Ian Gleckler

The Stakeholder Organization

May 11, 2016

The Current Shape of Corporate America:

Executive Summary:

Current companies within corporate America have become so focused on profits

that the public has seen many scandals in the past. Companies such as Enron, WorldCom,

Sunbeam were adored by the public until it came to light that they had defrauded their

investors and had been involved in shady business practices. Beginning by discussing what

management ethics are, this paper aims to discuss how a high tone of ethics within an

organization can help the company avoid ethical dilemmas that caused these events. This

paper discusses in detail the events specifically regarding Enron and Sunbeam, and offers

opinions on why they occurred. In addition, the Financial Collapse of 2008 is analyzed to

see what role the overall market had in the events that occurred.

The analysis of past events is followed by one of current companies that embody a

perspective that is both forward looking and ethical. These companies either look to please

their workers first and then care about profits second or are constantly looking at how they

can use their profits to affect change in the world. In concluding with a discussion on what

could be done to ensure that another large scandal could not occur I hope that this paper

challenges you to think critically about the ways ethics play a large part in everyday life.

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Table of Contents:

What is Management Ethics?..............................................................................................................................4

The Scandal at Enron.............................................................................................................................................5

Accounting Fraud at Sunbeam...........................................................................................................................7

The Housing Bubble and Financial Collapse................................................................................................9

Existing Alternatives……....................................................................................................................................12

TOMS Shoes.............................................................................................................................................................13

Mondragon Corporation....................................................................................................................................14

Policy Implications:..............................................................................................................................................15

Works Cited.............................................................................................................................................................18

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What is Management Ethics:

What is management ethics and what happens when a company is too focused on

turning a profit? Companies can become so focused on profit that they begin to lose sight of

ethics, which can lead to dire consequences for both the company and the public. Before

delving into historical examples of companies who have lost sight of ethics in their pursuit

of profit it is important to determine what management ethics entails. Management itself

can be defined as “the profess of reaching organizational goals by working with and

through human and nonhuman resources to continuously improve value added to the

world.” according to Joseph Petrick and John Quinn in their book Management Ethics:

Integrity at Work. (Petrick and Quinn 1997) Well-managed corporations have a large

competitive advantage over poorly managed corporations, and not only excel within their

competitive environment but also in public confidence as well. Well-managed corporations

“…influence their competitive external environments through more productive and focused

activities, thereby providing a more stable horizon for planning and progress.” (Petrick and

Quinn 1997) But what happens when management is poorly executed? Petrick and Quinn

state that “Overt irresponsibility leads to corporate sabotage in the private sector and to

defensive uncooperativeness in the public sector.” (Petrick and Quinn 1997) In additions

companies usually have either a shareholder or stakeholder perspective guiding their

decisions, and while each is a valid way of conducting business it becomes apparent that

when ethical violations do occur it is normally when a shareholder approach is taken.

When corporations overstep their bounds and behave irresponsibly the public tends to

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withdraw their favor of the company. What exactly causes the public to fall out of favor

with a large company, and what did the company do wrong?

The Scandal at Enron:

One of the most well known failures of a large company occurred with the collapse

of Enron. Known as one of the most innovative companies during its time, Enron

revolutionized the way the world thought about energy. Corporate executives at Enron

changed the way people thought about the energy market, and Fortune magazine even

named Enron its “Most Innovative Company” for six consecutive years for their various

innovations in different industries. As is well known however Enron eventually collapsed

in a scandal that brought about various new forms of regulations and laws, such as the

Sarbanes-Oxley Act of 2002, as well as the dissolution of a major accounting firm Arthur

Anderson. In a piece by the New York Times, Bill Keller sums up what happened to Enron,

“As often happens with buccaneering entrepreneurs, it got a case of hubris. It

figured if it could trade energy, it could trade anything, anywhere, in the new virtual

marketplace. Newsprint. Television advertising time. Insurance risk. High-speed data

transmission. All of these were converted into contracts -- called derivatives -- that were

sold to investors. Enron poured billions into these trading ventures, and some failed. It

turned out Enron was good at inventing businesses, but terrible at the tedious work of

running them, judging by some appalling internal management audits discovered by The

Times's Kurt Eichenwald. For a time, Enron swept its failures into creative hiding places,

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but ultimately the truth came out, confidence in the company collapsed and you now have a

feeding frenzy.” (Keller 2002)

Ultimately what happened was Enron become arrogant. CEO Jeffrey Skilling brought

in Andrew Fastow as CFO, and together with other executives they created a series of

accounting loopholes, special purpose entities, and through the use of poor financial

reporting were able to hide massive amounts of debt from failed project ventures. In

addition Enron was able to mislead and pressure Arthur Anderson, who was supposed to

be looking out for these things, into signing off on audit reports and ignoring issues.

