Business Ethics either Moral or Immoral Companies

Business Ethics : Moral or Immoral Companies

2005 Outline

Abstract

Statement of Authenticity

Introduction

What is Business Ethics

Evidence of Ethical Problems

Why Are Corporations Unethical

Long-Term Goals versus Short-Term Perspectives

Management 's Role in the Corporation

Case Study : HealthSouth Financial Fraud\

Conclusion

Annotated Bibliography

Abstract

The examines the ongoing phenomenon of high-level business ethics The definition of business ethics is given , and the changes in the contemporary phenomenon of high-level morality are explored . The purpose of the will also be to try to

find the solution to the deterioration in management ethics

Statement of Authenticity

We state thereby that the following is original , does not contain any plagiarism and has not been reproduced in full or in part before

Introduction

Few would deny that management ethics has deteriorated in the past few decades . The public interest in management ethics has risen proportionately . Whether this deterioration is perceived and spurred by the media publications or real and evidenced by more business cases is a debatable issue . Anyway , society has begun to pay greater attention to the moral standards maintained by the managers of large corporations This will study how management ethics has changed and how this change has been perceived in the public opinion . We will seek to explore what is going on with high-level ethics and whether there have been major changes in the ethical pro of corporate officers . The purpose of the will also be to try to find the solution to the deterioration in management ethics

What is Business Ethics

To start the discussion of business ethics , it would make sense to pinpoint what ethics is . Ethics involves a discipline that examines good or bad practices within the context of a moral duty (Business Ethics Fundamentals . Ethical considerations determine which style of behavior is right or wrong . The two branches of ethics that provide guidelines for the choice of proper action course for most people are descriptive ethics and normative ethics . Normative ethics prescribes rules and norms for behavior , while the descriptive branch explores and characterizes the current and past state of morality in society . The crunch is how to get from the current state of ethical norms to the desired state embodied in normative ethics

To distinguish between various management practices , it is possible to differentiate between moral , immoral and amoral management . A moral manager adheres to the ethical norms and principles . In contrast immoral management is a style devoid of ethical principles and active opposition to what is ethical (Business Ethics Fundamentals . Amoral management does not imply active opposition to ethical norms and behaviors . Instead , an amoral manager is oblivious of ethical norms and plans one 's decisions without consideration for the proper standards Amoral management may be intentional or unintentional where the manager does not consider ethical factors as an important factor

Evidence of Ethical Problems

Measurement of managerial immorality is indeed a daunting task Corporate scandals are cited most often as proof that corporate officers are increasingly spurning their roles as protectors of shareholders interests to pursue their own gains . The number of corporate high-pro scandals in the past few years has been amazing . Enron WorldCom , dot-com companies , mutual funds are just a few examples . Even the once revered company like AIG has been involved in the scandal concerning its reinsurance deal with General Re , a subsidiary of Warren Buffett 's Berkshire Hathaway

However , to equate the rising number of accounting scandals with decline in managerial morality would be erroneous . Such a conclusion would proceed from the assumption that accounting principles and norms have remained intact and the social standards of managerial performance have not changed . This may not be the case . Thus , Eliot Spitzer 's recent attacks on widespread practices in mutual funds and reinsurance business challenged processes that went unnoticed for decades and only came to the public 's attention thanks to recent pro cases by the untiring New York State Attorney General

It has become customary to evaluate the ethical problems and their scope by the reaction of the public in general and interested parties to the rise or decline in managerial ethical norms . The study of the public in general is probably less meaningful since the public opinion can be more easily slanted towards one view or the other by the media approach , but anyway is indicative of the general trend . A Gallup study has discovered that only 17 percent to 20 percent of the public thought the business ethics of executives to be very high or high (Business Ethics Fundamentals

