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Current Issues in Business Ethics – 2019

Current Issues in Business Ethics – 2019. Boz Bostrom Associate Professor of Accounting/Finance College of Saint Benedict / Saint John’s University bbostrom@csbsju.edu (612) 414-9629 February 14, 2019. 1. Learning Objectives. Learn about the ethical attitudes of others

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Current Issues in Business Ethics – 2019

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  1. Current Issues in Business Ethics – 2019 Boz Bostrom Associate Professor of Accounting/Finance College of Saint Benedict / Saint John’s University bbostrom@csbsju.edu (612) 414-9629 February 14, 2019 1

  2. Learning Objectives • Learn about the ethical attitudes of others • Understand current ethical violations and learn how to avoid them • Learn about examples and pitfalls of unethical leadership • Learn about examples and benefits of ethical leadership

  3. Ethics and the law

  4. Introduction to Ethics • What are ethics? • Moral principles • Rules of conduct followed by an individual or group

  5. Why be ethical? • Compliance with rules, regulations, codes • Stakeholder confidence, trust and loyalty • Social acceptance / respect of peers • Personal pride

  6. United Airlines Debacle • Flight booked to capacity • Additional crew members “needed” to fly • United asked for volunteers / $800 compensation • No volunteers – Dept of Transportation guidelines allow passengers to be denied entry • But…passenger was already on plane • https://www.youtube.com/watch?v=VrDWY6C1178

  7. United Airlines Debacle • Were United’s actions legal? Still unclear…but possibly. • Were United’s actions ethical? • Your thoughts? • Public reaction / impact on United’s value • What alternatives did they have? • Pro’s/con’s

  8. Ethical Attitudes

  9. Gallup Poll – rate honesty and ethical standards “high” or “very high” • Accountants • Auto Mechanics • Business executives • Judges • Lawyers • Medical doctors • Members of congress • Military officers • Newspaper reporters • Nurses • Police officers December 2017 – 1,000+ adults in the US (accountants % from Dec 2015) 9

  10. Gallup Poll – rate honesty and ethical standards “high” or “very high” • 82% • 71% • 65% • 56% • 43% • 39% • 32% • 25% • 18% • 16% • 11% December 2017 – 1,000+ adults in the US (accountants % from Dec 2015) 10

  11. Gallup Poll – rate Accountants’ honesty and ethical standards high or very high 11

  12. Current Ethical Violations

  13. Ethical decision making model • Identify the ethical issue(s) involved • Identify the two “clear” options • Consider how stakeholders would be affected by these two clear options • Use moral imagination to come up with “hybrid” options – usually the best result • Consider your ‘blind spots’ / Discuss with independent parties • Finalize and communicate decision • Change decision if needed 13

  14. Case Study • One of your friends knows you are smart when it comes to finances and has asked for your advice in structuring their investment into a startup company • The startup company refuses to produce financial statements, but has a number of high profile and seemingly trustworthy board members • You have heard rumors that the startup company’s product is not performing as well as advertised • How do you advise your friend?

  15. Theranos / Elizabeth Holmes

  16. Timeline • Founded in 2003 by Holmes, a Stanford dropout • Claimed it had a product which could run dozens of blood tests from a finger prick • Would save dollars and get results to patients more quickly • Over $700M raised from an investors - $9B valuation • Major partnerships with Walgreen’s and Safeway

  17. Board of Directors • Channing Robertson, a chemical-engineering professor at Stanford • George Shultz (former Secretary of State) • William Perry (former Secretary of Defense) • Henry Kissinger (former Secretary of State) • Sam Nunn (former U.S. Senator) • Bill Frist (former U.S. Senator and heart-transplant surgeon) • Gary Roughead (Admiral, USN, retired) • James Mattis (General, USMC, later Trump’s Secretary of Defense) • Richard Kovacevich (former Wells Fargo Chairman and CEO) • Riley Bechtel (chairman of the board and former CEO at Bechtel Group)

  18. Problems • Many people within the company and at customers/investors raised red flags that the products did not work as advertised • Fired • Nondisclosure agreements • Threatened with lawsuits • Suicide • CEO/founder in a secret romantic relationship with company’s President • Began to unravel with October 2015 WSJ article • Company’s products not accurate • Company used competitors’ products

