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Finance, Accounting & Investing
&
Business’ New Moral Imperative
Mortgages, Risk & Financial Institutions
• In a free-market, efficient producers serve customers
with good prices outperform competitors & succeed.
- Through competition, the general public reaps the benefits of
lower prices and better goods & services.
- The role of government is to keep competition fair.
• Traditional mortgage model was slowly replaced as
lenders no longer sought profit from long-term loans.
- Instead, banks reaped profits from origination fees or from
commissions on making loans.
- Banks then sold mortgages to others who bundled, divided
them, & sold them to still other investors.
• The profit was in commissions: no value was added, but
others made $ by reselling the paper in various ways.
Homebuyers
• Those who lied about their income are guilty of lying
or falsification of some sort.
• With booming housing market, buying more house
than you could afford did not seem reckless.
Lenders1/2
• Some people blame the lenders (banks & brokers),
who received fees for writing mortgages.
– Critics charge them & others with greed & acting unethically.
• Had the lenders simply lent money to home buyers &
assumed the risk of failure to keep up payments, the
mortgage crisis likely would not have arisen.
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Lenders2/2
• Commercial banks sold mortgages (often subprime)
– Investment banks bought, bundled the loans, & issued
securities based on the collateral they provided.
– The bundles were divided into various sorts of securities &
sold to investors of all kinds.
• Investment banks developed new financial
instruments that became so complex that no one knew
what they represented & no one knew what they were
worth.
– These banks became interested mainly in the commissions
from selling financial instruments they invented, & gave little
thought to the value of the underlying mortgages.
• No one was sure what MBSs were worth or whether
they could rely on CDSs, and the lack of knowledge
Insurers
• AIG structured instruments in ways that no one knew
what was subprime &, what the collateral or risk was,
& what the risk was.
- AIG was morally deficient in providing essentially insurance when
it did not have the assets to make good on the instruments sold.
Raters
• Bond-rating agencies are Standard & Poors, Moodys, Fitch.
• Ratings range from AAA to C.
– Higher ratings = more secure principle & interest payments.
• All 3 agencies gave AIGs paper AAA ratings.
• The rating agencies certainly did not perform their
function well until it was too late.
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Government Policy
• Lack of regulation by governments, both in the
U.S. worldwide, contributed to the financial crisis.
• The government bears responsibility for its failure
to keep the market fair.
• The government failed to sufficiently regulate and
oversee the financial giants.
• It allowed AIG to issue what amounted to insurance without
making sure that it had assets to cover its commitments.
• Credit default swaps were over-the-counter two-party
contracts, and so not subject to regulation.
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Moral Lessons from the Mortgage Crisis
• Risk should be borne by those likely to benefit.
– Those who assume risk in expectation of returns should
bear negative as well as positive consequences of their
actions.
• To increase transparency & make transactions clear to
all those directly affected by the it is a matter of
justice.
– Those who buy securities should know what they are buying
and the level of risk involved.
• Since moral injunctions aren’t effective in face of big
incentives to act unethically or recklessly, we need
market-generated controls &/or governmental controls.
• When government steps in to remedy situations
Corp. Takeovers & Restructuring
• The trend of corp. mergers & takeovers developed in
the 80s has been called the restructuring of business.
• The trend continued into the 1990s, when it was joined
with the downsizing of many firms.
• The many takeovers of one firm by another often
brought significant changes in the firms taken over
• Takeover threats frequently forced changes in many
firms. other companies.
• Topics pertinent to an evaluation of restructuring are:
corporate takeovers, LBOs, and downsizing.
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Corporate Takeovers
• Ethical debate about corp. takeovers often focuses on
the utility & consequences of such takeovers.
• Another set of debates focuses not on efficiency or
consequences, but freedom versus fairness or justice.
– The benefit of this is it allows us to make well-founded
ethical decisions now, rather than waiting for anticipated
or predicted consequences, like junk bond failures or the
onset of a recession.
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Leveraged Buyouts
• Taking private a publicly owned firm by buying its stock.
– The $ comes from what have become known as junk bonds.
– These are bonds issued against the assets of the company.
– Called junk bonds since they are below investment grade.
• From an ethical point of view, management LBOs
raise a serious issue of possible conflict of interest.
• Governments role here is not clear & is being debated.
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Downsizing
• As the 90s began, restructuring via downsizing joined
restructuring by mergers/takeovers rampant in the 80s.
• Downsizing involved making do with fewer workers,
both at the managerial and lower levels.
– Workers may not have a right to lifelong employment with a
firm, but they have a right to be treated with respect, & firms
have the obligation to do as little harm as possible in firing
folks who have done good work & would normally be kept on.
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Ethics & Restructuring1/2
• Restructuring is defended in terms of efficiency, but it
is not yet clear whether this has been the result.
– Critics claim that no new products have resulted, along with
no increased productivity and no new jobs.
– The process has also tended to undermine corporate loyalty
& increase the level of fear about job security.
• Institutional stockholders have fed takeovers.
– Fund managers are obliged to vote for a takeover that pays
a premium, even if not in the best long-term corp. interest.
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Ethics & Restructuring2/2
• Both the utilitarian & deontological approaches can be
used to evaluate restructuring financial practices.
• Central to the market is competition, and central to
acceptable competition is fairness.