National Business Ethics Survey (NBES ) performs a regular assessment of employees ' perception of their leadership ethics . Their surveys are of greater interest since the ask employees to evaluate the status of ethics in a particular corporation they work for and thus gauge more or less first-hand experience . NBES surveys also draw on a large base thus , a 2003 poll involved 1 ,500 employees in 48 states . The study has found that 82 of the respondents reported that their management kept promises as opposed to 77 in 2000 . This increase may reveal a greater urge for moral behavior sensed by corporate officers after the passage of the Sarbanes-Oxley Act . 22 as opposed to 31 in 2000 observed management misconduct and 10 versus 13 in 2000 experienced pressure for compromise from management . The survey has also demonstrated that employees pay greater attention to actions than to professions of adherence to ethical principles stating that actions count (Coates 2003 , pp . 169-170 .The NBES survey has also discovered what types of unethical behavior persist in corporations . The most widespread one was abusive /intimidating behavior ' with 21 , closely followed by misreporting of working hours ' at 20 . Not far apart were lying (19 ) and withholding needed information (18 . In addition , the survey has found that pressure to break moral norms is twice as high for young managers (those aged under 30 ) who have spent 3 years or less with the corporation (Coates , 2003 ,

. 171

Thus , the problem of unethical behavior persists in corporations and rises in the organizational hierarchy are often supported by results attained through questionable practices . Implementation of ethics-oriented programs does not always guarantee a sharp increase in the morality of the corporate leadership . About one-fifth of the respondents report observance of managerial misconduct , a sizeable number if one assumes that a great part of this misconduct goes on unobserved . This is plausible given the intricate governance structures of modern corporations . The above findings suggest that problems with misconduct continue to exist in the corporate environment despite the persistent efforts to remedy this evil

Why Are Corporations Unethical

The roots of corporate immorality have continued to puzzle academic minds for years . Indeed , most left-wing and in particular Marxist theorists firmly believed that business is inevitably immoral and based on culture of greed . Pro-business social thinkers spent time and effort on designing and implementing a system that would pinpoint the roots of contemporary immorality and put in deterrent forces that would induce managers and others to act in a more moral way . What caused companies to abandon moral principles they supposedly held on to years ago

Ioan Petrisor in his Managerial Ethics - Strategic Issues evaluates corporate ethics within the context of the organizational culture as a whole . He claims that being ethical will help management to achieve success in the end . The managerial culture incorporates at least two parts , efficiency element that permits integration into the world of business and stability element that allows preservation of a certain system of values and beliefs in the organization (Petrisor , 1998 ,

.43 Every organization possesses a distinct business culture that expresses its identity and translates into the unique image of the organization Culture incorporates a number of elements , including managerial policy and strategies , attitudes , managerial events and management 's ethical standards . The latter component is no less important than the rest . The underlying factor for the formation of a system of ethics is the complex of values supported by the organization

A manager 's incentive to be ethical is the judgment of the environment since every manager is encouraged to make decisions that will be approved by most stakeholders of the corporation . In addition , in today 's highly dynamic environment the managerial decisions require a great degree of flexibility and often imply a greater degree of risk-taking than before . A manager is often forced to make decisions in situations that were not envisaged in ethics codes , and the very nature of the managerial profession demands that choices be made in a timely and efficient manner . Lengthy considerations of ethical implications can deprive a manager of the most treasured gift - flexibility in decision-making . Thus , a decision that may not have been as unethical by the manager as unethical at the moment it was made may come to be regarded so by the public later on . Sometimes , moral norms just lag behind the speed of innovation and leave management somewhat disoriented in the maze of new opportunities and unorthodox decisions . Thus regulation of the Internet is going to take decades before a meaningful system of what is permissible and what is not on the vast spaces of the World Web arises

The most vivid contradiction in decision-making is the discrepancy between the financial-economic criteria and ethical considerations These two perspectives sometimes yield very different results when used in evaluating managerial decisions on different points . Consequently , a manager who is committed to compliance with ethical norms can find this policy at odds with the goal of making a profit for the company . An example that could illustrate the difference in views on managerial decision-making is the option of turning into unemployed some of the employees so as to increase the profit of the company or the gradual politics of reducing the number of the unskilled employees , or the retirement of those who have a considerable length of service (Petrisor , 1998 ,

.44 . In this view , a business manager always has to balance between demonstrating allegiance to the declared ethical norms and pursuit of material gain . A system of deterrent factors that will block the way to immorally gained profits is then necessary

