Case Study: Ethics

Video Transcription

Hi, I'm Jeff. And in this lesson, we'll take what we have learned about ethics and apply it to some real world examples. So let's get started.

If you remember, ethics are the principles of right and wrong and of the morality of the choices. In the context of ethics, we'll first discuss the Enron scandal, which came to light in 2001 and eventually led to the bankruptcy of the Enron Corporation, an energy company based in Texas. It also led to the dissolution of Arthur Andersen, one of the five largest accounting companies in the world. This is a case of business ethics, which are the principles of right and wrong and of the morality of the choices made in the business world.

So what happened with Enron? Kenneth Lay helped form Enron in 1985 from a series of mergers. But it was a few years later when Jeffrey Skilling was hired as the chief executive officer that the issues truly began to occur. Managerial ethics are the principles of right and wrong and of the morality of the choices made in the context of management. And these people failed to stay on the right side of managerial ethics.

Now, Enron is a complicated example. And there were many cases of wrongdoing. But let's discuss just a few. Enron owned a large number of assets around the world. And these varied assets led to some complex financial statements. Enron also provided wholesale trading and risk management for other companies. When reporting on these assets and trades, Enron used methods that both inflated the trading revenues and were highly optimistic about the future. Overstating profits in this manner can be a question of ethics.

Why is it being done? To provide truth to the stakeholders or to drive the stock price higher? In Enron's case, it was to drive the stock price higher. The executive team hand-picked by Skilling constantly worried about their stock price. And Enron's complicated corporate structure allowed the executive leadership team to make many unethical choices similar to this in their attempts to overstate profit. And some of these choices were not legal. It was later learned that the board of directors also knew about some of these practices and approved.

But these revenue results couldn't be maintained, and these issues became public. This led to requests for a financial audit. And as the audit progressed, it was discovered that Arthur Andersen, Enron's accounting firm was also complicit in these financial wrongdoings. Enron stock price plummeted. And both Enron and Arthur Andersen fell under legal and political investigations.

What were the consequences of this lapse in business and managerial ethics? Enron was forced to declare bankruptcy. Arthur Andersen was dissolved. Stockholders lost considerable money. And Jeffrey Skilling and a number of other executives were sentenced to prison. Ken Lay would also have been sent to prison, but he passed away before sentencing. And, finally, Congress enacted the Sarbanes-Oxley Act of 2002, which provided stiff penalties for defrauding shareholders and destroying records related to this fraud.

Now, let's discuss a more modern example where lives were lost due to unethical choices. In 2013, the Rana Plaza, a commercial building in Savar, Bangladesh, collapsed. This resulted in 1,129 deaths and 2,515 injuries. The building contained numerous stores and apartments. But it also contained factories used to make garments for such companies as Walmart and Bon Marche. And those factories were the problem, because it was a number of unethical business choices that led to the collapse.

This was an eight-story building. And the upper four stories had been built without a permit. The architect had planned for these spaces to be used for more shops and offices, but not factories. The additional weight from the manufacturing equipment and the large number of workers caused the collapse.

These types of labor conditions and poor quality construction can be common in the international clothing market since there is such a pressure to keep costs low. But what made this worse was that the collapse was not sudden. One day before cracks were discovered in the building. Though the building was initially evacuated, employees for the factories were forced back to work the next day if they wanted to keep their jobs. That day the building collapsed.

When managerial ethics are not considered, these are the possible results. What were the consequences? Over 1,100 people killed, including children who were in nurseries while their parents worked. And the Rana Plaza owner, Sohel Rana was jailed pending upcoming court cases about the collapse. 5 other factories and their stakeholders were also charged with wrongdoing. And due to this tragedy, an accord on factory and building safety was created and signed by 38 companies doing business in Bangladesh. Walmart and 14 other companies refused to sign the agreement though.

In both the Enron and the Rana Plaza collapse, decisions were made that placed corporate or personal profit above the safety or the livelihood of the employees. To an outsider, it might seem these managers were disconnected from reality. But the culture at Enron and in the garment industry seemed to encourage these types of decisions. And those making the decisions were rewarded. They were taught by the company that this was what they should do.

And this is why business and managerial ethics are so critical at every level of a company. If managers or employees believe that ethics can be ignored and they will be rewarded, then some will make the choice to ignore ethics. And this will lead to more and more workers making that choice. Eventually, a price will need to be paid by the company for these unethical choices. And in some cases, that price can be quite costly to workers and shareholders.

All right, good job. In this lesson, we reviewed a classic and a modern example of lapses in business ethics. And we discussed some of the similarities between the two cases. Thanks for your time, and have a good day.