Page 49 - Introduction to Business

CHAPTER 1 What Is Business? 23

Ethics in Business

Corporate Profits Versus Corporate Ethics

The U.S. business system focuses on and those with retirement plans) as well as employ-
maximizing short-term profits; stock ees of those companies, led to a public outcry and an
analysts as well as investors continually focus on the investigation by Eliot Spitzer, the New York attorney
quarterly profit performance of companies. Corporate general. In April 2003, ten well-known Wall Street
managers (whose salaries and bonuses are often tied investment banks (Citigroup, Credit Suisse First
to corporate performance) in turn try their best to Boston, Bear Stearns, Goldman Sachs, J. P. Morgan
meet short-term expectations—maximizing corporate Chase, Lehman Brothers, Morgan Stanley, UBS
profits and boosting stock prices! Recent events, espe- Warburg, US Bancorp Piper Jaffray, and Merrill
cially in corporate America, have brought the issue of Lynch) were reprimanded and settled (for a total of
business ethics to the forefront. Business ethics deals $1.4 billion in fines) investigations into whether their
with questions about whether certain business prac- research analysts misled the public by touting stocks
tices (some of which may be legal) are morally accept- publicly that they denigrated privately in order to win
able, especially when they have a detrimental impact lucrative investment banking business from those
on consumers, investors, or employees—compromis- corporations. These events have raised serious dis-
ing long-term wealth maximization for short-term gain cussions in Congress and in academia about the need
by encouraging various forms of corporate to improve corporate ethics (social responsibility) and
(especially accounting and financial) scandals. For curtail white-collar crime.
example, since early in 2000, investors have been hit
Source: D. Quinn Mills, “Buy, Lie, and Sell High: How Investors Lost
with a wide array of scandals that have tarnished the Out on Enron and the Internet Bubble” (NJ: Financial Times,
reputations of some of the United States’ largest cor- Prentice-Hall, 2002).
porations and financial institutions. While the facts in
each case have varied, the downfall of several major Questions
companies (e.g., Arthur Anderson, Enron, Global
1. Should corporations regulate themselves? Or can
Crossing, HealthSouth, IM Clone, Lucent Technologies,
market forces rectify the situation? Or is better
Rite Aid, Worldcom, etc.) can be attributed to a com-
government regulation and supervision needed?
mon thread: unethical behavior of key corporate exec-
Is this a case of a few rotten apples, or is the
utives that had been tolerated for years, often with
problem systemic?
regulators and industry insiders looking the other way.
2. Why do you think so many well-known U.S.
These corporate scandals were generally the result of
firms have been involved in unethical behavior,
executives boosting short-term revenues and artifi-
especially when compared with the relatively
cially inflating their corporation’s stock prices.
few cases in Europe and Japan?
These developments, which have had significant
detrimental effects on investors (especially retirees
that takes into consideration the welfare of all its constituents: customers, manage- business ethics The principles
ment, employees, suppliers, and society. While maximizing shareholder wealth is governing whether certain business
practices are morally acceptable,
relatively straightforward, measuring stakeholder wealth and maximizing it can get
especially when they have a
a bit difficult. For example, in the latter case, companies are obliged to keep retrain- detrimental impact on consumers,
ing their employees and sharing some of society’s cost. Europeans believe strongly investors, or employees
that in the long term, such a socially responsible company will be better off than
businesses that are exclusively based on shareholder wealth creation. In stakeholder-
oriented companies, employees are considered more than a factor of production
and they cannot be hired or fired easily. As a comparison of equity, the ratio of salary
paid to the chief executive of a company to that of an average factory worker is
close to 50:1 in Europe and Japan, as compared with 400:1 in the United States.
As Warren Buffet, the Sage of Omaha, indicated in Berkshire Hathway’s 2003 annual
letter (March 7, 2004) to shareholders, “In judging whether corporate America is

Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.