Current Issues in Business Ethics 2019 Boz Bostrom Associate Professor of Accounting/Finance College of Saint Benedict / Saint Johns University [email protected] (612) 414-9629 February 14, 2019 1 Learning Objectives Learn about the ethical attitudes of others
Understand current ethical violations and learn how to avoid them Learn about examples and pitfalls of unethical leadership Learn about examples and benefits of ethical leadership Ethics and the law Introduction to Ethics What are ethics? Moral principles Rules of conduct followed by an individual or group
4 Why be ethical? Compliance with rules, regulations, codes Stakeholder confidence, trust and loyalty Social acceptance / respect of peers
Personal pride 5 United Airlines Debacle Flight booked to capacity Additional crew members needed to fly United asked for volunteers / $800 compensation No volunteers Dept of Transportation guidelines allow passengers to be denied entry Butpassenger was already on plane https://www.youtube.com/watch?v=VrDWY6C1178
United Airlines Debacle Were Uniteds actions legal? Still unclearbut possibly. Were Uniteds actions ethical? Your thoughts? Public reaction / impact on Uniteds value What alternatives did they have? Pros/cons Ethical Attitudes
8 Gallup Poll rate honesty and ethical standards high or very high
Accountants Auto Mechanics Business executives Judges Lawyers Medical doctors Members of congress Military officers
Newspaper reporters Nurses Police officers December 2017 1,000+ adults in the US (accountants % from Dec 2015) 9 Gallup Poll rate honesty and ethical standards high or very high
65% 56% 43% 39% 32% 25% 18% 16% 11% December 2017 1,000+ adults in the US (accountants % from Dec 2015)
10 Gallup Poll rate Accountants honesty and ethical standards high or very high 50 45 40 35 30 25 20
15 10 5 0 1998 2000 2002 2004
2006 2008 2010 2012 2014 2016
11 Current Ethical Violations Ethical decision making model 1. Identify the ethical issue(s) involved 2. Identify the two clear options 3. Consider how stakeholders would be affected by these two clear options 4. Use moral imagination to come up with hybrid options usually the best result
Consider your blind spots / Discuss with independent parties 5. Finalize and communicate decision 6. Change decision if needed 13 Case Study One of your friends knows you are smart when it comes to finances and has asked for your advice in structuring their investment into a startup company The startup company refuses to produce financial statements, but has a number of high profile and
seemingly trustworthy board members You have heard rumors that the startup companys product is not performing as well as advertised How do you advise your friend? 14 Theranos / Elizabeth Holmes 15 Timeline Founded in 2003 by Holmes, a Stanford dropout
Claimed it had a product which could run dozens of blood tests from a finger prick Would save dollars and get results to patients more quickly Over $700M raised from an investors - $9B valuation Major partnerships with Walgreens and Safeway Board of Directors Channing Robertson, a chemical-engineering professor at Stanford George Shultz (former Secretary of State) William Perry (former Secretary of Defense) Henry Kissinger (former Secretary of State)
Sam Nunn (former U.S. Senator) Bill Frist (former U.S. Senator and heart-transplant surgeon) Gary Roughead (Admiral, USN, retired) James Mattis (General, USMC, later Trumps Secretary of Defense) Richard Kovacevich (former Wells Fargo Chairman and CEO) Riley Bechtel (chairman of the board and former CEO at Bechtel Group) Problems Many people within the company and at customers/investors raised red flags that the products did not work as advertised
Fired Nondisclosure agreements Threatened with lawsuits Suicide CEO/founder in a secret romantic relationship with companys President Began to unravel with October 2015 WSJ article Companys products not accurate
Company used competitors products Charges SEC report in March 2018 Massive fraud Company claimed it had $100M in revenues. Actually was $100,000 Holmes settled - $500k fine, forfeiture of (worthless) shares, barred from leadership positions with a public company for 10 years June 2018 - Charged with wire fraud and conspiracy to commit wire fraud Investors and doctors and patients were defrauded.