Long-Term Goals versus Short-Term Perspectives

Luckily , many scholars and business professionals are convinced that the conflict between gain and moral pain is overdrawn . They draw readers attention to the fact that over the long run a company is more likely to benefit from a disciplined , conscious approach to its social obligations rather than reckless abandon of duty for the sake of a quick profit These considerations suggest that CEOs should avoid focusing only on the short term , if the free economy is to realize its full potential (Klesney , 2001

Indeed , long-term perspective has long been welcomed in corporate finance as the only way to achieve maximization of shareholders ' value Otherwise , capital investment in projects that will only be able to bring in a profit years later would make no sense . However , reality tells a different story . Corporate leaders realize that the investing public is informed about their actions once in three months and these results are reflected in stock performance . This puts enormous pressure on corporate officers to step up short-term results and boost the stock value . Some officers like the famous former AIG boss Maurice `Hank Greenberg was known to go as far as call exchange people to inquire why his stock is doing so poorly . Thus , the pressure is there , but how the company will respond to short-term challenges depends on its commitment to long-term goals

Joseph Klesney (2001 ) cites the example of General Motors said it would cut 15 ,000 jobs from its workforce after just two months of lower-than-expected earnings . In case business activity picked up , the company would have to increase its workforce to handle increased output However , the detrimental effect on the loyalty of employees who have been once laid off would remain , and the recollection that people were left in the street in difficult times would linger in the minds of the employees and public

Long-term perspective is also likely to result in a more ethical behavior of the management since immoral behaviors will surface more easily over an extended period . Enron management would probably never find themselves in a legal battle if they left immediately after the forging of the quarterly report . Instead , they stayed and had to reap the consequences of their immoral behavior . Even if unethical behaviors of the management does not result in penalty so drastic as law suits the decision to act immorally can shun the firm 's suppliers contractors , clients or other business partners and result therefore in losses for the business . The emphasis for the companies that have come to stay is on construction of long-term partnerships built on mutual respect and support , not on desire to exploit partners for getting a quick gain

Management 's Role in the Corporation

The main problem of corporate governance is coached in the very structure of the modern joint stock company where the assets of shareholders are managed on their behalf by corporate officers without claim to the assets of the company . This setup is complicated by the participation of the management in the ownership of the public companies through inclusion of options in compensation packages . The conflict between owners and their agents who may sometimes demonstrate unwillingness to pursue the owner 's interests was explicitly described in the agency theory . The modern agency theory was derived from the work of Berle and Means (1934 ) who devoted their attention to the potential sources of conflict that may result from a separation of ownership and control in the `modern corporation ' whose owners have ceded their power to employed managers who exercise control on their behalf (Klein et al , 2005 ,

.2 . Agency theorists envisage a divergence of interests between the employed managers and the owners . This necessitates invention and application of governance mechanisms that will curb management 's desire to act in their own self-interest where it contradicts the interests of the owners . These mechanisms have been evolving over the past centuries , with board oversight and compensation structures being the most common ones

A contrasting approach is stewardship theory that states the alignment of principal 's and manager 's interests . In the stewardship theory , the underlying model of man leaves no room for the assumption of divergent preferences as made in the agency theory (Klein et al , 2005 ,

.2 Therefore , management does not have to be controlled and monitored , but on the contrary has to be empowered since the management and the owners are working together for the benefit of the company . The role of the management is that of a fiduciary , or someone engaged in the management of an asset for the benefit of another person . A fiduciary role implies responsibility for the actions and decisions performed by the management on behalf of the owners

The modern-day approach focuses predominantly on monitoring of the managerial performance and placement of threats and deterrents that would curb the management 's desire to fool stakeholders . High-pro legal cases involving former Enron , WolrdCom executives and the rest should serve as a demonstration that corporate management is not infallible and `untouchable . The agency approach was most notably embraced in the Sarbanes-Oxley Act of 2002 that establishes tougher guidelines on corporate governance and accounting disclosures . The law adopted in the wake of accounting scandals , pioneered new tougher standards on disclosure lamented by companies that found them costly Titles VIII , IX , and X of the law include criminal enforcement tools that attach liability for senior management for violating reporting requirements (Coates , 2002 ,

. 165 . Therefore , the law was intended to be a deterrent force that will prevent roguish behaviour on the part of the corporations and expose it to the public view if it occurs . This is in consonance with the agency approach and therefore involves containment of the managerial fraud . The stewardship theory has not so far been convincingly applied , perhaps because recent corporate scandals have undermined the public belief in the honesty of the companies management

