Nowadays, business ethics become a controversial issue. Although we have many laws and regulations to prevent business dishonesty but it seems that the number of unethical business case is not in a decreasing trend. We hear a lot more about tax evasions, briberies, financial frauds from news every day. According to AP, the number of financial fraud has increased fourfold from 40 cases in 2008 to 150 cases in 2009 (Associated Press).
Unethical business exists under various aspects and in corporate governance point of view, business dishonesty is approached through different relationships between corporation with external and internal factors. Firstly, in a relationship with external factors, dishonest business is represented by breaking laws, polluting the environment, refusing social responsibility, or cheating customers … For instance, Dong Nam Associate used to be a giant mobile-phone and luxury watch distributor in Vietnam.
That company had evaded income tax and defrauded value-added tax since 1999. In 2002, that dishonest business was revealed through a total investigation conducted by the Vietnamese authorities. From 1999 to 2002, Dong Nam is alleged tax evasion of over USD 10 million. It was the biggest tax scandal in that period in Vietnam. Consequently, Dong Nam’s director Nguyen Gia Thieu was sentenced for 15 years in prison and his company disappeared since that time. Another way, by using dishonest advertising, a corporation can cheat its customers to increase its revenue or to attract more potential consumers. A very good example is Vinamilk case - the Vietnamese leading milk producer. In 2006, Vinamilk performed an integrated advertising campaign for its new 100% pure a fresh milk product. But actually, 40% of that “pure fresh milk” was made from powdered milk. When the truth was uncovered, customers boycotted Vinamilk products. Consequently, its turnover decreased between 25% and 50% from the last quarter of 2006 to the first of 2007 (Lindgreen A., Hingley M. K., Vanhamme J.). As a result, Vinamilk lost its huge fresh milk market share to its competitor, named Moc Chau JSC. The two cases above are two different manifestations of business dishonesty, however they have a common that corporations aimed to maximize its benefits in short term not for a long term and at the end, both received a very bad result.
Secondly, in relationship with internal factors , bribery and getting money by defrauding shareholders are popular unethical behaviours. Following individual benefit, manager could unethically promote the wrong man who gave him a bribe instead of the suitable one. His unfair treatment makes other employees unmotivated and destroys the corporation’s working environment.
Nobody wants to contribute to corporation anymore. Because of others’ unethical behaviour in workplace, productivity could decrease as much as 25% (Varca P.E. and Valutis M.J.). On the other hand, dishonesty may occur when the manager acts for their own interests instead of those of the shareholders. We still do not forget the collapse of the Enron Empire and recently, the biggest ever-seen fraud of Bernard L. Madoff with his Investment Securities Corporation. Thousands of investors become victims of these two scandals and many of them lost their all-life savings.
Bernard Lawrence Madoff is a former stock broker, investment adviser , non-executive chairman of the NASDAQ stock market. He founded Bernard L. Madoff Investment Securities in 1960. After 20 years of development, his firm was one of the largest independent trading operations in the securities industry. The company had around USD 300 million in assets in 2000 and ranked among the top trading and securities firms in the United States. It operated more than two dozen funds overseeing USD 17 billion (Ruby Washington, NY Times). To attract potential investors to his company, Madoff promised to pay them an extraordinarily high return even in the economic recession time. But on Dec. 11, 2008, Madoff B.L. was arrested by federal agents and charged in what could be the largest fraud in Wall Street history-a Ponzi scheme (also called pyramid scheme) that costs over 20 years was put at USD 65 billion. The list of investors who were victims of this “century fraud” was growing, including some of the world's biggest banking institutions and hedge funds, the super rich and the famous, pensioners and charities. When the truth was revealed, he admitted his guilt : “I’m responsible for a great deal of suffering and pain, I understand that”. Madoff began his Ponzi scheme in 1991. He paid returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. Meanwhile, he strengthened investors and authorities confidence by sending them fake financial statement. He admitted he had never made any legitimate investments with his clients' money during this time; instead, he deposited the money into his business account at Chase Manhattan Bank, then purchased properties and services for his personal use and benefit of himself, his family members and his associates. “Yes, Madoff sure seems to be a really, really bad guy who ruined lots and lots of lives and should probably be locked up for the rest of his natural days”- Allan Sloan, Senior Editor-at-large, Fortune magazine. In the end, on June 16, he was sentenced by a federal judge to the maximum prison term: 150 years (Allan Chernoff, CNN).
In brief, there is no future for business dishonesty. Bad consequences are unavoidable for corporations cheating to maximize its profit in short term rather than sustainable development and for dishonest managers who follow their own benefit rather than their shareholders. Firstly, untruthfulness business harms company’s sales. In another way, company will lose its customers. In a 2003 survey by Wirthlin Worldwide, 80% of people said they decide to buy a firm’s goods or services partly on their perception of its ethics. Secondly, unethical behavior in work place would worsen firm’s productivity. When workers do not trust each other and their manager, then stress in workplace increases and output will be undermined. Furthermore, without fairness manager can’t keep good and skilled employees.
Seventy night percent of employees said their firm’s concern for ethics was a key reason they remained (National Business Ethics Survey, 2009). Thirdly, unethical behavior would harm corporation’s stock price. There is no doubt that nobody wants to buy share of corporation that they do not trust. Investments in unethical firms earn negative returns for a long run. Fourthly, dishonesty business will lose partners’ and suppliers’ confidence, hence the company will drop off its own business opportunities. The company will be isolated when banks do not accept to its capital loans and suppliers do not allow for its credits. It could not survive when good employees keep leaving the company and no customers want to buy its products or services. Because of dishonest business, a worldwide powerful brand could be ruined after one night. The company has to pay a great hidden cost for its untruthfulness behavior.
