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Martha Stewart Case Study Report

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Updated: Jul 3rd, 2020

Introduction

Ethical behaviour is crucial in any business industry. Activities such as insider trading significantly jeopardize ethical values, which are of significant importance to industries such as the financial sector.

Essvale Corporation Limited (2008, p.11) defines insider trading as the act of trading shares or other securities held in a company by individuals, with the potential of gaining access to information on the company, which is not accessible to the public. Insider trading is an offence punishable by law in the US. This paper seeks to examine the Martha Stewart insider trading case.

Martha Stewart Case; Her Image’s Contribution; Her Conviction’s Implication for Martha Stewart Living Omnimedia, Inc. and Modern Day Business Environment

It is believed that Martha Stewart’s association with ImClone System was the origin of her role in the insider trading scandal. Martha Stewart held 3,929 shares in ImClone System, which was a biopharmaceuticals company.

Martha Stewart being a highly profiled business and corporate personality, her image had significant influence on potential investors in both Martha Stewart Living Omnimedia and ImClone System (Pride & Ferrell 2006, p. 115).

Martha Stewart had prior information that the shares of ImClone System would decline in value, following a notification that the Food and Drug Administration would not approve a prescription drug the pharmaceutical company was developing.

As such, Martha acted by instructing her broker to sell her shares a day to the impending action by the Food and Drug Administration, in order to avoid incurring financial losses to her shares (Rawls 2009, p.1).

Martha Stewart’s image played a critical part in the trading scandal (Peck 2011, p. 94). First, Peck (2011) reiterates that Martha had worked as a stockbroker before founding her very successful company, Martha Stewart Living Omnimedia Inc.

As such, more than the other personalities involved in the insider trading scandal, she should have known better, the implications of insider trading, given her background in the securities trading industry. Second, the net worth of Martha Stewart was $ 650 million, while the amount she avoided loosing was only $ 45,673 at the time of the insider trading scandal.

Thus, the striking thing in the context of her wealth is that it is hard to understand why Martha Stewart, was willing to break the law on insider trading for such a relatively small amount of money. Her actions portray her image as a greedy and arrogant individual. She was greedy in the sense that she made the decision to save as little as $ 45,673, at the expense of making an ethical decision.

Her decision was arrogant since she thought that she could get away with the crime, by insinuating the sale of her 3,929 shares in ImClone System, with regard to the $ 60 stop-loss order. This was scandalous since there was no evidence of any stop-loss order issued to her broker, Peter Bacanovic (Pride & Ferrell 2006, p. 115).

Even without Martha Stewart the person, Martha Stewart Living Omnimedia will survive though with difficulties. According to Franzen and Moriarty (2009, p. 340), this is because the brand was created on virtues which emphasize “how-to” ideas and inspiration; and high quality products which foster style, usefulness and affordability to the middle-class consumers.

The company will survive without Martha Stewart the person, due to the company’s internal strengths (forces) which include business scope and organization, history and identity of the brand, corporate culture, branding competency, image and reputation of the brand.

However, the company suffered significant loses when it experienced depreciation of share prices from $ 49 to $ 5.26, and an estimated loss of $ 54 million in the first half of 2004.

According to Ferrell, Fraedrich and Ferrell (2013, p. 32), ethical misconduct as well as decisions that damage business and corporate business stakeholders such as Martha Stewart, will generally have significant implications on a company’s reputation.

These implications will be in terms of investor confidence as well as the confidence of the company’s consumers. Martha Stewart Living Omnimedia as a brand, significantly suffered when Martha Stewart the person was found guilty and jailed for insider trading related crimes in 2004.

A major concern for the brand’s stakeholders was what changes to make in order to ensure the survival of the brand. Franzen and Moriarty (2009, p. 340) note that separating and managing the association between Martha Stewart the brand and company, and Martha Stewart the person, was an immediate change to be made to ensure the survival of the company.

The CEO, Sharon Patrick, guided the brand in creating some distance between the brand and the person, with the objective of lessening the dependence of the brand upon the name, image and face of the founder. The editorial department remained focussed on achieving the mission and objectives of the brand.

This ensured that the consumer remained with the brand in spite of the advertising fraternity abandoning Martha Stewart Living Omnimedia Inc. It was also necessary to launch a new product without any links with Martha Stewart the person. For instance, the company launched “Everyday Food”, a new food magazine, to achieve this obvious strategy in the fall of 2003 (Franzen & Moriarty 2009, p. 340).

A major challenge that Martha Stewart Living Omnimedia would encounter is detachment from Martha Stewart as a person. This is due to the fact that the company significantly depended on the name as well as the image of Martha Stewart, and thus has a strong association with Martha Stewart.

Martha Stewart was found guilty and convicted to five months in prison, for lying to the federal officials investigating the sale of her 3,929 shares in ImClone System. She also incurred immeasurable financial loss following her conviction, as compared to the financial profit she had accrued following insider trading.

According to Tapiero (2010, p. 30), various stakeholders in the business today, have learned that ethics in finance really matter. Non-compliance to ethical behavior through acts such as insider trading, can be extremely costly not only at individual level, but also at organizational level.

This is because business companies can also significantly suffer from unethical behavior of the various stakeholders in the company, such as the founders, CEOs, as well as financial brokers.

The conviction of Martha Stewart significantly impacts on the contemporary business environment, by emphasizing on the importance of ethical and moral behaviour in the business environment (Tapiero 2010, p. 30).

Conclusion

The financial industry is both profitable and risky. It is due to this reason that good ethical behavior and decision making are essential, for sustainability of the efficiency of the financial market and industry.

The conviction of Martha Stewart is a crucial lesson for most businesses in the US, as well as other parts around the world. Businesses now conduct their operations and activities in an ethical way, with regard to the codes of ethical behavior, as well as in conformity to various laws guiding the financial markets.

References

Essvale Corporation Limited, 2008, Business Knowledge for IT in Trading and Exchanges: A Complete Handbook for IT Professionals, Essvale Corporation Limited, London.

Ferrell, O. C., Fraedrich, J & Ferrell, U 2013, Business Ethics: Ethical Decision Making & Cases, South-Western Cengage Learning, Mason.

Franzen, G. & Moriarty, S. 2009, The science and Art of Branding, M.E. Sharpe, New York.

Peck, S. 2011, Investment Ethics, John Wiley & Sons, Hoboken.

Pride, W. M. & Ferrell, O. C. 2006, Marketing, Houghton Mifflin Company, Boston.

Rawls, K. L. 2009, . Web.

Tapiero, C. S. 2010, Risk Finance and Asset Pricing: Value, Measurements, and Markets, John Wiley & Sons, Hoboken.

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