Eventually allegations arose that “…company officials willfully ignored internal warnings

about the accounting irregularities even as they pocketed millions of dollars in stock-

market gains. It quickly became clear that the sudden collapse of the country's seventh-

largest company was going to have implications not only for business, but for politics and

policy as well…” (Enron NPR) It certainly did have an impact on regulation. In 2002 the

Sarbanes-Oxley Act (SOX) was signed into law, and the following excerpt from the New

York Times the day after the bill was signed into law by then President George Bush:

“The bill, an extensive overhaul of corporate fraud, securities and accounting laws,

creates a regulatory board with investigative and enforcement powers to oversee the

accounting industry and punish corrupt auditors. It also establishes new standards for

prosecuting wrongdoing and gives corporate whistle-blowers broad new protections.

Executives who deliberately defrauded investors would face long prison terms.” (Bumiller

2002) Sarbanes-Oxley now enforced that both the CFO and CEO of a public corporation

would have to personally sign off on the financial statements to ensure their accuracy. In

addition, the Public Company Accounting Oversight Board (PCAOB) was formed to provide

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stricter regulation of the audits of public companies in order to ensure that another Arthur

Anderson disaster could not occur.

Both Arthur Anderson and Enron failed in their responsibility to both their workers

and the public to act ethically. The schemes perpetrated at Enron ended up defrauding

investors and employees alike, causing their stock price to plummet as investors withdrew

their money. Similarly, Arthur Anderson failed to uphold the principles that an audit should

have during the course of an engagement. Arthur Anderson became too heavily involved

and connected with the dealings going on within Enron, and afraid to lose a large client,

signed off on documents that they should not have. As William Bratton discusses within his

book, Enron and the Dark Side of Shareholder Value, “That pursuit of immediate shareholder

value caused them [Enron] to become risk-prone, engaging in levered speculation, earnings

manipulation, and concealment of critical information.” (Bratton) It appears that

companies who engage in a pursuit of immediate shareholder value often fall into the trap

of becoming risk-prone and losing a sense of ethics, and the case of Sunbeam is no

different.

Accounting Fraud at Sunbeam :

The case of Sunbeam is not that much different from that of Enron. Once known as a

leading appliance manufacturer, they used shady business tactics during a time of financial

hardship and lost the public's trust when the scandal came out. In 1996 Sunbeam

encountered financial difficulties and brought in Al Dunlap to become CEO and Chairman.

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During his tenure in 1997 Sunbeam reported a massive increase in sales for its consumer

line of products, such as backyard items like grills and kitchen items like blenders. Dunlap

was brought in due to his reputation in the business world as a “turn-around” artist,

someone who could flip failing companies into profitable ones. Sunbeam saw an immediate

jump in its share price once investors noted that Dunlap was taking over, as he had such a

proven track record within the industry. One of the first things that Dunlap did was cut

over 6,000 jobs in an effort to streamline the company. In addition, “Sunbeam [took] a $300

million pretax charge to cover severance and other costs, [sold] four major product lines

and [reduced] to 13 from 43 the number of cities globally where its plants and warehouses

are situated.” (3a) Known as “Chainsaw Al” these mass layoffs and other measures were

nothing out of the ordinary for Dunlap, and share price continued to rise. In 1998 rumors

began to emerge that shady and questionable accounting tricks were the cause of the

majority of Sunbeam’s financial success. Sunbeam’s revenue growth began to slow as

management ran out of accounting loopholes to exploit and investors became worried.

After Sunbeam declared a loss in the first quarter of 1998, share price fell almost

25%. Claims regarding fraudulent accounting practices were ultimately investigated

internally, and Dunlap was forced to resign amongst pressure from Sunbeam’s board of

directors. After a full investigation it became apparent that Dunlap manipulated several

aspects of Sunbeam’s financial statements to make it appear that prior management did a

worse job than they actually did, so that when he moved forward as CEO it would appear

that he was making a massive turnaround for the company. Dunlap was barred from ever

serving as a director or officer of a publically held company.

