Desjardins5e ppt ch7

CHAPTER SEVEN: EMPLOYEE RESPONSIBILITIES
AN INTRODUCTION TO BUSINESS ETHICS
Copyright © 2014 by McGraw-Hill Education. All rights reserved.

THIS CHAPTER SEEKS TO
 Examine the nature and range of employee responsibilities
 Explain the agency view of employee responsibilities
 Examine the role of business professionals as gatekeepers
 Examine managerial responsibilities
 Explain and examine the concept of conflicts of interests
 Analyze the responsibilities of trust and loyalty in the workplace
 Analyze responsibilities for honesty in business
 Examine the ethical responsibilities concerning whistleblowing and
insider trading
Copyright © 2014 by McGraw-Hill Education. All rights reserved. 7-2

DISCUSSION CASE: CONFLICTS OF INTEREST IN
SUBPRIME MORTGAGES AND AT GOLDMAN SACHS
AND ENRON
 Goldman Sachs is hired by clients to manage their investment
portfolios
 Thus, financial professionals at Goldman Sachs should make
decisions in the clients’ best interests
 Yet these finance professionals are also employees of
Goldman Sachs, a firm that has its own financial interests at
stake
 Keeping these interests aligned, serving the firm’s interests by
serving clients interests, was the corporate culture so
appreciated by Greg Smith

AND ENRON (CONT.)
 However, Goldman culture systematically and
intentionally shifted away from this alignment
 Instead of being served by the agents they hired, clients
were disparaged as “muppets” to be manipulated for
the financial gain of Goldman Sachs
 Employees received promotions and huge bonuses
based not on how well they served clients, but on how
much money they made off of these clients

AND ENRON (CONT.)
 Created in July 1985, Enron evolved from a gas and energy
supplier to an energy-trading company
 To minimize risks in the highly volatile energy industry, traders
commonly ”hedged” their positions, effectively entering into
futures contracts that balanced current risks
 Senior management at Enron balanced risks by entering into
agreements with companies that its own executives created
for that very purpose
 Enron’s relationships with these “special purpose entities”
(SPEs) was at the heart of the company’s corruption and
collapse

AND ENRON (CONT.)
 Accounting regulations:
 Allowed anyone with a minimum of 3 percent equity share
to be identified as an SPE’s owner
 Held that as long as Enron owned less than 50 percent of
an SPE’s voting stock, its debts did not have to be
accounted for on Enron’s books
 Enabled SPEs to technically be separate business entities
 The entire process allowed Enron to record a lowering of its
liabilities (as its debts were paid off) without also recording
the corresponding increased liability (which had been shifted
to the SPEs

AND ENRON (CONT.)
 Aspects of these relationships that were
particularly egregious:
1. Enron’s SPEs had little use other than to shift
debt and risk off balance sheets, and the entire
financial stability of Enron was supported only by
its ability to shift debt onto SPEs

AND ENRON (CONT.)
 Aspects of these relationships that were
particularly egregious: (cont.)
2. The person managing these SPEs was Enron’s
CFO
3. Enron was supported through all of this by its
accounting firm: Arthur Andersen, which
provided allegedly unbiased and accurate
financial reports

AND ENRON (CONT.)
 Enron began collapsing in early 2001
 Enron Vice President Sherron Watkins warned the
CEO and other Enron executives about serious
accounting improprieties
 Enron’s senior executives were selling Enron stock at
a furious rate
 Arthur Andersen realized its mistake and acted to
cover up its actions

AND ENRON (CONT.)
 October 16, 2001: Enron announced a $618 million
quarterly loss
 November 8, 2001: Enron acknowledged that
widespread accounting errors in four previous years
had overinflated its’ stock by $600 million
 December 2, 2001: Enron filed for bankruptcy

WHAT DO I OWE OTHER PEOPLE?
 It depends
Workers are employees and the employment
relationship establishes a variety of
responsibilities that employees owe to their
employers
 Managers, while employees, are agents of the
corporation and have specific responsibilities to
the stockholders and to others

EMPLOYEES AS AGENTS
 Agent-principal concept
 An agent is a person who act on behalf of another
person
 Not all agents are employees
 Common law in the U.S. historically has treated all
employees as agents of employers, establishing a
fiduciary responsibility
 Agency relationships variety in the latitude of
decision making

EMPLOYEES AS AGENTS
 Managerial employees have greater discretion and
responsibility than other employees
 Managerial employees are free from close oversight
 The law holds that employee-agents owe legal duties of
loyalty, trust, obedience and confidentiality to the
employer-principal
 These duties override employee personal interests

EMPLOYEES AS AGENTS
 Is this narrow view ethically defensible?
 Why would anyone believe this view?