Defendants were aware of the unreliability and inaccuracy of their products, but concealed that information Up to 20 years in prison Case Study You work at the manager level for your organization You receive an email from a senior leader asking you to pull together an analysis In scanning the email chain, you see some confidential financial information unrelated to the task you have been asked to complete You realize the senior leader probably didnt mean to send you
that confidential information What do you do? 20 Lifetime Fitness Insider Trading Scandal Timeline Shane Fleming VP of Sales at Lifetime Fitness Feb 23, 2015 In-house lawyer tells
Fleming that LTM is being acquired. Fleming passes info along to a friend and business partner, Bret Beshey Agreed that Beshey would trade (or tell others to do so) and share profits with Fleming Bretts phone call to brokerage firm If you are trading, and Ive heard of, uh, companies that are trading and eventually they sometimes are bought and they go private and the company will buyout all of the existing stock that is outstanding, you know. So how
does that work? Like, say for example if I had, uh, if I had just bought options on a stock, if I bought, uh, options on a stock, and say I bought the options, like say I bought March 25s on it. . . . If I bought calls, for the March 25 and say that went up to, say the company, say the stock was trading at like 20, uh, say it was trading at 24 and my options are at 25, and say the company gets bought for 30, then do they cover the outstanding options? Timeline Feb 24 March 5 Information passed to 7 more individuals. About 2,300 call options purchased (along with a small amount of
shares) Stock price around $58 per share, options mainly purchased at $65/share Almost all would expire in less than one month March 5 (after close of trading) Wall Street journal reports LTM will be purchased. Share price jumps to as high as $69 per share. Most options sold March 16 LTM announced deal. Stock jumps to $71 per share Final options sold June 10 LTM sold / de-listed
Was it worth it? About $900,000 of total gains Fleming received $10,000 Beshey netted $15,000 The biggest profiteer was Eric Weller (over $500,000) who didnt give his up-line any cash, but instead Now what? Shane - Pled guilty to a count to commit securities fraud Up to 5 years in prison / $250,000 fine
Future employment of all involved Ages 28 to 54 Family / personal shame and guilt Linklaters Linklaters is a global law firm, with nearly 3,000 lawyers and partners working in 30 offices in 20 countries Menglu Wang graduated from Harvard Law and began working for Linklaters in 2015 Fei Yen 31 year old MIT research scientist
Linklaters Sibanye Gold and Steinhoff International Holdings were clients of Linklaters and acquired publicly traded companies, including Stillwater Mining Wang worked on these transactions Yen obtained information about the transactions, setup a brokerage account under mothers name, and traded About $120,000 of profits Linklaters SEC noticed unusual trades and investigated Yen
Found various google searches: how sec detect unusual trade insider trading in an international account Article - Want to Commit Insider Trading? Here's How Not to Do it Linklaters July 2017 Yen arrested March 2018 Yan sentenced to 15 months in prison and must forfeit the $120,000 Wang suspended, then fired from Linklaters Her lawyer: There were a number of innocent
bystanders. She is one of them. She is not a target. Its an unfortunate side effect that she lost her job. How were Yen and Wang affiliated? Unethical Leadership Case Study You are in upper (but not top) management at your organization and you hope to continue to advance up the chain Your top manager, a superstar performer, has become increasingly edgy Rough language Jokes about employees of other genders, ethnicities, etc.
Comments of a sexual nature You have dropped some subtle hints that the manager should tone it down Their reply, Maybe I should go somewhere I am more welcome. This managers strong performance has greatly helped your own performance metrics and has you positioned for your next promotion What do you do? Uber Initial Success 2009 - Founded 2016 - $4 billion revenue, $69 billion valuation
The Infamous Miami E-mail From: Travis Kalanick Date: Friday, October 25, 2013 Subject: Info: URGENT, URGENT - READ THIS NOW OR ELSE!!!!! To: Uber Team Hey guys, I wanted to get some important information out there. I've put together a Q&A that we can use when other folks ask what we're doing here, and have some DOs and DON'Ts for our time here in Miami. You better read this or I'll kick youre ass.