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Much like Bratton discusses about Enron, the pursuit of immediate shareholder

value caused Sunbeam to become risk prone. In his quest for a higher share price and

happier shareholders, Dunlap and other top executives at Sunbeam ignored accounting

rules and sought out loopholes that would allow them to boast massive profits. Dunlap

himself was a large proponent of the shareholder value theory, and sought to create as

much value as he could in the least amount of time. Dunlap and the team of executives at

Sunbeam knew that the fraudulent accounting that they were using was unethical, but they

were just trying to turn a profit long enough to sell their shares of stock in the company to

make some money. Dunlap’s continued search for profit led Sunbeam to financial ruin, and

his overt irresponsibility caused the public to lose massive amounts of money because they

invested in Enron stock. Throughout the course of his business deals, Dunlap also acquired

several companies. The three acquisitions that Sunbeam purchased right before their stock

rose to an all time high were paid for mostly in Sunbeam stock, as the investors were

confident that share price would continue to risk giving them more money for the

exchange. The case of Sunbeam again points to a lack of management ethics driving a

company further towards the pursuit of profit while losing sight of their impact on the

public.

The Housing Bubble and Financial Collapse:

Another more recent scandal of greed in America was the housing bubble and

subsequent emergence of what would be called the “Great Recession” in America. The

issuance of subprime loans for housing caused the market to form a bubble, which

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eventually burst in late 2007. A large decline in home prices after the collapse of the

housing bubble led to a significant rise in mortgage delinquencies. With the increase in

delinquencies foreclosures became rampant, and many Americans lost their homes. What

perpetrated this and allowed it to occur? Mortgage and loan lenders began lowering their

standards for credit and began issuing loans known as subprime mortgages for housing.

Subprime mortgages are a type of loan granted to individuals with poor credit histories

(often below 600), who, as a result of their deficient credit ratings, would not be able to

qualify for conventional mortgages. Because subprime borrowers present a higher risk for

lenders, subprime mortgages charge interest rates above the prime lending rate. (Holt

2009) Normal mortgage loans normally had fairly consistent standards in the decades

prior to the development of the housing bubble. A typical loan would be a 30-year fixed

rate loan requiring a down payment of at least 20% of the value of the home. In the mid

1990s new governmental policies were enacted that contributed to a relaxation of

standards for mortgage loans. The Community Reinvestment Act was modified in 1995 to

compel banks to increase their mortgage lending to lower income households. (Holt 2009)

To meet these new standards, many banks relaxed their criteria for giving out mortgage

loans.

The housing crisis was not caused only by the relaxation of mortgage standards by

the government. While the relaxation of these standards did allow new mortgages to be

issued to those who may not have typically been able to receive a loan due to their

economic conditions before, the root of the problem came from lenders. In their search for

ever increasing amounts of profit, mortgage lenders realized that they could now issue

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more loans to people who typically couldn't have applied, opening up a whole new market

segment for them. After issuing these loans, lenders would often sell their mortgages, in

order to mitigate some of their risk. Investors then sold these mortgages as a "package

deal" in something called a Collateralized Debt Obligation (CDO). These considered of

thousands of mortgages making an asset-backed security that investment banks could sell.

Thus lenders could issue massive amounts of subprime mortgages and then sell them off to

reduce their risk and make some money.

Subprime loans were not inherently bad, as they could provide benefit for

consumers who had low credit. However, most of those mortgages written and purchased

to meet arbitrary quotas were high risk ones that “…would never have been made by

capitalists who have to balance the possibility of profit against the risk of loss.” (Leef 2014)

The greed of both investment bankers and lenders led to a huge increase in an issuance of

these types of loans and when the housing bubble burst this house of cards came tumbling

down. Many jobs within the housing industry were lost in addition to many individuals

losing homes that they most likely never should have borrowed to purchase.

Who else was affected by this? Many different investment banks now invested in

many different CDO's that were primarily made up of mortgages. When people began to

default on these loans, which was thought to be impossible on a scale that would affect the

CDO's, investment banks quickly realized that they were in trouble. Several lending

institutions such as Lehman Brothers or Washington Mutual went out of business. As the

recession spread to other industries, America lost many large companies to bankruptcy.