To prevent those unexpected consequences, a good director must consider the success of the company and benefits of the shareholders as the most important target. Firstly, he must act fairly and care about the interest of the company’s employees to improve the productivity and working environment.
Secondly, he must foster the company’s business relationships with suppliers, partners and society at large. Thirdly, he must manage all company’s activities focusing on customers’ needs and find the best way to satisfy them. Fourthly, he must to try his best to enhance the company’s reputation and to build a powerful longevity brand. Fifthly, he must regard to likely consequences of any decision in the long run.
Sixthly, he must ensure the achievement of maximum efficiency and profitability for shareholders. To perform those responsibilities, a good director must be a honest, confidential, loyal and qualified manager.
However, there exist potential interest conflicts between capital - providing shareholders, and managers. Usually, many of these managers who do not hold significant shares in the corporation can make the decisions directly related their benefit rather than those of shareholders. For example, a director ignores other managers’ fraud which could harm the company’s wealth because he fears that dishonest manager will obstruct his next promotion. In that case, keeping silence is also a dishonest behaviour. “We will have to repent in this generation not merely for the hateful words and actions of the bad people but for the appalling silence of the good people.”-Dr Martin Luther King Jr. More seriously, a director can directly cheat shareholders to receive his own benefits, like Madoff case above. The recent scandals, such as Enron’s collapse and Madoff Ponzi scheme have raise serious problems about dishonesty in workplace.
These crises also demonstrate the need of significant reform in corporate governance not only in the developing industries but also in developed ones. To overcome corporate governance weakness and to enhance the accountability, integrity and transparency of the NYSE’s listed companies, on 1 August 2002, NYSE Board of Directors accepted 7 recommendations of NYSE Corporate Accountability and Listing Standards Committee (see appendix). These recommendations are very practical for reforming corporate governance. They focus on empowering the role of independent directors, increasing the authority and responsibilities of the audit committee, disclosing and adopting a code of bus iness conduct and ethics for directors, officers, and employees.
Generally, a good corporate governance must achieve following objectives: 1. Promoting appropriate ethics and values within the organization; 2. Ensuring effective organizational performance management and accountability; 3. Effectively communicating risk and control information to appropriate areas of the organization; 4. Effectively coordinating the activities of an communicating information among the board, external and internal auditor and management (Standard 2130).
In terms of global corporate governance, to avoid bad consequences for the economic wealth of corporation and society, we have to implement efficient reforms to overcome its failings and weakness as soon as possible. We have to adopt adequate code of business conduct and ethics to prevent any dishonesty in business. Dishonest behaviour can push individual in particular and corporation in general into deeper and deeper troubles time by time. Stopping dishonest behaviour in business is an urgent task.
Usually, people choose the dishonest way because it maximizes their own benefit immediately or helps them to escape from the situations that threaten their goals. For any reason, dishonest behaviours will result in bad outcomes. All things considered, choosing to be honest is the best decision though the hardest choice. “It is necessary for the good man to do nothing for evil to triumph”-Edmund Burke.
APPENDIX:
Focusing on the NYSE report of 6 June 2002, the recommendations include:
(1) Requiring listed companies to have a majority of independent directors.
(2) Tightening the definition of “independent director”. For example, independent directors should have no material relationship with the listed company and cannot be a former employee of the company until five years after the employment has ended.
(3) Empowering non-management directors to serve as a more effective check on management by requiring them to meet at regularly scheduled executive sessions without management being present, and requiring independent directors to designate, and publicly disclose the name of, the director who will preside at the executive sessions. This is to facilitate a lead director amongst the independent directors who may act as a counterbalance to the CEO.
(4) Requiring listed companies to have a nominating/corporate governance committee composed entirely of independent directors to consider new appointments to the board and to shape the corporate governance of a corporation. Similarly, the compensation committee should be composed entirely of independent directors.
(5) Increasing the authority and responsibilities of the audit committee, including granting it sole authority to hire and fire independent auditors, and to approve any significant non-audit relationship with the independent auditors.
(6) Listed companies must disclose their corporate governance guidelines, including director qualification standards, director responsibilities, director compensation, etc.
(7) Requiring listed companies to adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers.
REFERENCES:
1) Adrian Cadbury, 2002, “Corporate governance and chairmanship: A personal view”, Oxford University Press, USA
2) Allan Sloan, January 9, 2009, “The Real Lesson of the Madoff case”, CNN New York
3) Allan Chernoff, March, 16, 2009, “Madoff won't appeal 150-year sentence, attorney says”, CNN
4) Carey W.P., 23 Nov, 2005, “The Hidden Costs of Dishonesty: Ethics is Vital to Business Education”, Knowledge Publisher.
5) Curt Anderson, December 28, 2009, “Ponzi collapses nearly quadrupled in '09”, Associated Press
6) Lindgreen A., Hingley M.K., Vanhamme J., “The crisis of food brands”, chapter 5, page 65, Gower Publishing ltd.
7) Mark Gregston, 2009, “The rising tide of teen dishonesty”
8) Michael L.D. and Spuma Rao, “The Wealth Effects of Unethical Business Behaviour.” Journal of Economic
9) Ruby Washington, Nov. 3, 2009, “The Madoff Fraud:Scam of the Century”, The New York Times
10) Varca P.E. and Valutis, M.J. “The Relationship of Ability and Satisfaction to Job performance” Applied Psychology: An International Reviews, v.42, no.3, 1993, pp.265-275.
11) Standard 2130, Standards for the Professional Practice of Internal Auditing, The Institute of Internal Auditors
12) Ethics in Corporate America Survey, 2003, Wirthlin Worldwide and LRN
13) National Business Ethics Survey (NBES), 2009, Partnership for Transparency Fund (USA)
14) Report Card on the Ethics of American Youth, 2008, Josephson Institute, Centre for youth ethics