Throughout the course of this paper, I will look closely into insider trading, corporate governance systems, and business ethics in Italy to help fathom such behavior. Next I will critically analyze the characters involved in the shocking scandal along with the stakeholders who were collateral damage of this act of immortality, followed by a thorough analysis of the scandal based on classical ethical theories. And finally, I will critically reflect upon the case, adding any moral solutions that could be suggested to prevent future Parmalat’s.
Method and framework:
Internal control and corporate governance in Italy:
As I will demonstrate, the Italian system is not to blame entirely for the decisions made by the executives at Parmalat leading to their downfall. In proof to such a statement, substantive rules and regulations were in place prior to, and during Parmalat’s operations. That is regardless of the fact that Parmalat is an old and established company and had been participating in unethical behavior for a long period of time preceding the scandal.
“Things have been strange [there] since the mid – 1980’s “(Edmondson, Fairlamb, & Byrnes, 2004)
In 1988, a journal was released for the first time in Italy entitled “Etica Degli –Affari” (Unnia, 1990) in order to promote ethical affairs in corporations. This journal sought to encourage ethical executive training and introduce codes of ethics in Italian corporations.
In Italy, the business community faces two great threats, one of which is organized white-collar crime, which is commonly known as “The Mafia”. The other threats are derived from the corrupt political systems.
“The first problem is the fact that Italy is a country with a low ethical temperature. We don’t have a strong sense of the state. The second difficulty has to do with the business environment and the Italian business community itself “(Unnia, 1990)
It is not that Italy knows nothing or doesn’t care about ethics in its business operations. But for historical reasons, Italy operates under catholic principles governed by Rome. However, in practice, many of those biblical teachings are not implemented as shown in this case.
Parmalat scandal character analysis, the characters involved and the driven forces behind the scandal:
“Plenty of observers want to dismiss the affair as a local Italian matter. After all, didn’t Silvio Berlusconi’s government water down penalties for false accounting? And isn’t Italy a model of disregard for rules on corporate governance, a place where the rights of minority shareholders are regularly abused?” (Leaders, 2004)
Internal fraud was thus considered globally as a US problem rather than a global problem, disregarding the fact that immorality and unethical traits were widespread across the globe and were sleuthing their way up to the surface. Many people were therefore not convinced that there was a global problem and cast a blind eye at the flaws in their systems. This led to the downfalls of major corporations including, the oldest merchant bank in England, Barings bank.
In view of Parmalat’s case, investors clearly turned a blind eye for years to Parmalat’s curious debt-issuing practices, and its corporate governance flaws. Could the investors have been more conscience and aware, then the fraud would have been detected, and less damage would have been done to them the shareholders, and the other stakeholders involved.
Parmalat’s poor corporate governance stood out clearly as the sun, but a lack of strict regulation and internal controls, dismissed such facts to the public eye.
Parmalat lacked board independence in the sense that the board comprised of nine insiders, one affiliated outsider and just three independent directors.(Gray, 2006) The company was family owned, run by CEO Calisto Tanzi as mentioned, and was composed of key board member committees, in which insiders sat on each key board committee. The audit committee was in addition a big corrupt department on its own. Members of the audit committee both internal auditors and external auditors were part of the scandal as much as the executives were.
The level of corruption throughout the structure of the firm was beyond belief, self-indulgence and greed had taken over each individual employed by Parmalat. The failure of Parmalat was expected.
When it comes to long-term financial success and ethical performance in a company, the goals is to achieve and sustain ethical core values, and establish a role model of moral leadership, in which the whole firm follows through by his/her actions. In accordance to Aristotle’s view on virtue ethics business leaders must have a strong moral character while reigning in their pursuit of wealth.
When comparing Calisto Tanzi’s moral leadership to ABN amro’s CEO Santander, the long term survival of ABN amro and the transparency in its internal communication structure, and its content stakeholders shows the effect moral leadership has on an organization.
Analysis of the case using ethical theories:Similar to world-renowned global scandals, Parmalat has raised multiple questions regarding corporate governance issues and standards. Questions were raised concerning who made such decisions, and why they were made. As fraud can only be hidden for so long, especially for a major financial fraud of this size, it was only a matter of time until the truth unfolds itself and Parmalat fell under.