Case Study : HealthSouth Financial Fraud

The case study will focus on the relatively little-known fraud perpetrated in HealthSouth Corporation that boosted its cumulative earnings in the amount ranging from 3 .8 billion to 4 .6 billion according to the data from PricewaterhouseCoopers January 2004 report This case was considered to be of special interest , as it occurred in the post-Enron , and most importantly , post-Sarbanes-Oxley world , and demonstrates that accounting scandals did not vanish with the introduction of the new legislature

The primary perpetrator of the fraud was found to be the company CEO Richard Scrushy , charged with accounting fraud by SEC on March 19 , 2003 The chief executive bullied his subordinates into being his accomplices in the scheme , reminding them that they are already involved in the crime , promising them financial incentives and reassuring them that the fraud will turn out just fine as everything has been taken care of Scrushy also used the recommendation of forgiving corporate loans to those people who participated in his scheme and controlled his co-conspirators by reading their e-mails . The scheme was therefore far-reaching and involved many managers willing to continue partaking in the fraud since they were pressurised into doing so by the corporate management

The main driver for the CEO was the necessity to meet analysts forecasts and expectations . The executives of HealthSouth who faked financial records regularly received bonuses and other rewards based on financial results . Through inflating HealthSouth 's stock price they also raised the value of their stock compensation . The need to falsify records came ahead of a projected reform in health care industry closure of reimbursement opportunities , when the company for the first time faced the threat of missing analysts ' projections

This fraud , like many others , could have been prevented if analysts examining the state of the company began to ask the right questions when early symptoms of the fraud appeared . For instance , HealthSouth bought a string of rehabilitation clinics and outpatient surgery centers to expand its business in the 1990s , even though the return on investment was decreasing at that time . Weld , Bergevin and Magrath have found that "all of the components of investment return decreased in the later four-year period " that elapsed between 1998 and 2001 (Weld , et al This shrinking return on investment could raise the natural concerns of the auditors or analysts and served as a warning sign , or symptom : Why did the management pursue such an active acquisition strategy amid the decline in return rates

One more of the early symptoms that could have alerted the financial community to the possibility of a fraud going on was the volatility in the percentage of receivables estimated as uncollectible that ranged from 38 .9 of gross accounts receivable to 12 .2 . Besides , the provision for doubtful accounts for 1999 is distinctly higher than its average previous level . In addition , the write-offs for uncollectible receivables were inconsistent (Weld et al . Magrath and Weld described "reserves that are not correlated with balance sheet item (Weld et al as one of the warning signs that can be used by investors and auditors to detect possibility of fraud in a company "Acquisitions with no apparent business purpose " are also on this list of potential warning signs that can be employed in the fraud detection (Weld et al

HealthSouth used its bad-debt expenses to manipulate earnings attempting to raise them in the years when the company was expected to perform poorly , and keeping this expenses low at the time when the company had to do well to meet expectations . Thus , the 1999 large write-off that constituted about 8 .4 of the corporation 's revenues happened at a time when HealthSouth learned about the drop in analysts targets for its earnings

The perpetrators of fraud at HealthSouth boosted patient statistical data in to make these numbers chime in with the fraudulent financial information . The company made false entries in its income statements in to boost its earnings to meet projections . The entries were not made in those states where separate audits were required or where HealthSouth owned assets in partnership with doctors

The company had weak internal controls as the whole process was controlled by the chief executive who kept a tab on the internal circulation of falsified financial records and supplied the auditing teams with false records . HealthSouth added 175 million to its assets intentionally mistinterpreting Medicare 's guidelines for reimbursement HealthSouth also intentionally inflated the size of the company 's assets

To conceal the fraud , the HealthSouth executives put millions of dollars into the capital expenditures account , that eventually led to an overstatement of earnings , according to Merrill Lynch analyst A .J . Rice who testified in the HealthSouth trial . She said that the numbers of HealthSouth 's capital expenditures that were "significantly higher " than the numbers for companies in the same business . In the period from 1999 through 2001 HealthSouth 's capital expenditures twice exceeded the industry average (Reeves

