THE ETHICS OF MANAGEMENT
Fifth Edition
LARUE TONE HOSMER
Professor Emeritus of Corporate Strategy and Managerial Ethics
School of Business Administration University of Michigan
McGraw-Hill 2006
PART I
Face ethical issues with confidence
LaRue Hosmer believes leadership is essential for ethics, especially in today’s business environment where pressures to dodge issues and cut corners are greater than ever. The Fifth Edition of Ethics of Management employs a three-part framework to analyze these problems by combining economic outcomes, legal requirements, and ethical principles. Students will learn how to convincingly present their moral point of view to others in order to jointly serve their companies and protect their careers.
Preface
The growing importance of ethics in management
The past several years, starting with the financial and moral bankruptcy of Enron Corporation in 2001, have seen almost daily revelations of apparent ethical violations by persons working for large global companies. There have been fabricated statements of corporate profits, improper concealments of corporate debts, exploitive trading of mutual funds, self-serving reports by securities analysts, insider trading by brokerage firms, unauthorized payments and perks to senior executives, etc. This text contains new cases on all of the actions mentioned above, plus others dealing with harmful environmental discharges, unsafe working conditions, sudden plant closings, continuing job exports, untruthful marketing policies, etc. Tyco, Enron, Bank of America, New York Stock Exchange, WalMart, Electrolux, Whirlpool, and Martha Stewart are among the company situations and individual actions that are described in the following written cases for class discussions.
The students in those classes are going to have to deal with these issues soon after graduation; the pressures on entry-level employees to ‘get along by going alone’ are immense in today’s highly competitive, highly complex, and highly diverse global economy. Yet at the same time, the opportunities for those same entry-level people to ‘stand out by standing up’ are equally great. My most basic argument is that all members of our courses are going to have to learn how to convincingly present their moral point of view to others in order to jointly serve their companies, protect their careers, and improve their societies. There are, in my view, five steps in making such convincing presentations:
- Recognize that moral problems in business are complex and difficult to resolve. Moral problems in business inherently involve some individuals and/or groups associated with the firm who are going to be hurt or harmed in ways outside their own control, while others will be benefited or helped. Further, some of those individuals and/or groups associated with the firm will have their rights ignored or denied, while others will have their rights recognized and extended. There is a mixture of benefits and harms, of rights exercised and rights denied, in the moral problems of management, and this mixture makes it very difficult for business managers to decide upon a course of action that they can confidently say is ‘right’ and ‘just’ and ‘fair’ when faced with a moral problem.
- Understand that business managers cannot rely upon their moral standards of behavior or the intuitive ways they just automatically feel about what actions are ‘right’ and ‘just’ and ‘fair’ (and which are not) to make their decisions when faced with a moral problem. Moral standards of behavior differ among people, depending on their personal goals, norms, beliefs, and values, which in turn are dependent upon their cultural and religious traditions and their economic and social situations. The individuals and groups in a global economy come from very different cultural and religious traditions and live in very different economic and social situations, and consequently their moral standards of behavior, being subjective, are bound to differ substantially. Business managers have to understand, and deal with, those differences.
- Accept that it is not enough for a manager to simply reach a decision on what he or she believes to be a proper balance of benefits for some and harm for others, of rights recognized and rights denied, in any given situation. Managers have to go further and be able to explain convincingly why that balance should be viewed as ‘right’ and ‘just’ and ‘fair.’ A convincing explanation requires objective methods of analysis rather than subjective standards of behavior. These objective methods of analysis include: economic outcomes based on impersonal market forces; legal requirements based on impartial social and political processes; and ethical duties based on universal human goals. This logical decision process starts with a listing of the benefits and harms, together with an accounting of the rights exercised and the rights denied, for each of the involved individuals and groups to make certain that everyone understands the magnitude of the problem, despite the differences in their moral standards of behavior, and then moves on to the tripartite analysis.
- Anticipate that if this proposed decision process is followed on a consistent basis, with moral solutions that are logically convincing to the individuals and groups associated with the firm, the result will be an increase in the trust, commitment, and effort evidenced by those same individuals and groups. Everyone wants to be treated justly in the workplace, but the only way most people can ensure that just treatment in the future is to work for managers they trust because of actions in the past. They tend to trust those managers who have logically and convincingly explained the economic, legal, and ethical foundations of their decisions and actions. The argument here is that trust leads to commitment, that commitment leads to effort, and that committed effort is essential for continuing success in a competitively intense, technologically complex, and culturally diverse global economy.
- Believe that it is not enough for the senior executives in a firm to consistently recognize moral problems and convincingly present moral solutions in order to bring all of the individuals and groups associated with the firm into a committed, integral whole. Instead, this sense of corporate integrity has to be spread throughout the firm, and that requires a mission statement based on accepted organizational values and defined corporate goals and sustained by financial supports, performance measures, incentive payments, prohibited procedures, and leadership actions. Given the increasing intensity, complexity, and diversity of global competition, companies cannot continue to operate successfully without the resulting cooperation, innovation, and unification that come from trust, commitment, and effort.
It has often been said that ethics is essential for leadership. My argument is that leadership is also essential for ethics. Somebody has to be willing to stand up and say, “This is what we should do, and this is why we should do it.” That is the combined character and skill that I think we should be teaching in our classes.
Bank of America and the “Market Timing’ Trading of Mutual Funds
- B of A is one of the largest financial institutions in the US, providing retail banking (checking a/c, credit cards, mortgages, and mutual funds for middle income individuals and families), commercial banking (loans, leases, and financial services for small to middle-size business firms), and investment banking (bond/equity transactions for large corporations and trust funds and high-net-worth individuals and institutions).
- It was the combination of the mutual funds for middle income individuals and families and the ‘special services’ for high-net-worth individuals and institutions that brought about a substantial problem for B of A in the late summer and early fall of 2003.
- B of A was charged that they had permitted Edward Stern to engage in the market timing trading of the mutual funds sold by the bank to their middle income customers.
- Stern’s Canary Capital Holdings had ‘eye-popping’ gains despite generally adverse market conditions.
- ‘Late trading’ is based on an honor system. If a brokerage company or security firm was willing to accept orders after the 4.00pm deadline yet report them as having been received before 4pm it would give customers an unbeatable advantage.
- The Wall Street Journal reported on September 9, 2003 that the ‘special services’ section of the investment banking division of B of A had installed special equipment in the offices of the Canary Capital Holdings hedge fund that allowed that fund to buy and sell shares of the mutual funds sold to individuals and families by the retail banking division of Bank of America far after the 4.00 pm closing time, yet be stamped with a much earlier time of submission.
- It was discovered that many mutual fund managers had not only permitted market timing and late trading of their fund’s shares, they had actually encouraged it.
Class Assignment
- Why did this happen? Why didn’t people not directly involved speak out? If you were a staff member would you have complained? What should B of A done and why did the bank not take any of those actions?
Chapter 1: Moral Problems in Business Management