• In addition to fairness, the market should operate to
the benefit of society in general.
• If the root of the problems in the finance industry has
been correctly identified as greed,
– The solution is not to try to change people so they are not
greedy or motivate them to control greed, but to establish
structures to eliminate temptations to which many succumb.
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Debate
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Accounting
• Accounting is the process by which any business
keeps track of its financial activities by recording its
credits and debits and balancing its accounts.
• Management is ultimately responsible for the financial
statements, & choosing among the various accounting
methods for reporting assets, liabilities & income.
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Ethical Issues for Accountants
• Accountants face a great many pressures from clients
who want them to do what is illegal:
- Underreporting taxable / over-reporting financial income.
- Falsifying accounts, and engaging in outright fraud.
• Accountants are governed by FOUR (not 3) codes:
-
Generally Accepted Accounting Principles (GAAP),
Generally Accepted Auditing Standards (GAAS), and
Code of Professional Ethics (COPE).
THE LAW!
• For many practicing accountants, obeying the rules are
the guide to ethical behavior (for the law, its insufficient).
• For some critics, it is not the individual accountants
honesty that is the problem.
- They attack the rules & the system itself as ethically deficient.
The Accounting Rules
• One major issue is the apparent conflict of interest that
is built into the accounting system.
• A 2nd complaint stems from the idea that accounting
firms simply certify that the accounts are correctly
presented & are in accord with the generally accepted
accounting & auditing standards. YES THEY VERIFY.
• As a result of widespread scandals, the general public
lost confidence it had in accounting firms & corp.s in
general, though only a small % engaged in wrongs.
• The Sarbanes-Oxley Act was an attempt to help
restore public confidence and trust.
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Ethical Investing1/2
• Moral responsibility involves a causal connection:
– to an action or result that is morally evaluated,
– and moral responsibility is properly ascribed and assumed
only if the action in question was done knowingly and freely,
– and if there were no excusing conditions.
• Shareholders cannot be held morally responsible for
what a firm does since they are distant from control:
– This does not relieve shareholders of all moral responsibility.
– No one is ethically allowed to invest in an unethical corp.
• To evaluate a firms ethical practice one must consider
– The company’s policies. / The company’s record.
– Whether a firm is to be held responsible for anything that its
employees do, or whether it is to be held unethical only if the
action done by a corp. official is part of company policy.
Ethical Investing2/2
• Critiques include:
– Demands are too stringent & so are impossible to follow.
– If some individuals & institutional investors do not invest in
unethical firms, other less scrupulous investors will.
– Ethical investing demands too much because it looks only at
specific policies and fails to consider the broader picture.
• Many claim there is no evidence that ethical investing
applies pressure on firms to change policies. Yet:
1. Even if firms do not change, that is no reason for others to
engage in unethical practices by providing them with funding.
2. Strong protests against firms operating in S. Africa during
apartheid had some effect since many of them withdrew.
3. Ethical investing should be seen as one part of an overall
strategy to apply pressure on companies to operate ethically.
Case Analysis
CASE ANALYSIS
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The Changing Business Mandate
• The original mandate to business has changed, as
times and conditions have changed.
• The new moral mandate to business can be found not
only in efforts like consumerism, environmentalism, &
conservationism, but in outcries over bribery, windfall
profits, & excessive exec. compensation, & new laws.
• What is clear in the new mandate is that business
must now consider the views of the worker, consumer,
& the general public as well as the shareholder in
making decisions. The good of all must be considered.
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Quality of Work Life
• Quality of work life is a reflection of the affluence &
level of tech. development present in a society, which
has become concerned with the general quality of life.
• Quality of Work Life involves the following:
–
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Conditions of Labor
The Organization of Work
Worker Relations
Worker Attitude
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The Role of Government
• From a moral point of view, no government has the
right to demand, through law, that which is immoral.
– A prime requisite for a moral government is that it act justly.
• A tendency for law to move in the direction of greater
free enterprise is no more or less moral than the
tendency for it to move in the direction of socialism.
• Issues that deserve careful scrutiny are:
– Complaints about inefficient government regulation;
– About regulators being partial to the industries they regulate;
– About people moving back and forth between the regulating
agencies and the industries regulated, and;
– About overregulation.
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Corp. Democracy &
the New Entrepreneur
• One reaction to the death of corp. paternalism has
been the rise of individual entrepreneurs.
• Once lifelong employment could no longer be taken
for granted & once corp. loyalty had eroded workers
came to see they were responsible for their own
futures.
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Building a Good Society1/2
• A society without justice, at least without justice in its
basic institutions, cannot be a good society.
• A good society must also have a sufficient amount of
wealth, distributed in such a way that all its people
have their basic needs satisfied & enough in addition
for them to enjoy some of the goods of life.
– Beyond this, there is no single morally preferable mix of
other goods in a good society.
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Building a Good Society2/2
• There are three stages in the process of
overcoming the Myth of Amoral Business.
1. To see it as a myth.
2. Raise the moral consciousness of those
engaged in any aspect of business (workers,
investors, management, consumers) or those
affected by what happens in business.
3. Change the structures that have been built
under the guise of being value neutral.
• Processes of business are all value laden.
• The need for moral heroes in business is an
indication of immoral structures in business.
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