Emerging ethical issues and ethical perspective
The demand for broadband drops, the company ran into loss and as pressure for more profit to keep investors, they had practiced some ethical issues such as:
- Stock analysts gave false information on company stock price. Although stock price plummeted due to reduced revenues, stock analyst still advice shareholders to buy more stock. Stock analyst also influence on key business and management decision.
- Insider trading: Executives use confidential information to sell stock for personal earnings before the company declares bankruptcy.
- Pressure for profit also led top executives to make false accounting report (financial reports did not comply with general accepted accounting standard), Global Crossing sold the use rights of fiber-optic networks at end of the quarter to record more revenue in order to record more profit. This is a cheating & misleading actions toward investors on their financial report
- Conflict of interest for the role of Chairman of the Defense Policy Board and advisor to Global Crossing
In addition, there is some ethical perspective in this case as follow:
- From the view of an egoist, actions and decisions of the top executives, managers of Global Crossing had done was to maximize their personal interest. Jack Grubman, the telecom stock analyst who had influenced Global Crossing’s stock price as well as influenced investors in buying Global Crossing’s stock. He even helped Global Crossing in making key business and management decisions allegedly with the purposes of being rewarded with bonuses.
- As an egoist, people may ignore the vast benefits of others. Egoistic people “do the act that promotes the greatest good for oneself” and this is true for the case of Chairman Gary Winnick and other top executives who had decided to sell company stocks to earn millions of income dollars event in the event that they had seen the revenue forecasting fall of $300 million. They even ignored the severe penalties for insider trading which may include both civil and criminal punishment. The enlightened egoism can also be found in the case that is action of the Vice President of Finance, Roy Olofson, who had whistle-blew Global Crossing’s improper accounting report in which the report did not comply with the general accepted accounting principles. Revenues were manipulated at an increase while cost underreported with the aims of reportedly profitable in order to attract more investors. Roy Olofson had stood up to protect investors. He placed the interests, the well-being of others in precedence of his own interests. On the contrary, Leo Hindery, CEO from March to October 2000 is a typical example of egoism, he had requested his claims precedent over other creditors and the claims were unpaid severance benefits, house rental. He had ignored the bigger losses from investors who had offered finances to give birth to Global Crossing. In summary, Global Crossing is an egoistic organization.
Case issue: Assumption and Nuisance
Assumptions:
- The telecommunication stock analyst: Grubman- telecommunication stock analyst paid about $20 million per year- stated wrong considerations, predictions to mislead investors. Basing on his reputation and power in telecom industry, he gave negative effects to this industry. When he lowered his price target for GC stock in May 2001 from 70$ to 30$, he also labeled the stock a ” core holding” and maintained his “buy” recommendation . He frequently communicated with Winnick and advised Winnick. He also help to negotiate mergers with U.S.West, Inc. and Frontier Corporation. There were questions for his income as well as his dubious distributions for telecommunication companies such as Global Crossing.
- Insider trading: By knowing information about the fall of Global Crossing company in near future, Winnick and GC executives tried to sell a large amount of his shares to the other investors. This way brought them a big profit instead of a big loss. Although their responsibility is managing the development of company, they tried to escape safely from the failure of company.
- The capacity swaps: Global Crossing and Qwest swapped their network capacity to increase their revenues and overstated their profits, sending their stock price higher. This only created virtual asset for both sides, real economic value was not created in this transaction. They wanted to hide their actual losses in order to keep the investors.
Nuisances:
Global Crossing was forced to declare bankruptcy on January 28, 2002. Global Crossing investors were misled and lost a total of about $54 billion. Some 14,000 employees lost 401(k) fund s and pension funds, as well as health and severance benefits.
Resolutions
- Long-term and sufficient strategy, financial, technical capabilities must be required to corporation following huge plan like Global Crossing.
- Government should support huge plans that bring many benefits to society, economy like fiber-optic cables network to reduce difficulties for corporation.
- Processes to audit control companies selling stock must be carried out strictly.
- Issue or adjust regulations to prohibit behaviors to mislead the investors, such as increasing the punishments for these behaviors. The stock analysts having ultimate influences in a industry must be noticed by authorized agencies.
- Selling a large amount of stock by executives must be prohibited or should be allowed with reasonable requirements in specific cases.
- Training about ethical business for whole operation, special to those has influence in decision making.
- Giving rewards and punish procedure to all related people in business
- Reviewing in mid-way of strategy.
- Audit independently. GC investors should hire a well – known and independent auditing company and force GC to audit. Auditing helps investors understand financial statement clearly. GC’s assets and top executives’ assets and bonuses will be clarified.
- Require government agency audit the source of GC’s asset. Revenue resulted from stock market, expense, cost and debt will be clarified. Compensation of top executive will be withdrawn if they are not transparent.
