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Regulation and the Greater Good

Published August 26, 2013 by Mayrbear's Lair

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Innovations in technology and politics have been significant factors for the expansion of government agencies and the administrative laws that govern citizens. Seaquist (2012) suggests these government agencies are also considered the fourth branch of government. Since the 1930s, the federal government has been expanding its regulatory authority on most areas that affect commerce. Congress created these administrative agencies to oversee and manage specific functions. In addition, they are empowered to create agency rules set forth by guidelines provided from the Administrative Procedure Act (APA). Furthermore, these agencies have the force of the law to support them (Seaquist, 2012). For example, Federal agencies consist of two separate branches: (a) independent and (b) executive. These agencies manage regulatory control and are powerful entities. Independent agencies (some of which include the EPA, EEOC, FCC, ICC and FTC) are granted the power to create their own rules, enforce them, conduct investigations and arbitrate disputes. In other words, they have been granted the power to act as legislator, law-enforcement, judge and jury. Executive agencies, on the other hand, serve to assist carrying out the responsibilities of the executive branch of the government. These agencies include the Justice Department’s FBI, the Treasury Department’s US Customs Service, the FDA is part of the Health and Human Services Department, and the FAA is an offshoot of the Transportation Department. These agencies, unlike independent agencies, are under the direction and control of the US President, who is also responsible for appointing and removing staff members. These agencies serve to regulate and control laws that govern society.

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With all these agencies and the government regulations established, how was an event like the credit crisis of 2008 even possible? Blinder (2013) reminds us that as many witnessed the financial crisis unfold, one of the most perplexing issues Americans faced was how very little explanation was offered as to why and how it occurred. During the crisis, President Bush, on his way out of office, was elusive, and although President Obama was more visible, his explanation fell short of what the citizens deserved (Blinder, 2013). For example, the US economy, leading up to the crisis was that of growth and job creation. According to Jarvis (2012) Alan Greenspan, the head of the Federal Reserve governmental agency lowered interest rates which made investors eager to take advantage of (Jarvis, 2013). In other words he created cheap credit and made borrowing money easy which motivated bankers and lenders. The investment bankers in turn used their leverage to control outcomes to make more money by joining banks together with homeowners offering high risk sub-prime loans.

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So the million dollar question is, if these government agencies were established to oversee and regulate laws, how were Wall Street investors and bankers able to create the credit crisis in the first place? And even more important, why was no one held accountable for their conduct or their part in creating the crisis? Soros (2008) contends that the crisis was slow in coming and that authorities could have anticipated it several years in advance when the “dot com” industry of the internet exploded in 2000.  The Federal Government responded by cutting interest rates. This cheap money helped create a housing explosion because of leveraged buyouts and other excesses. The mind set was that because money was practically free, lenders kept lending until there was no one left to lend to (Soros, 2008). What could have prevented this? Many agree there is no one easy answer. Government agencies are there to help prevent situations like this, but when government officials are also being compensated by big business and are favored by Wall Street, they are more inclined to look the other way and go with the flow, until the situation reaches a tipping point. In other words, until those in places of authority are caught in ethical misconduct, these situations will occur because of issues like greed and power. Until serious reforms are implemented from trusted institutions these events will continue to surface. The first order of business in my view, is to identify the agencies and authorities that have a proven record of trust and ethical behavior including spotless track records. Use those as models to build others. Unfortunately, however, it has been difficult to discern who is trustworthy and truly have the citizen’s best interests at heart.

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The US economy has endured financial crises in the past, but the credit crisis was a new beast that spread like wildfire from one market across many others. One thing is certain, that the financial markets and authorities were very slow to recognize that the global economy would be affected. Perhaps there were those that did not care about the consequences because they were too consumed by the wealth and affluence they enjoyed. What this crisis did reveal however, was that greed and excesses were at the root of the credit crisis. The good news is that the value of the American dollar will continue to grow because of the ongoing expansion of raw materials and energy. For example, biofuel legislation is generating a boom in agricultural products. Economic growth and falling interest rates in countries like China that turn negative, are positive signs that is normally associated with economic growth. This gives hope that the winds of change are making progress.