  19. Charges • SEC report in March 2018 • “Massive fraud” • Company claimed it had $100M in revenues. Actually was $100,000 • Holmes settled - $500k fine, forfeiture of (worthless) shares, barred from leadership positions with a public company for 10 years • June 2018 - Charged with wire fraud and conspiracy to commit wire fraud • “Investors and doctors and patients were defrauded.” • “Defendants were aware of the unreliability and inaccuracy of their products, but concealed that information” • Up to 20 years in prison

  20. Case Study • You work at the manager level for your organization • You receive an email from a senior leader asking you to pull together an analysis • In scanning the email chain, you see some confidential financial information unrelated to the task you have been asked to complete • You realize the senior leader probably didn’t mean to send you that confidential information • What do you do?

  21. Lifetime Fitness Insider Trading Scandal

  22. Timeline • Shane Fleming • VP of Sales at Lifetime Fitness • Feb 23, 2015 – In-house lawyer tells Fleming that LTM is being acquired. Fleming passes info along to a friend and business partner, Bret Beshey • Agreed that Beshey would trade (or tell others to do so) and share profits with Fleming

  23. Brett’s phone call to brokerage firm “If you are trading, and I’ve heard of, uh, companies that are trading and eventually they sometimes are bought and they go private and the company will buyout all of the existing stock that is outstanding, you know. So how does that work? Like, say for example if I had, uh, if I had just bought options on a stock, if I bought, uh, options on a stock, and say I bought the options, like say I bought March 25s on it. . . . If I bought calls, for the March 25 and say that went up to, say the company, say the stock was trading at like 20, uh, say it was trading at 24 and my options are at 25, and say the company gets bought for 30, then do they cover the outstanding options?”

  24. Timeline • Feb 24 – March 5 – Information passed to 7 more individuals. About 2,300 call options purchased (along with a small amount of shares) • Stock price around $58 per share, options mainly purchased at $65/share • Almost all would expire in less than one month • March 5 (after close of trading) – Wall Street journal reports LTM will be purchased. • Share price jumps to as high as $69 per share. Most options sold • March 16 – LTM announced deal. Stock jumps to $71 per share • Final options sold • June 10 – LTM sold / de-listed

  25. Was it worth it? • About $900,000 of total gains • Fleming received $10,000 • Beshey netted $15,000 • The biggest profiteer was Eric Weller (over $500,000) who didn’t give his “up-line” any cash, but instead…

  26. Now what? • Shane - Pled guilty to a count to commit securities fraud • Up to 5 years in prison / $250,000 fine • Future employment of all involved • Ages 28 to 54 • Family / personal shame and guilt

  27. Linklaters • Linklaters is a global law firm, with nearly 3,000 lawyers and partners working in 30 offices in 20 countries • Menglu Wang graduated from Harvard Law and began working for Linklaters in 2015 • Fei Yen • 31 year old MIT research scientist

  28. Linklaters • Sibanye Gold and Steinhoff International Holdings were clients of Linklaters and acquired publicly traded companies, including Stillwater Mining • Wang worked on these transactions • Yen obtained information about the transactions, setup a brokerage account under mother’s name, and traded • About $120,000 of profits

  29. Linklaters • SEC noticed unusual trades and investigated Yen • Found various google searches: • “how sec detect unusual trade” • “insider trading in an international account” • Article - “Want to Commit Insider Trading? Here's How Not to Do it”

  30. Linklaters • July 2017 – Yen arrested • March 2018 – Yan sentenced to 15 months in prison and must forfeit the $120,000 • Wang – suspended, then fired from Linklaters • Her lawyer: “There were a number of innocent bystanders. She is one of them. She is not a target. It’s an unfortunate side effect that she lost her job.” • How were Yen and Wang affiliated?

  31. Unethical Leadership

  32. Case Study • You are in upper (but not top) management at your organization and you hope to continue to advance up the chain • Your top manager, a superstar performer, has become increasingly “edgy” • Rough language • Jokes about employees of other genders, ethnicities, etc. • Comments of a sexual nature • You have dropped some subtle hints that the manager should tone it down • Their reply, “Maybe I should go somewhere I am more welcome.” • This manager’s strong performance has greatly helped your own performance metrics and has you positioned for your next promotion • What do you do?