The Infamous Miami E-mail I have gotten a list of concerns from the legal department. I have translated these concerns into a clear set of common sense guidelines. I've also added a few items of my own. The Infamous Miami E-mail DONTs 1) No lives should begin or end at 2) We do not have a budget to bail anyone out of jail. Don't be that guy. #CLM 3) Do not throw large kegs off of tall buildings. Please talk to Ryan
McKillen and Amos Barreto for specific insights on this topic. 4) TBA 5) Drugs and narcotics will not be tolerated unless you have the appropriate medicinal licensing. 6) There will be a $200 puke charge for any public displays on the Shore Club premises. Shore Club will be required to send pictures as proof. The Infamous Miami E-mail DONTs 7) DO NOT TALK TO PRESS. Send all press inquiries to Andrew - [email protected] Additionally, stay vigilant
about making sure people don't infiltrate our event. If and when you find yourself talking to a non-Uber (look for the wristband), keep confidential stuff confidential... no rev figures, driver figures, trip figures... don't talk about internal process, and don't talk about initiatives that have not already launched. The Infamous Miami E-mail DONTs 4) Do not have sex with another employee UNLESS a) you have asked that person for that privilege and they have responded with an emphatic "YES! I will have sex
with you" AND b) the two (or more) of you do not work in the same chain of command. Yes, that means that Travis will be celibate on this trip. #CEOLife #FML Uber Recent Concerns Feb 19, 2017 Blogpost discussing sexual harassment Not taken seriously when reported to management Feb 28, 2017 Dashcam video of CEO arguing with driver June 6, 2017 Uber fires 20 employs when investigation reveals harassment June 8, 2017 Miami E-mail surfaces (sent October 2013)
June 20, 2017 CEO resigns Investors cut valuations by 15% Ethical Leadership Indra Nooyi Chair and CEO of PepsiCo Born and raised in India Undergrad in India / Masters from Yale in 1980 Joined PepsiCo in 1994 as a Senior VP of Strategic Planning
Became CFO, then President, then Chair and CEO in 2006 How many of the Fortune 500 CEOs are women? 41 Benefits of ethical leadership Quick Questions How ethical is senior leadership at your employer? How ethical is your direct supervisor?
Do you love your job? Do you plan to stay at your company for a long time? Do you work hard for your company? Ethical Leadership in the Accounting Profession July 2018 Survey Strongly agree Agree Neutral, disagree, or strongly disagree
Senior Direct leadership is supervisors are ethical ethical 52% 59% 40% 35% 8%
5% Survey Results - Details I plan to I work stay at my very hard company for my for a long company time (4.1) (4.6)
Senior leadership is ethical I love my job (3.9) Strongly agree Agree Neutral, disagree, strong
disagree 4.3 3.7 4.4 3.9 4.8 4.5 3.0
3.1 4.1 Survey Other Findings Only 26% strongly agreed that they loved their job, but that figure jumps to 43% for those who strongly agreed that senior leadership and director supervisors were very ethical Directly asked if the ethical environment impacts: Love for job 4.4
Plans to stay with company 4.4 Work ethic 4.1 (women 4.3, men 4.0) I have someone I can talk to about ethical issues 4.6 But staff only 4.1 Survey Other Findings Ethics impacts recommendation for: Promotions 4.7 Suppliers 4.3 Customers 4.3 How ethical are you compared to the average CPA? 56% said at least somewhat more ethical
58% men, 52% women 51% tax, 76% audit 78% of those under 30 Only 2% said at least somewhat less ethical What do the following 18 companies have in common? Accenture Kao Corporation Aflac Incorporated
Marriott International, Inc. Cummins Inc. Milliken & Company Deere & Company PepsiCo, Inc. Ecolab Inc
Premier Inc Fluor Corporation Starbucks Coffee Company GE Symantec Corporation International Paper Company
Texas Instruments Incorporated Johnson Controls, Inc. Xerox Corporation 11 or 12 of the past 12 years 49 Investment returns 10 year compounded annual total growth of S&P 500
Index? Median 10 year compounded annual growth of ethical companies? 50 Final Tips Discuss decisions with others Have a long-term view. STP = LTG Avoid financial and other pressures which can increase ethical pressures Assume your decision will be publicized
Be willing to walk away from an unhealthy environment
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