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References:

Blinder, A. (2013). After the music stopped: The financial crisis, the response, and the work ahead. New York, NY: The Penguin Press.

Jarvis, J. (2013). The crisis of credit visualized. Pasadena, CA, USA. Retrieved August 11, 2013, from http://vimeo.com/3261363

Seaquist, G. (2012). Business law for managers. San Diego, CA: Bridgepoint Education, Inc.

Soros, G. (2008). The new paradigm for financial markets: The credit crisis of 2008 and what it means. New York, NY: PublicAffairs.

Regulatory Measures

Published July 12, 2013 by Mayrbear's Lair

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It seems like practically every day a new scandal is spotlighted in the media regarding ethical misconduct. For example, recently celebrity chef Paula Deen quickly lost several corporate endorsement deals because of revelations that she engaged in behavior that reflected views of bigotry and discrimination. Other scandals, like Enron on the other hand, were just as shocking because what appeared as a highly ethical organization was, in fact, quite the opposite. It is not clear whether Deen will survive her scandal, but because of Enron, regulatory measures were implemented to prevent another occurrence of this nature. Ferrell et al. (1998) suggested that because of events like Enron, the federal government intervened to help guide the ethical conduct of organizations and institutionalized ethics as a preventative measure to prevent corporate legal violations (Ferrell, LeClair, & Ferrell, 1998). This research is focused on three significant regulatory measures: (a) The Federal Sentencing Guidelines for Organizations (FSGO), (b) The Sarbanes-Oxley Act of 2002, and (c) the Consumer Financial Protection Bureau (CFPB). This study identifies the events that led to the development of these measures and scrutinizes the impact these directives played on business ethics. In addition, case examples are included to highlight how these mandates affect ethics in business. The results of these findings conclude that in a business arena, leaders who navigate without regulations are conducive to ethical misconduct.

Three Significant Regulatory Measures

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The Federal Sentencing Guidelines for Organizations (FSGO)

When regulatory measures are implemented, they have a great impact on the ethical manner in which organizations behave and operate. Ethical compliance programs are more of a process and a commitment from organizations to practice ethical behavior than they are specific blueprints for the direction of ethical conduct. In this context, regulatory measures serve to help leaders achieve positive outcomes with social awareness and accountability. Ferrell et al. (1998) pointed out that today’s leaders are dealing with complex issues that require effective leadership skills. For example, managers are required to identify, comprehend, and implement the acceptable use of corporate funds; recognize the falsification of important documents and account records and pinpoint controversial techniques sales representatives use for closing deals. These are some of the common challenges managers face in the modern workplace. In addition, competition, political pressure, and different value systems also influence ethical conduct (Ferrell, LeClair, & Ferrell, 1998). Organizational ethics programs are established, therefore, to outline the parameters of accountability and responsibility with respect to acceptable business conduct. For instance, news reports revealed unethical practices in the grocery industry where, in some cases, managers will re-date food products to extend a product’s shelf life. This kind of ethical misconduct is identified as a white collar crime (WCC) and as a result, the government responded by issuing the Federal Sentencing Guidelines (FSG).

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The goal of these mandates was to reward organizations for implementing legal and ethical compliance programs. They were created to encourage corporations to monitor internal control systems by decreeing punishment and restitution should the systems fail. For example, to demonstrate compliance, a company is required to create and document an internal conformity program by demonstrating their ethical culture. In addition, the legal standards are communicated throughout the entire organization to make sure violations do not occur. If and when they do occur, management must provide evidence that a proactive compliance program was implemented. In short, the main objectives of the FSGO are to take aggressive actions to police and self-monitor an organization’s ethical behavior to avoid unethical acts and punish perpetrators that are engaged in WCC and misconduct. The penalties for violating these mandates include the remedy of any harmed caused, are subject to stiff fines, and include any further actions required to reduce future criminal misconduct.

