerned with defining and subsequent human achievement of excellence and virtue. The focus of this theory is not on a single ethically right course of action, but rather on the conceptualization of what is good in character and human excellence (Becker, 2020). This scandal’s CEOs and other players failed by lacking basic business virtues like honesty, truthfulness, and restraint. In business, an individual’s intrinsic values should guide his actions, contrary to which the individual may be driven to vice.
Secondly, the Kantian perspective requires determining, whether the action is right. His respect-for-persons formula queries the net effect of the taken action on the dignity of all persons involved (Becker, 2020). In a business context, does the decision respect dignity of all individuals affected by its operations? The decisions leading to such kind of fraud defile the dignity of many individuals. The public trust is broken, the shareholders are misled about their investment performance, and the law is broken. The actors themselves are victims of their actions as they end up in jail.
Virtues, or lack of it, make or break even the most powerful CEOs. Any decision that is dishonest and compromises the dignity of those involved should be avoided at all costs. If, as a leader, I find myself in a situation where the firm is underperforming, I would truthfully report the actual performance of the firm. The fear of the repercussions should not overwhelm an individual’s inherent sense of responsibility and accountability at any time.
References
Ameriks, K., & Clarke, D. M. (2000). Aristotle: Nicomachean ethics. Cambridge University Press.
Becker, C. U. (2018). Business ethics: Methods and application. Routledge.
Ganti, A. (2021). What is insider trading? Investopedia. Web.
Levine, R., Lin, C., & Wei, L. (2017). Insider trading and innovation. The Journal of Law and Economics, 60(4), 749-800. Web.
Tutino, M., & Merlo, M. (2019). Accounting fraud: A literature review. Risk Governance and Control: Financial Markets and Institutions, 9(1), 8-25. Web.
Oppel, R., & Sorkin, A. (2021). Enron’s collapse: The overview; Enron corp. files Largest U.S. claim for bankruptcy. NY Times. Web.