  33. Uber – Initial Success • 2009 - Founded • 2016 - $4 billion revenue, $69 billion valuation

  34. The Infamous “Miami E-mail” From: Travis Kalanick Date: Friday, October 25, 2013 Subject: 九 Info: URGENT, URGENT - READ THIS NOW OR ELSE!!!!! To: Uber Team Hey guys, I wanted to get some important information out there. I've put together a Q&A that we can use when other folks ask what we're doing here, and have some DOs and DON'Ts for our time here in Miami. You better read this or I'll kick you’re ass.

  35. The Infamous “Miami E-mail” • I have gotten a list of concerns from the legal department. I have translated these concerns into a clear set of common sense guidelines. I've also added a few items of my own.

  36. The Infamous “Miami E-mail”DON’T’s 1) No lives should begin or end at 九 2) We do not have a budget to bail anyone out of jail. Don't be that guy. #CLM 3) Do not throw large kegs off of tall buildings. Please talk to Ryan McKillen and Amos Barreto for specific insights on this topic. 4) TBA 5) Drugs and narcotics will not be tolerated unless you have the appropriate medicinal licensing. 6) There will be a $200 puke charge for any public displays on the Shore Club premises. Shore Club will be required to send pictures as proof.

  37. The Infamous “Miami E-mail”DON’T’s 7) DO NOT TALK TO PRESS. Send all press inquiries to Andrew - anoyes@uber.com Additionally, stay vigilant about making sure people don't infiltrate our event. If and when you find yourself talking to a non-Uber (look for the wristband), keep confidential stuff confidential... no rev figures, driver figures, trip figures... don't talk about internal process, and don't talk about initiatives that have not already launched.

  38. The Infamous “Miami E-mail”DON’T’s 4) Do not have sex with another employee UNLESS a) you have asked that person for that privilege and they have responded with an emphatic "YES! I will have sex with you" AND b) the two (or more) of you do not work in the same chain of command. Yes, that means that Travis will be celibate on this trip. #CEOLife #FML

  39. Uber – Recent Concerns • Feb 19, 2017 – Blogpost discussing sexual harassment • Not taken seriously when reported to management • Feb 28, 2017 – Dashcam video of CEO arguing with driver • June 6, 2017 – Uber fires 20 employs when investigation reveals harassment • June 8, 2017 – Miami E-mail surfaces (sent October 2013) • June 20, 2017 – CEO resigns • Investors cut valuations by 15%

  40. Ethical Leadership

  41. Indra NooyiChair and CEO of PepsiCo • Born and raised in India • Undergrad in India / Master’s from Yale in 1980 • Joined PepsiCo in 1994 as a Senior VP of Strategic Planning • Became CFO, then President, then Chair and CEO in 2006 • How many of the Fortune 500 CEO’s are women?

  42. Benefits of ethical leadership

  43. Quick Questions • How ethical is senior leadership at your employer? • How ethical is your direct supervisor? • Do you love your job? • Do you plan to stay at your company for a long time? • Do you work hard for your company?

  44. Ethical Leadership in the Accounting Profession – July 2018 Survey

  45. Survey Results - Details

  46. Survey – Other Findings • Only 26% strongly agreed that they loved their job, but that figure jumps to 43% for those who strongly agreed that senior leadership and director supervisors were very ethical • Directly asked if the ethical environment impacts: • Love for job – 4.4 • Plans to stay with company – 4.4 • Work ethic – 4.1 (women 4.3, men 4.0) • I have someone I can talk to about ethical issues – 4.6 • But staff only 4.1

  47. Survey – Other Findings • Ethics impacts recommendation for: • Promotions – 4.7 • Suppliers – 4.3 • Customers – 4.3 • How ethical are you compared to the average CPA? • 56% said at least somewhat more ethical • 58% men, 52% women • 51% tax, 76% audit • 78% of those under 30 • Only 2% said at least somewhat less ethical

  48. What do the following 18 companies have in common?

  49. 11 or 12 of the past 12 years 49

  50. Investment returns • 10 year compounded annual total growth of S&P 500 Index? • Median 10 year compounded annual growth of “ethical” companies? 50

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