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The Sarbanes – Oxley Act of 2002 (SOX)

When corporations display unethical conduct that affects the public on a grand scale, the government is forced to step in to enforce penalties that will influence social responsibility. For example, the Enron financial disaster was one of the most significant events that occurred to rattle the modern business world. It revealed a level of corruption in the business arena on an unprecedented scale. For example, to many individuals, business ethics are considered different than individual ethics. Because of this perception, Enron staffers that were cognizant of the firm’s off-balance partnerships accepted these practices as part of doing business in a competitive market. Because they were informed these partnerships were legal, employees did not perceive this conduct as an issue of ethics. Bredeson & Prentice (2010) explained that in order to avoid this happening again, the Sarbanes-Oxley Act (SOX) was developed and imposed the most important security mandates since the great stock market crash of 1929, which led Congress to pass the original federal securities laws. SOX consists of provisions that: (a) created a new federal agency, (b) restructured the entire accounting industry, (c) implemented Wall Street practice reforms, (c) created extreme alterations in corporate governance practices nationally and internationally, and (d) attacked insider trading and obstruction of justice (Bredeson & Prentice, 2010). Since then, to support these laws, the Public Company Accounting and Oversight Board (PCAOB) was developed and, together with the SEC, issued additional rules and policies to implement SOX’s many regulations.

In addition to enforcing corporate giants to revamp their governance practices, the PCAOB was also designed to protect whistleblowers. Boatright (2009) suggested that protection to private sector employees who acted as whistleblowers was a significant issue that SOX addressed for the first time. In other words, as a result of the massive fraud events from Enron, WorldComm, and other conglomerates, this reform prevents the retaliation from corporate institutions against any employees that provide law enforcement evidence which relates to the exposure of trade commission offenses (Boatright, 2009). However, the immediate purpose for SOX was to restore stakeholder confidence in the securities market once again. Experts contend the only significant complaint leaders have about SOX is that post-Enron, SEC accounting rules require market to market estimations. This practice forces financial institutions to revalue assets in situations where the value is not easily ascertainable due to pricing fluctuations. All in all, most leaders agree that despite the additional costs and extra energy required to ensure big corporations adhere to these provisions, SOX effectively enforces best practice policies in both the corporate and accounting worlds.

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The Consumer Financial Protection Bureau (CFPB)

The mortgage and loan crisis of 2008, where lenders failed to educate brokers about the disastrous consequences of falsifying financial data to help people secure loans, contributed to organizational misconduct in the financial services industry. As a result, the government stepped in once again to take more regulatory measures by outlining the legal framework to help guide ethical practices in the financial service industry. Carpenter (2012) contended that as a result of that crisis, Congress was forced to pass significant reforms through a new regulatory system called the Dodd-Frank Wall Street Reform and Consumer Protection Act. This act entitled stakeholders financial protection and established the Financial Protection Act of 2010 (CFP Act). The CFP Act in turn served to help establish the Consumer Financial Protection Bureau (CFPB or Bureau) within the Federal Reserve System  (Carpenter, 2012). The Bureau was designed to oversee and provide the rulemaking, enforcement, and supervisory powers over a wide range of consumer financial products and services as well as the institutions that sell them.

The laws also enable the Bureau principal rulemaking authority over many federal consumer protection laws that were enacted prior to the Dodd-Frank Act. Among the numerous consumer protection laws developed were the Truth in Lending Act and the Real Estate Settlement Procedures Act. These directives were designed to help stakeholders comprehend the complicated lending transactions they engage in with more transparency and accountability. In short, the Bureau serves as a system for bank supervision to ensure corporations are in compliance with federal consumer financial protection laws and make sure the markets work for families rather than bankrupt them. In 2011, the Bureau reported their operations included the assessment of each institution’s internal ability to detect, prevent, and remedy violations that may harm consumers by examining the corporation’s internal procedures (CFPB Public Affairs, 2011). These mandates and regulatory measures serve to insure that corporate moguls follow ethical governance practices to avoid further financial disasters from occurring in financial service industries.

