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Case Study: Ethics

Case Study: Ethics

Author: James Howard

This lesson is a case study on a classic business ethics situation and a more modern one.

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Hello and welcome to this case study in Ethics. Now as always with these tutorials please feel free to fast forward, pause, or rewind as many times as you need in order to get the most out of the time that you're going to spend here. Now let me ask you a question. What is unethical behavior look like at a company wide level? Can you give any examples? And what consequences and results does that have for the people, the stakeholders of the company?

Well, during this lesson we're going to be taking a look at a classic example, a modern example of unethical behavior, and we're going to look at the overarching similarities between these two cases. Now the key terms for this lesson are going to be Ethics, Business Ethics, and Managerial Ethics. And we're going to do something a little bit different and get started with defining those terms right off the bat.

Now Ethics is the principles of right and wrong and the morality of the choices, those choices we make in every day life. Business Ethics concerns the principles of right and wrong and the morality of the choices made in the business world, those everyday choices that are made within the world of business. So we're limiting it down just a little bit from the overall view of ethics.

And lastly, Managerial Ethics. These are the principles of right and wrong and of the morality of the choices made in the context of management. And what I want you to do is see if you can find issues with these three terms as we go through the case studies.

Well, let me start off by telling you a story. Let's say you're an investor in 1999. And I'm your broker. And I come to you and say, hey, I got this great deal that I want you to get in on. You see, this year so far the stock for this company's gone up 56%. It's beat the market by 36%. That's pretty impressive, you say. So you go ahead and buy. You put all the money that you have into it.

Well, the next year in 2000 that stock went up 87%. And at this point the sky's the limit. Well, that company was Enron. And it made a lot of people very, very wealthy for a little while. The problem was they weren't doing it on the up and up. You see, Enron was am energy, commodities, and service business. They were in the business of providing, and selling, and transmitting electricity, natural gas among other things.

Well, the problem they got into was when they started using something called Mark to market accounting in the early 1990s. You see, Mark to market accounting is an accounting practice that while perfectly legal at the time had never been used for Enron's particular sector.

Now let's say I have a security or a bond, stock for instance. On Mark to market I can account for the entire future value of that stock on today's financials. So all the money the future value of that stock I would count today. I just couldn't use it again in the future. That would be the only time we could take that income.

Well, what Enron was doing with Mark to market was they were using this to hide the failures in their business. They were hiding the debt that they had. And this created a huge problem for them. As a matter of fact in 2000 the press finally started to notice. And they started to dig deeper into Enron's books. And suddenly people realized, we have no idea how Enron is making their money.

So enter Arthur Andersen. Now Arthur Andersen was the accounting firm that did the books for Enron. Now Arthur Andersen not only did the books, but they also consulted. Now this created a conflict of interest for Arthur Andersen. You see, having the same firm tell you how to do your accounting and then turn around and audit those very same practices is probably not such a good idea.

So they're pressuring the CEO of Arthur Andersen to make these calculations work. And to hide things from the general public on their annual statements. Now after Enron collapsed in 2000 this resulted in the CEO, Mr. Skilling, from Enron and a few other people from that company going to jail. The company went into bankruptcy.

The stockholders were devastated. And it also brought about the creation of the Sarbanes-Oxley Act as a result. And what this act did was require company executives of any company, any publicly traded company, to personally sign those annual statements to the stockholders certifying them as true under penalty of law.

So if something was going on that was hinky in the financials and the CEO knew about it, and he signed his name, he's automatically going to jail. And it also cracked down on conflict of interest stories like what happened with Arthur Andersen.

So let's go back to owning that stock. It's 2000. You're up 100 and some odd percent. And then this happens. The beginning of the graph is August of 2000. The end of the graph is January, 2002. They lost $90.00 and change in a two year period. Everybody who owned stock, every retirement account that had stock suffered a complete loss. This devastated people's retirement programs. Not to mention it put 30,000 people who worked for Enron out of a job. Pretty terrible, huh?

Well, let me tell you another story. This one takes place in Rana Plaza in Bangladesh. Now this particular building in Rana Plaza was owned by a man named Sohel Rana. And he's an international shirt manufacturer among other things. And that was the business he was in in this particular building, manufacturing shirts to be sold on a worldwide stage.

So they would make the shirts here. They would take advantage of the country's cheap labor, and crank out shirts at a ridiculously low price in order to undersell the competition internationally. And, of course, this attracted buyers from all over the world.

Well, in April of 2013 people ran from the building in terror. They heard explosion like sounds inside. Sounds reasonable to me. An evacuation was ordered after an engineer took a look at the building and said, hey, you know what, this is unsafe.

You see, the problem with the building was it was never engineered or designed to have a factory in the building. And it was illegally raised from one story to five stories a few years earlier. See an issue yet? What happened with Rana employees is they were forced to return to work. I don't care if they say it's unsafe. You have to come back to work. As a matter of fact, Mr. Rana himself had a press conference on the bottom floor of the building on April the 24.

And he assured them, hey, everything's fine. It's just the plaster cracking. Those engineers have no idea what they're talking about. On April 24 everyone went back to work. A generator on the roof started, which sent vibrations through the building and this happened. 1,100 people lost their lives in that collapse.

As a result not only were these people dead, there were 2,500 injured, but this sent the global market in disarray for shirt manufactures. The stakeholders were devastated. Now their names were tied to this tragedy which cost 1,100 lives. There was an alliance called for to improve the working conditions within Bangladesh. Mr. Rana was arrested and the stakeholders were permanently tarnished for doing nothing else but seeking the best price they could get on shirts, and assuming that the company was making the shirts would take care of their employees.

So what are the overarching similarities between these two? Well, first there's a focus on the short term. With Enron they were worried about year to year. How do I make it look better year after year after year? With Rana they were focused on, we have to get these shirts done now. And we're going to take shortcuts in both cases to get there. We're not going to do it by the rules.

Even though Enron in most cases never broke a law as far as the SEC was concerned. The SEC gave them a pass, the Securities and Exchange Commission. There was a disregard in both counts for stakeholders. They were so focused on short term gains and short term improvements in their bottom line that they forgot why they're really there, to continue the business. Make money for the owners and continue the business.

They didn't care how this would affect the workers. They didn't care how this would affect the stakeholders. All they cared about was making money now and using any means they could to get it. And in the case of Enron it ruined thousands of lives financially. And in the case of Rana the choice to be unethical at a company wide level ultimately cost 1,100 lives.

So what did we learn during this lesson? Well, we looked at a classic example of unethical behavior. Enron, in this case. We also looked at a modern example. The Rana Plaza collapse in Bangladesh in 2013.

And we looked at those overarching similarities, that tendency to make shortcuts, that tendency to do anything I can to make a buck no matter what the cost. I want to thank you for spending some time with me as always, folks. And have a great day.

Terms to Know
Business Ethics

The principles of right and wrong and of the morality of the choices made in the business world.


The principles of right and wrong and of the morality of the choices.

Managerial Ethics

The principles of right and wrong and of the morality of the choices made in the context of management.