EMPLOYEES AS AGENTS
 First, managerial employees in particular play a
particular role within the economic system
 Second, managerial employees in particular must
protect the property rights of owners and
prevent economic harms they might suffer from
other employees

EMPLOYEES AS AGENTS
 Nonmanagerial employees have a
responsibility to obey only when employer
demands are reasonable, job-related and do
not violate legal or ethical duties
We have to consider what nonmanagerial
employees “owe” to their employers

EMPLOYEES AS AGENTS
 The narrow view of employee responsibilities
is more plausible when the employees hold
positions of managerial authority
 In general, managerial employees have an
ethical responsibility to act in the best
interests of their employers – to a limited
degree

EMPLOYEES AS AGENTS
 There are cases in which ethical responsibilities take
second place to role-specific responsibilities, e.g.
physicians and lawyers
 But does the role of a manager, like the role of a
physician and a lawyer, serve social ends important
enough that people in those roles can sometimes be
exempt from ethical responsibilities?

PROFESSIONAL ETHICS & GATEKEEPING
 Our responsibilities are a function of the
relationships that we have with others
 Professionals have very specialized knowledge or
expertise that serves the public good;
certification by some public agency is usually
involved

 Within the business and economic context, some
professions have evolved to serve important
functions: attorneys, auditors, accountants and
financial analysts
 Many of these professionals are paid by the
business that they are responsible for watching
over

 Real conflicts of interest exist between
professional duties and a professional’s self-interest
 But knowing what one’s duties are and fulfilling
those duties are two separate issues

What does the word “reason” mean?
- In one sense, a reason refers to the legitimacy
or justification for acting in a certain way
- In another sense, reason refers to a
psychological state in which we act, like
motivation

 Acting on principle sometimes can require real
courage – or discipline – or will-power
 Our habits are developed over time and
influenced by our surroundings
 If we recognize that it can be difficult for
individuals to fulfill their gatekeeping function,
then society has a responsibility to make changes

MANAGERIAL RESPONSIBILITY & CONFLICTS OF
INTEREST
Return to Enron…
- Who are the owners of Enron?
- How many different “desires” existed in Enron
at the time of the scandal?
- What is the “cult of the shareholder? How did
it become the biggest reason behind the
accounting scandal at Enron?

INTEREST
Return to Enron…
- If the varied interests of various stakeholders are the
interests that a business manager ought to serve, how
does the manager prioritize these interests, and what
interests might inappropriately conflict with these?
- What are the costs stakeholders endured as a result of
managerial decisions?

INTEREST
 A kickback is an illegal payment that occurs when
a portion of some payment is paid back to the
payer as an incentive to make the original
payment.
 Soft money occurs when financial advisors
receive payments from a brokerage firm to pay
for research and analysts services that should be
used to benefit the clients of those advisors.

TRUST AND LOYALTY IN THE WORKPLACE
To trust someone is to be confident in and rely
upon their judgment when one is vulnerable to
their decisions.
 Trustworthy managers develop and maintain
professional competence and expertise

Loyalty, in business, is understood as a willingness
to make personal sacrifices in the interest of the
firm.
- To what degree do employees have a
responsibility to make personal sacrifices for the
firm?
- Ronald Duska argues employees have no
responsibility

Claims for loyalty by the firm can often be little
more than a disguised way to exploit employees’
willingness to make sacrifices for the firm
However, until and unless the firm is willing to
sacrifice for employees, those employees have
little reason to demonstrate loyalty to the firm

Is the case different for managerial employees?
- Sherron Watkins
- Andrew Fastow
If loyalty means willing to sacrifice one’s own interests by
going above and beyond ordinary responsibility, then we
ought to be suspicious of calls for employee loyalty.

HONESTY, WHISTLEBLOWING & INSIDER TRADING
 Honesty: Are there situations in which
dishonesty is common and acceptable?

There are three reasons to explain the ethical
responsibility to be honest:
 Dishonesty undermines the ability of people to
communicate
 Honesty and trust create essential preconditions for
all cooperative social activities
 A dishonest person must have more than one
identity, which undermines his integrity

A bluff can only work as a bluff if the person being
bluffed believes that it is true (is being deceived).
While a dishonest act can have beneficial social
consequences, routine dishonesty erodes the
trust that seems essential to social cooperation.

A whistleblower is an employee or other insider who
informs the public or a government agency of an illegal,
harmful, or unethical activity done by their business or
institution.
- Whistleblowing puts the employee at risk
- Whistleblowing pits responsibilities to third parties at
odds with employees responsibilities to their employer

Richard DeGeorge argues three conditions must be met
before whistleblowing is ethically permissible:
- There must be a real threat of harm that needs to be
addressed
- The whistleblower should first seek to prevent the
harm through channels
- The whistleblower, if possible, should exhaust all
internal procedures for preventing the harm

Insider Trading generally refers to the practice of
buying or selling securities on the basis of
nonpublic information that one has obtained
as an “insider”.

Three arguments are cited in ethical criticism of
insider trading:
- Property rights
- Fiduciary duties
- Unfairness claims

Desjardins5e ppt ch7

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