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Conclusion

The law is ubiquitous. It enables, prohibits, and regulates practically every activity of a human being directly or indirectly in some way. Mann & Roberts (2013) purported that in an effort to resolve moral issues, experts have struggled for years to fine tune various ethical behavioral systems. Laws were created to help define relations between individuals and corporations. These relations have an effect on the economic and social order and are the products of civilization’s governance practices. In this respect, the law is designed to reflect the social, political, economic, religious, and moral principles of a society (Mann & Roberts, 2013). In other words, laws are used as tools for social control. Their function is to regulate and guide conduct in human relations.

When corporate leaders misuse their power, government agencies step in to create mandates that outline acceptable and ethical conduct which protects people and keeps the public safe. Ferrell et al. (2013) contended that these regulatory measures provide motivation for organizations to develop core practices throughout their organizations to ensure ethical and legal compliance and are designed to move emphasis away from an individual’s moral obligations. Instead, focus is put on the development of structurally sound organizational core practices and structural integrity for both financial performance and nonfinancial performance purposes. These methodologies include access to communications, compensation, social responsibility, corporate culture, leadership, risk, stakeholder perceptions, and the more subjective aspects of earnings, corporate governance, technology, and other significant areas (Ferrell, Fraedrich, & Ferrell, 2013). The findings of this research deduce that regulatory measures implemented by the federal government have played a significant role in the development of ethical behavior in organizations because time and time again, history proves that many influential leaders who are motivated to achieve high levels of success, and operate without regulations, are unable to avoid the temptation to engage in ethical misconduct when the stakes, profits – especially when competition in the marketplace is extraordinarily high.

References

Boatright, J. (2009). Ethics and the Conduct of Business (Sixth ed.). Upper Saddle River, NJ: Pearson Education, Inc.

Bredeson, D., & Prentice, R. (2010). Student guide to the Sarbanes-Oxley Act. Mason, OH, USA: Cengage Learning.

Carpenter, D. (2012). The consumer financial protection bureau. Washington, DC, USA: CreateSpace Independent Publishing Platform.

CFPB Public Affairs. (2011, July 12). Consumer financial protection bureau outlines bank supervision approach. Treasury Department Documents and Publications. Latham, US: Federal Information and News Dispatch, Inc. Retrieved June 26, 2013, from http://search.proquest.com/docview/876103177?accountid=32521

Ferrell, Fraedrich, & Ferrell. (2013). Business ethics and social responsibility (9th ed.). Mason, OH: Cengage Learning.

Ferrell, O., LeClair, D., & Ferrell, L. (1998, March). The federal sentencing guidelines for organizations: A framework for ethical compliance. Journal of Business Ethics. Dordrecht, Netherlands: Springer Science & Business Media. Retrieved June 26, 2013, from http://search.proquest.com/docview/198195145?accountid=32521

Mann, R., & Roberts, B. (2013). Business law and the regulatoin of business. Mason, OH, USA: Cengage.

Identifying Ethical and Legal Issues

Published July 8, 2013 by Mayrbear's Lair

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Resolving ethical business challenges is not a topic many leaders are anxious to address. However, to stay successful in a competitive business market, leaders are required to make decisions as best as they can. One of the most sensitive issues leaders deal with are trade secrets and the complex set of problems they present with respect to the rights and obligations of personnel and their competitors. Boatright (2009) defined trade secrets as information that is used in the conduct of the business that outsiders do not have access to.  It consists of formulas, patterns, devices or a combination of information that is used in a business operation to give a company the competitive edge in the marketplace (Boatright, 2009).  An example of trade secrets may include ingredients to recipes like Mrs. Field’s Cookies, chemical compositions of products, the schematics and design of machines, details of the manufacturing of products like iPhones, the methods of quality control, results of marketing surveys, financial projections and lists of customer and suppliers.