In an attempt to hide the misstatements , HealthSouth paid 300 million in tax on its US overstated profits that were overstated by 2 .5 billion . In fact , however , the corporation was forced to borrow to cover that obligation . The company also artificially inflated its losses in 1998 that were caused by the alterations in Medicare policies . This fraud was perpetrated twice , the other time in 2002 when HealthSouth claimed that it had incurred expenses in prior years but did not fully assess the impact of those changes at the time (HealthSouth : The Accountancy Fraud . The accounting data are discussed and evaluated here to demonstrate how a company systematically continued to perform manipulations with earnings , using deeply unethical and outwardly roguish schemes

The fraud at HealthSouth was committed primarily through the creation of bogus revenue , and shifting of future expenses . Provoked by the trite reason of meeting analysts ' expectations , the fraud was originated by the CEO who could not reconcile to the loss of HealthSouth 's glamour The scandal grew out of the ambitious corporate culture that opted for "fixing the numbers " rather than portraying the true nature of the company 's problems . HealthSouth 's CEO Scrushy seemed to many to be a `bright kid ' who was eager to stay in his hard-won position of the leader of a successful company . To admit problems was to descend from the pedestal of power where he had stayed for a long time and to forfeit all the achievements of his long career . Resistant to do this , the corporate leader chose to press his officers into fraudulent action rather than face the world with an account of HealthSouth 's problems

The conclusion that can be drawn from the case of HealthSouth is that culture of greed has not disappeared after the passage of the Sarbanes-Oxley Act . In fact , it was vain to expect that such a pervasive phenomenon as managerial fraud will be destroyed by legislation . In the case of HealthSouth we deal not only with a culture of greed , but also with one of ambition , unwillingness to compromise achievements for obvious problems . HealthSouth managers , in line with our previous discussion , acted regardless of the long-term perspective , preferring to stay on the surface for the time being . They probably hoped to cover up their manipulations if the company 's business picks up through massive write-offs . Anyway , Scrushy 's subordinates acted like an ostrich that hides its head in the ground , responding to their leader 's coercion with continuation of the fraudulent activities . Long-term , they proved to be wrong : the punishment arrived perhaps more speedily than they supposed However , punishment cannot be the cornerstone of an ethical system Awaited penalty is a serious deterrent , but it cannot hamper perpetration of crime and less serious immoral actions in firms where the very organizational culture sanctions such behavior patterns

Conclusion

The findings of the suggest that the problem with managerial ethics exists and will not go away in the nearest future . The deficiencies in the moral level of the employed managers are evidenced by a high number of corporate scandals and perceptions of employees Part of the perceived immorality may be attributed to the dynamic nature of governance challenges , whereby the actions of the corporate management have to evolve against a dynamic background of factors and draw on ethical norms that have not yet been coined for particular situations . The management might have to uphold more rigorous working standards acting in the long-term perspective , but this perspective will not eliminate the conflict between short-term wants of a gain and moral values . Various theories have taken different approaches to solve the apparent contradiction between ethical rules and economic motives of the management . Agency theory , mostly endorsed by the current legislature supports the need for a more efficient system of control and monitoring for corporate officers , while stewardship approach calls for empowerment of management

Currently , monitoring seems to be a viable option . Until the system of managerial compensation is reformed to remove the dependence between the management 's perks and short-term results , the temptation to fudge numbers to make the quarter ' will always be there . That is why it is logical for shareholders to strive for a control mechanism that will deter such violations . On the other hand , this type of fraud is not the only way for management to be unethical , since it is possible for corporate officers to make decisions that are not punishable by law Legislature , including the Sarbanes-Oxley Act of 2002 will always play catch-up with actual practices , and so to hope to track down every managerial violation is futile . Consequently , a system that will provide a balance between empowerment and monitoring is necessary to prevent the management from unethical actions through deterrent penalties , while also underscoring the need for cooperation between the organisation 's various stakeholders . Otherwise the culture of greed and ambition as exemplified in HealthSouth 's case will remain pervasive

Annotated Bibliography

Anatomy of a Conspiracy (n .d . Retrieved on July 31 , 2005 from Scrushy-report .com : http /www .scrushy-report .com /rsanat .html

