Managing Business Ethics, Chapters 1 – 5, 7, 8,
11: 5th Edition
Chapter 1:
Financial disaster 2008:
Direct causes
Shadow financial market Subprime mortgages
- Credit default swaps - “Liar” Loans
- Securitized mortgages (“slice & - No $ down, no income
dice”) verification
- Derivatives - Consumers bought more than
- Hedge funds they could afford
Regulatory climate Incentives
- Glass-Steagall Act repealed - Big rewards for short-term
- Debt regulations for banks thinking for companies and
eased individuals
- “Markets can self- regulate”
- Revolving door between
regulators and companies
- “Government is the problem”
Contributing factors
“Herd mentality” Investment banks
- Wall street - Go public
- Consumers - No “skin” in the game
- “Real estate is safe”
Lots of cheap $$ Rating agencies
- Fed (low interest rates) - Conflicts of interest
- Demand from China and Middle - Didn’t understand what they
East were rating
“Innovation”
- Math whiz kids create complex
products
- No one really understood what
these products were
Bottom-line
- Arrogance - Greed - Total recklessness
, The players:
Went public and became shareholder owned; paid fees by
Rating companies they were supposed to rate; took the investment
Agencies banks’ advice on how to rate securitized mortgages (AAA ratings
while many were complete junk)
Much of their compensation is driven by stock price – this
CEOs focused them on the short term; Also many did not understand
the sophisticated financial products their firms peddled
Financial
Paid huge salaries and bonuses for short-term results
Professionals
Mortgage Relaxed lending standards and created sophisticated products
Originators consumers did not understand
“Asleep at the switch” -- also looking for their next jobs (high-
Regulators
paying) in the financial industry (which they are regulating)
Lobbied and “paid” by the financial industry to relax regulations
Legislators
– “the markets can self-regulate”
Investors Punished companies that did not deliver huge returns
Bought more house than they could afford. Home values
Home
plummet and mortgages are “under water” – home values sink
Owners
and are worth less than their mortgages
Financial disaster results:
- Business failures or contractions
- Government bailouts
- Unemployment
- Consumer distress: foreclosures and bankruptcies
- Tattered reputations (corporations, industries, countries)
- Plummeting trust in government and institutions
Moving beyond cynicism:
- Edelman Trust Barometer (2009):
More than half of respondents say they trust business less than
they did a year ago
Worse in the U.S.
No decline in BRIC countries (Brazil, Russia, India, China)
Business case for trust:
91% of consumers purchase products from companies they
trust
77% of consumers refuse to purchase products from companies
they don’t trust
Business ethics defined: The principles, norms, and standards of conduct
governing an individual or group
Why bother teaching ethics?
Bad apples are encouraged by bad barrels
Good character isn’t always enough
Adults develop moral judgment into their 30s
Conduct is influenced by environment
11: 5th Edition
Chapter 1:
Financial disaster 2008:
Direct causes
Shadow financial market Subprime mortgages
- Credit default swaps - “Liar” Loans
- Securitized mortgages (“slice & - No $ down, no income
dice”) verification
- Derivatives - Consumers bought more than
- Hedge funds they could afford
Regulatory climate Incentives
- Glass-Steagall Act repealed - Big rewards for short-term
- Debt regulations for banks thinking for companies and
eased individuals
- “Markets can self- regulate”
- Revolving door between
regulators and companies
- “Government is the problem”
Contributing factors
“Herd mentality” Investment banks
- Wall street - Go public
- Consumers - No “skin” in the game
- “Real estate is safe”
Lots of cheap $$ Rating agencies
- Fed (low interest rates) - Conflicts of interest
- Demand from China and Middle - Didn’t understand what they
East were rating
“Innovation”
- Math whiz kids create complex
products
- No one really understood what
these products were
Bottom-line
- Arrogance - Greed - Total recklessness
, The players:
Went public and became shareholder owned; paid fees by
Rating companies they were supposed to rate; took the investment
Agencies banks’ advice on how to rate securitized mortgages (AAA ratings
while many were complete junk)
Much of their compensation is driven by stock price – this
CEOs focused them on the short term; Also many did not understand
the sophisticated financial products their firms peddled
Financial
Paid huge salaries and bonuses for short-term results
Professionals
Mortgage Relaxed lending standards and created sophisticated products
Originators consumers did not understand
“Asleep at the switch” -- also looking for their next jobs (high-
Regulators
paying) in the financial industry (which they are regulating)
Lobbied and “paid” by the financial industry to relax regulations
Legislators
– “the markets can self-regulate”
Investors Punished companies that did not deliver huge returns
Bought more house than they could afford. Home values
Home
plummet and mortgages are “under water” – home values sink
Owners
and are worth less than their mortgages
Financial disaster results:
- Business failures or contractions
- Government bailouts
- Unemployment
- Consumer distress: foreclosures and bankruptcies
- Tattered reputations (corporations, industries, countries)
- Plummeting trust in government and institutions
Moving beyond cynicism:
- Edelman Trust Barometer (2009):
More than half of respondents say they trust business less than
they did a year ago
Worse in the U.S.
No decline in BRIC countries (Brazil, Russia, India, China)
Business case for trust:
91% of consumers purchase products from companies they
trust
77% of consumers refuse to purchase products from companies
they don’t trust
Business ethics defined: The principles, norms, and standards of conduct
governing an individual or group
Why bother teaching ethics?
Bad apples are encouraged by bad barrels
Good character isn’t always enough
Adults develop moral judgment into their 30s
Conduct is influenced by environment