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Ethical misconduct is common in the brokerage and financial industries because of the large amounts of money are exchanged. Wall Wall Street after all pays attention to corporations that yield high returns. Managers want to impress their family and friends and work hard to achieve high levels of success and affluence. Most are highly educated and well trained. They develop work ethic and patterns from colleagues and peers who achieved higher levels of success. Unfortunately, they do not always engage in ethical tactics to achieve their goals. But, because that is how everyone else conducts business affairs, most new employees follow suit. Unethical conduct is observed by new recruits. They learn the ropes from other high achieving brokers that purport this is how it is done in a competitive market.  New hires gather and use information to achieve higher levels profit and in doing so, cross many ethical boundaries. In this atmosphere, it is easier to go with the flow rather than stand up and go against it which could cause an employee to lose their positions and high status. In a relentless pursuit to achieve respect and success in a firm, in the community, and with their family, who look up to these successful executives, many top managers make unethical choices like using insider information to help favored clients and themselves for reasons of personal gain, because that is what the organizational culture established. The behavior was learned and expected from the peer pressure of succeeding like their colleagues.

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The longer people engage in unethical behavior the sloppier they get and begin to make mistakes they are unable to disguise or cover up. Ferrel et al. (2013) cite one case study of an executive that was engaged in unethical behavior. The case cited an executive that was copied on an email which contained inappropriate language that violated organizational policy. When the rude emails began to surface, rather than address the bad behavior, the executive chose to ignore them and forward them. By this time, in the executive’s career, the leader may have been so accustomed to an imbalance of ethics she no longer had a grip on what was considered ethical conduct. By forwarding the emails that contained rude content, she was considered a participant. Because this behavior left a paper trail that could be traced, it required disciplinary action from all those who engaged. This eventually led to her termination because of further investigations of her other business affairs. She was spotlighted. Evidence uncovered other unethical behavior and questionable business practices she engaged in that she learned from fellow co-workers. In addition, the investigation revealed she used insider information to favor certain customers to yield higher profits and returns. When people are engaged in unethical practices and make one mistake, that mistake shines a light in their direction and usually leads to further probing. That is how ENRON and other corporate scandals were revealed. Once a few unethical practices become evident, investigators intervene and discover more evidence of additional ethical misconduct that can ultimately bring the entire conglomerate down. Ferrel et al. remind us that people are likely to make ethical decisions when they discover the ethical component of an issue. They suggested that the initial stage of understanding business ethics is to develop ethical issue awareness (Ferrell, Fraedrich, & Ferrell, 2013).  Any type of misrepresentation, manipulation, or an indication of the absence of transparency in the decision making process has the potential to bring harm to others. When people covertly engage in fraudulent, illegal, or deceitful behavior it suggests a strategic plan that is meant to represent only a fragment of the truth. That kind of behavior lacks honesty and truth. Without honesty and truth, there is no trust and most people will not support businesses or leaders that are not trustworthy.

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References:

Boatright, J. (2009). Ethics and the Conduct of Business (Sixth ed.). Upper Saddle River, NJ: Pearson Education, Inc.

Ferrell, Fraedrich, & Ferrell. (2013). Business ethics and social responsibility (9th ed.). Mason, OH: Cengage Learning.