The website exclusively devoted to the achievements and shortcomings of HealthSouth chief executive Richard Scrushy , the main figure in the company 's accounting fraud . The site digs into the motives and culture that generated fraud at once-revered company

Business Ethics Fundamentals . MGT 3800 , Chapter 6 . Retrieved on July 30 2005 from http /www .business .utah .edu mgtab /BS-06 .ppt

The Power Point presentation outlines the basic ethical concepts and lays the background for the exploration of managerial ethics phenomenon The author introduces the difference between moral and immoral behavior and companies

Coates , B .E (2003 . Rogue Corporations , Corporate Rogues Ethics Compliance : The Sarbanes-Oxley Act , 2002 . Public Administration Management : An Interactive Journal . 8 , 3 , 2003 , pp . 164-185 . Retrieved on July 30 , 2005 from HYPERLINK "http /www .pamij .com /8-3 /pam8-3-6-coates .pdf http /www .pamij .com /8-3 /pam8-3-6-coates .pdf

The journal article explores the culture of greed that gave rise to the Sarbanes-Oxley Act of 2002 and investigates what kind of effect the law had on this culture . This uses the results of the NBES poll given in the article

HealthSouth : The Accountancy Fraud (n .d . Retrieved on July 31 , 2005 from http /www .uow .edu .au /arts /sts /bmartin /dissent /documents /health /healthso uth_accfrd .html

The page discusses the anatomy of the fraud , evidence supplied by various stakeholders in the scandal and offers the timeline for the events

Klein , S .B , Pieper T .M

. Jaskiewisz (2005 . Antecedents for agency and stewardship orientation for corporate governance - The role of culture . Research proposal submitted for consideration for Family Enterprise Research Center (FERC , Oregon , USA , May 21-22 , 2005 Retrieved on July 30 , 2005 from HYPERLINK "http /www .familybusinessonline .org /programs /ferc /pdf /sessionb /05-11 .pd f http /www .familybusinessonline .org /programs /ferc /pdf /sessionb /05-11 .pdf br

The research proposal gives of stewardship and agency theories contrasting the two approaches and seeks to establish to which degree cultural similarity between board and owners removes the need for a board of directors

Klesney , Joseph (2001 . The Moral Trappings of the Short Term Fix Acton Instotute for the Study of Religion and Liberty . Retrieved on July 30 , 2005 from http /www .acton .org /ppolicy /comment /article .php ?id 35

The article describes business ethics from religious , in particular Christian perspective . The author seeks to reconcile the view that management has an intrinsic motive to be unethical with the Christian moral values by discussing the distinction between short-term and long-term goals

Petrisor , I (1998 . Managerial Ethics - Strategic Issues . UDC 658 .5 :174 .4 . The scientific journal FACTA UNIVERSITATIS , UNIVERSITY OF NI , Series : Economics and Organization , Vol .1 , No 6 , 1998 . pp . 43 - 47 Retrieved on July 30 , 2005 from HYPERLINK "http /facta .junis .ni .ac .yu /facta /eao /eao98 /eao98-05 .pdf http /facta .junis .ni .ac .yu /facta /eao /eao98 /eao98-05 .pdf

The article describes managerial ethics as component of organizational culture and discusses criteria involved in decision-making . It combines the of managerial ethics with the exploration of strategic issues and discusses these issues with regard to Romanian companies

Reeves , Jay . Analysts Saw Evidence of HealthSouth Fraud . Associated Press , March 11 , 2005 http /accounting .smartpros .com /x47356 .xml

The news report from Associated Press offers an account of the court proceedings of the HealthSouth Case . The article describes the day when a Merrill Lynch analyst testified sharing his views on whether the crisis could have been prevented

Weld , G . Et al (2002 . Anatomy of a Financial Fraud : A Forensic Examination of HealthSouth . The CPA Journal online . Retrieved on July 31 , 2005 from http /www .nysscpa .org /cpajournal /2004 /1004 /essentials /p44 .htm

The article describes the findings of a forensic audit of HealthSouth 's finances conducted by Pricewaterhouse Coopers . The author is concerned with the existence of early warning signs of the fraud and tries to research whether they could have served as manifestation of criminal activities for analysts

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BUSINESS ETHICS

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Date : August 1 , 2005 ...