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Ethical problems of organizations (part 2)

Ethical problems of organizations (part 2). Geoffrey G. Bell, PhD, CA University of Minnesota Duluth November, 2003. Conflicts of Interest @ Enron. Enron top management Fastow’s creation of partnerships placed him in conflict (he won only if Enron lost).

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Ethical problems of organizations (part 2)

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  1. Ethical problems of organizations (part 2) Geoffrey G. Bell, PhD, CA University of Minnesota Duluth November, 2003

  2. Conflicts of Interest @ Enron Enron top management • Fastow’s creation of partnerships placed him in conflict (he won only if Enron lost). • Ken Lay told people to buy Enron stock while he was selling. • Changed plan administrators for employee 401(k) plan, locking employees’ holdings in during last month when top management was bailing. Arthur Andersen • Garnered large consulting fees, so couldn’t jeopardize them with negative audit results. • Audit review partner answerable to local partner in charge of audit; not CEO of AA. Wall Street financiers • Because Enron brought large investment banking fees, didn’t want to issue negative analysts’ opinions. • Gained fees by developing instruments that helped Enron remove debt from books (& then sold same products to other firms). Law firms • Firms advising Enron on legality of partnerships profited by developing them with the bankers & AA.

  3. Costs of Enron debacle • Text estimates costs of Enron failure at $35 billion. • Arthur Andersen went out of business, leaving only 4 major accounting firms in US.

  4. Other conflicts of intereston Wall Street • Problems with IPO market. • See video “don.con” for examples. • Basically, firms went IPO too soon, before they were ready. Made them more risky than normal. • Investment bankers purposely under priced IPO issues, leading to a big “pop” and increasing attractiveness of IPOs, but costing new IPO valuable start-up funds. • Allocation of IPOs based on favors by investment banks, not on equal availability to all. • Clear conflict, as market is not equal, but bankers can use IPO allocations to develop relationships.

  5. Employees and ethics Employees should be able to expect: • Privacy • Not to be fired without just cause • A safe workplace • Due process and fair treatment • Freedom of speech • A work environment free of bias.

  6. Employee safety • Employees can expect to work without death or injury on the job. • OSHA was created both to protect workers from possible harm, and to inform them of possible risks.

  7. Employee layoffs • By their nature, layoffs involve misery. • Employers must hire and fire responsibly. • That means they shouldn’t hire knowing the demand is only temporary. • What are ethical alternatives to downsizing? Can they be good business too?

  8. Ethics and shareholders • The text argues that organizations and managers have an ethical obligation to the owners of the business. • Managers must serve the interests of owners. • Shareholders have a residual interest in the firm, and often their long term interests are served by meeting the needs of other stakeholders. • Question – why should shareholders have a residual interest in the firm? Why should their needs supercede those of other stakeholders, or do they?

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