A Look at the Ethics and Organizational Culture of ENRON

Published June 10, 2013 by Mayrbear's Lair

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Due to a number of highly publicized scandals including AIG, Countrywide Financial, Fannie Mae, and Enron, the ability to identify and manage complex business ethics issues has become an important priority. According to Shaw (2008) Enron was the organization that stood out among others because they were showing enormous rates of profit. As a result they quickly became favored by Wall Street and subsequently grew to become the seventh largest company in the US, was highly respected, and was quickly placed on a financial pedestal. Enron was looked at as innovative, forceful and most important, highly profitable. However, the truth was that while CEO Kenneth Lay was recommending stock to his employees, he and other executives were secretly cashing in their own shares and jumping ship. According to Shaw, Enron’s market value was $28 billion just two months prior to their filing bankruptcy. This is the reason shareholders and investors were completely caught by surprise. Unfortunately, the corruption of Enron execs affected more than $1 billion in the retirement accounts of their employees (Shaw, 2008). The leaders created a culture based on personal gain and profit, with a complex and complicated accounting system. In addition, employees were meshing into the corrupted culture because they too were receiving high levels of rewards. The organization established an atmosphere based on financial prowess and illusion. Workers and shareholders were unable and too comfortable with their fortunes to make ethical choices and stand up against the majority who ruled. This is one way corruption thrives. In fact, there are some organizational leaders that initiate new members into their elite boys clubs by taking them out to brothels encouraging them to engage in elicit behavior. This is a well known tactic corrupt leaders used to blackmail employees, should they later have inclinations to become whistler blowers.

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A poor reputation can damage an organization’s image and destroy the public’s trust. Ferrel and Fraedrich (2012) contend that employer decisions affect more than just those of their employees. In fact, their decisions most likely have impact on shareholders, customers, suppliers, and society as well (Ferrell & Fraedrich, 2012). Making good ethical decisions should be consistent throughout an organization on every level. Evidence revealed that Enron executives, through their operations, informally communicated and designed a culture whose objective was to achieve personal gain and organizational success at whatever cost, regardless of regulations and policies. Additionally, the climate consisted of executives who resorted to public use of vulgarity that created an atmosphere to encourage more of the same behavior from staff members. One reason for this is that some employees look up to their superiors and strive to become like them. Others just want to fit in and partake of the spoils. As a result, they tend to model and absorb similar methods as a justifiable means to an end. Because of Enron’s high level of success, a complicated accounting system to create misdirection in their underhanded practices, and a legal team to support those goals, Enron execs believed their organization was too big to fail.

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To prevent this from happening, Enron execs should have created a culture that was ethical and responsible from the onset. Instead, they established an organization of people that operated in a corrupted fashion and disguised their unethical behavior under the guise of a very ethical public persona. In addition, Enron’s CEO should have enlisted an auditing firm that had a track record for ethical practices. Shaw’s (2008) research disclosed that Enron’s auditing firm (spearheaded by Arthur Andersen), failed to make Enron’s public records reflect their purported financial reality. Instead, they were focused on their auditing and consulting fees and neglected their fiduciary responsibilities. Also, Enron’s CEO should have made sure all documents were turned in to authorities. Instead, one of the partners at the auditing firm was caught shredding incriminating records. Furthermore, Enron’s downfall exposed conflicting interests in Wall Street Analysts who were highly compensated for supporting their investment banking deals. Enron’s CEO should have enlisted Wall Street connections that were engaged in ethical practices. Finally, large banks like Citibank who did business with Enron, also participated in corrupt business operations in their manufacturing fraudulent financial statements (Shaw, 2008). Enron’s leaders should have identified banks that  operated ethically. In short, Enron was a well-oiled machine of corruption, reminiscent of organizations run by the Don Corleone family from Mario Puzo’s famous books. Enron had many influential people and corporations “in their pocket” that were also corrupt. This was the strategy they employed to engage in their unethical practices. Officials and staff members looked the other way because of the massive amounts of profits they were receiving. In conclusion, the Enron story is a classic example of how absolute power tends to breed absolute corruption.

References:

Ferrell, O., & Fraedrich, J. (2012). Business ethics: Ethical decision making (9th ed.). Mason, OH: South-Western College Publishing.

Shaw, W. (2008). Business ethics. Belmont, CA: Thomas Higher Education.