- Reevaluate GC’s business model to reduce operating cost. Restructure managerial positions and appoint the new board of directors.
- Identify GC’s position and percentage of market share in the market. Identify objective market segmentation to make plan to maintain market share
- Enhance key customer relationship and acquire more customers in new market segmentation.
- Organize stakeholders meeting to determine new long term strategy for GC based on available infrastructure. Acknowledge stakeholders’ ideas and their contributions. A new long term plan will be discussed in the meeting to bring the trust for stakeholders.
Recommendations
- To build processes to prevent the offenses of members of the leaders of a business follow this analysis such as:
- Because members of the leaders of enterprises who have a lot of favorable conditions to make their decisions for the survival of the business. If the purpose and benefits of their individual decisions benefit from the axis of the business activity will cause extremely large losses for businesses.
- GC is a company producing optical fiber by Gary Winnick, along with some friends is the founder of financial management in 1997. With the role as Chairman of the Management Board, Mr. Winnick did not set a prescribed prevent the dangerous behavior leads to a wrong decision in the business of the head of a business.
- Seeing the risk of bankruptcy of GC, Winnick was conducted gradually sold his shares in 2001 after only two years when the stock was released to the public, to give himself any profits activation ruffled accept the risk of bankruptcy of enterprises are approaching.
- Need to give a defined binding responsibilities of members of Board of Directors are not allowed to sell their shares within a certain period of time in certain conditions to ensure maintenance activities as well as benefits the other shareholders.
- Must establish committees to oversee the Ethics Audit in other to control the activities of the Board of Directors and the business like:
- Monitoring Committee is responsible for supervising all activities of the enterprise business in the face of financial reports and timely advice to Board of Directors decided to make timely adjustments.
- In GC, if the Committee was established to monitor and organize the good work then discovered the work of the GC in control transaction signing blank sales to increase virtual revenues in order to increase the cost of virtual trick investors in securities.
- That is said that the GC Board of Directors violated the principle of financial accounting.
- Financial analysis to ensure the principle of professional ethics is to provide information to honest, impartial and independent businesses in order to:
- Businesses want to expand the production without a bank loan with financial high cost; they often mobilize capital through investment channels from the stock market. To learn business investors often use the information provided by analysts. Based on the financial statement analysts often make to get advice for investors.
- However, investors need to know the principles of investment put into any one channel of capital mobilization which, must decide independently. Information from analysts refers not only to bring decisive factor.
- Through the GC case we see the investment securities were based on statements by Jack Grubman - securities analysts are reputable in the field of telecommunications. They buy and hold shares of the GC was off more than 57% in 2001 and the GC is on the risk of bankruptcy.
- Businesses must ensure compliance with the objectives of business strategy set out based on the analysis of the correct assessment of the situation of supply and demand market such as:
- The founder companies often set a goal long-term strategy for the business of his company. Business objectives must be linked to business advantage, the enterprises have the ability to make the product better meet the needs of market.
- We have seen that the founders of the company GC are financial managements; there is no advantage to the business telecommunications industry. When producing optical fiber, they do not measure the price of fiber optic products is too high, not measuring the purchasing power of the market, leading to not sell the product, leading to the risk of bankruptcy of an enterprise only after five years of operation.
- Internal transactions to impact direct personal benefit should be strict punishment to ensure equitable benefits for investors.
Prevention for the future
Before launching the project, the creators must set up an evaluation board and appraise exactly the potential costs and the expected benefits so that they would not meet the same mistake in the case of Global Crossing which is the profit could not afford the interest of its debt.
Second, risk associated with the intelligence and the sharing of data and related privacy issues. There is disregarded any person with high managerial authority responsible for the ethics program. An influencing stock analyst, Jack Grubman, and the CEO of Global Crossing have unethical sharing information. The problem emerged that stock holders would follow the advise of Jack Grubman which advocate buying Global Crossing stock. To avoid the abuse of stock analysts and companies, we must set up the regularly mandatory teaching ethic programs and put the same wrong situation in law with strong punishment depend on the total damage of the issue.
Next, there are some penalties which against insider trading. However, the wrong issues are still happened and more complicated. Therefore, the laws need to fasten, strict and practice seriously.
Finally, in my opinion, the most important thing is accounting audit. The Government needs to develop an Accounting Audit Committee which can examine the business record of every corporation. Through its representative inside the corporation, every record is made sure that it is honest and righteous. Moreover, this organization has privileged of interfering to the accounting activities of any company to guaranties that they are working healthy in the market./.
Reference:
Ferrell, O.C., John Fredric and Linda Ferrell (2008). Business Ethics: Ethical Decision Making and Cases, 7th ed. South-Western, Engage Learning