I shall therefore explore the corrupt internal structure of Parmalat that led to its downfall, on the basis of the classical ethical theories.
“Corporate governance is the term given to the structures within and external to organizations that are intended to ensure that corporate objectives are met. In theory and, at law this is the maximization of shareholder wealth”(Fisher & Lovell, 2009)
When analyzing ethical theories, shareholder interest must be taken into consideration, but in accordance to Edward R Freeman’s Stakeholder theory, stakeholders form the basis and are a vital part for the function of the organization. The stakeholders that were affected by this heinous scandal were vast in amount, as 36,000 employees jobs were in danger, so were the suppliers of the raw materials and the shareholders both large and small. (Svergie, 2004)
In a utilitarian’s point of view, where the greatest happiness principle is applied when making decisions. When the executives of Parmalat provided false information regarding their financial accounts this in turn allowed their investors to use their resources inefficiently, unaware that Parmalat will not be able to cover any of its costs in due time. When the scandal was made public, not only were the shareholders affected, but also the stakeholders were affected as well as a consequence of the unethical decisions.
When considering Kant’s three maxims, in analyzing ethics of duties, the accounting fraud is condemned because the stakeholders interests are not taken into consideration at all, and they are not used as ends in themselves but rather as means during the time Tanzi and the rest were committing the ultimate frauds. Financial forgery and fraud is not universally acceptable in any country, and therefore, on a global basis, this kind of behavior is considered a crime, and should be punishable by law. In accordance to the final maxim, which coincides with ones values and moral conscience “act only so that the will through its maxims could regard itself at the same time as universally lawgiving”(Crane & Matten, 2010), deceitful managers like Tanzi who try to make profits through fraud and other criminal and unethical acts, would not like to be financially harmed in turn by others who deceive them.
In a rights of ethics approach, by lying about the real financial strength of the company, Tanzi and Tonna, did not respect the right of freedom of information of their information of their shareholders. In justifying such an act, as an act of justice or not, the practice obviously violated any criterion of just. Since the shareholders have paid a lot of money for their stocks, and not only invested their money but also their trust in the company, they expect to benefit from the company’s profits, and expect to have a holistic view of the company’s activities and accounts.
Tanzi and Tonna evidently were aiming to enrich themselves at the expense of the stakeholders of the company, which is clearly an act of egoism. They did not consider any ethics of care when making a decision, not taking into account the consequences of their actions, as the fraud put at risk the jobs of the employees, as well as their pensions.
In conclusion to the above theoretical analysis, one might see that the various ethical theories unambiguously point into one direction, namely that these accounting practices were wrong, and immoral, affecting all those involved.
Critical reflections on the case:
The Parmalat case should not discourage the fact that with more regulations and internal supervision of firms and markets, frauds can and will be prevented. As moral leadership is key for the success of a business in the long term. Firms must aim to better the internal moral system from the inside out only then will positive results be seen.
Although Calisto Tanzi was a catholic man and was known by the general public for being a religious individual too. He failed to implement the teachings of the bible in his daily life, where his immoral behavior stripped him entirely of any virtue or morality for that matter. “But select capable men from all the people, men who fear god, trustworthy men, who hate dishonest gain” (Exodus,18:21)
Italy is in critical need of improving internal control systems. Where the corporate governance system must be independent. Parmalat was known as Europe’s Enron, which clearly manifests the great amount of corruption it had possessed over decades of operations. It is unmistakable however that over the past few years, with the collapse of major organisations such as Satyam, Enron and Worldcom, due to internal control flaws, this is not an Italian issue per se, but more of a global issue that should be contained by the reformation and regulation of auditing bodies initially, and then by the gradual rectifictation of the moral ideologies of corporate leaders, stearing them towards more ethical acts and although greed is part of human nature and cannot be eliminated entirely, conflicts of interest in organisations must be abolished to ensure greed is not acted upon and there is no domination in senior positions.
Control mechanisms must be introduced to decrease such incidents. Improvement of information transpareny throughout the organisation and between owners and stakeholders are of utmost importance. This gives the stakeholders a holistic view of the operations and activities of the firm.
Bibliography
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