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The government subsequently bailed out certain key companies such as AIG or General

Motors in order to keep the economy from totally collapsing.

Who is to blame for what happened? There are various critics that say the

government and regulators did not do enough to ensure the ratings on the CDO's. Others

think that the rating agencies were profit driven, caring very little about the ratings they

were giving out as long as they kept their customers. Another frequently attacked group is

mortgage lenders. Many people feel that because they were on the front line handing out

these subprime mortgages that they were ultimately responsible for the results of their

actions. Some people argue, “…some of the sub-prime lenders, really had bad practices.

They were pushing exotic loans to people that couldn’t afford even a month of the

mortgage payment. But they were a very small fraction of the sub-prime market, as well.”

(Wharton 2015) Regardless of whom the blame falls upon, the financial collapse showed

that greed within the marketplace on both side led to questionable management tactics

that ultimately caused a collapse.

Existing Alternatives :

The previous examples of Enron and Sunbeam along with the housing bubble and

overall financial collapse in 2008 provide past examples of how when corporations are

managed irresponsibly and unethically. Both Enron and Sunbeam looked towards the

future with a shareholder focus, trying to earn as much profit as they could. The housing

bubble and overall financial collapse was also perpetuated by lending institutions

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searching for rising profits through the sale of subprime loans. Are we destined to see more

companies like Enron and Sunbeam fail because they become so large and profit focused?

Or is there another type of company that will begin to emerge that will focus on its workers

first and profit second? In recent years there has been a rise in companies that have begun

to focus less on profit and more on helping the world such as TOMS Shoes. In addition

companies place their workers first and profit second such as the Mondragon Corporation.

The last half of this paper will discuss these examples, and will discuss what can be done to

ensure that company management does not act unethically.

TOMS Shoes:

TOMS Shoes is a company that was founded with the intention of both generating

revenue and providing a charitable service at the same time. For every pair of shoes that is

purchased, TOMS will donate a pair to people in need. After the initial success and

reception of their business model, TOMS expanded their gift of shoes to other gifts, such as

sight, water, safe birth, and kindness. Overall TOMS is a company that prides itself on the

work that it does to help other people. On their website one can not only see a link to go to

their catalogue to go buy shoes but a shopper will prominently see a large ad about their

one for one gift giving program. In addition TOMS describes the type of person who works

or shops at TOMS as a tribe member. A quote from their site about tribe members reads "As

a TOMS tribe member, you aspire to be part of something bigger -HELPING OTHERS AND

GIVING BACK - while letting inspiration guide your efforts and involvement.” (TOMS 2016)

Helping others and giving back is a large part of what TOMS believes in, and TOMS is a

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great example of what a company can do when they are truly shareholder focused. TOMS

also includes a quote about what to do if someone asks you about the TOMS Giving story,

“Let them know that you stand for creating positive impact, and influencing others to think

about new ways that BUSINESS CAN IMPROVE LIVES and the world around us.” (TOMS

2016) Clearly TOMS has figured out that businesses can both turn a profit and help the

world at the same time. This is not to say however that all businesses other than TOMS or

ones like it do not improve the world, but TOMS teaches the lesson that profits can still be

made in addition to having a significant impact on the world.

Mondragon Corporation:

The Mondragon Corporation is a corporation and federation of worker cooperatives

based in the Basque region of Spain. Graduates of a local technical college founded

Mondragon in the town of Mondragón in 1956. Mondragon believes in the philosophy of

workers first, profit second and operates around the idea of a worker controlled business.

Within Mondragon there is a living wage that gets paid to employees, and there is never a

larger pay gap than 6:1 for any employee. That means that even the CEO of the corporation

cannot earn more than six times the lowest paid worker. The majority of profits within

Mondragon go to their workers as well, around 70%. By placing such an emphasis on their

workers, Mondragon has become extremely profitable. “Whereas workers at other Spanish

companies must answer to shareholder needs – often by sacrificing their jobs – that is not

true at Mondragon, which acts as the parent company to 111 small, medium-sized and

larger co-ops.” (Tremlett 2013) When times are tough, Mondragon cuts wages instead of

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letting people go. This is decided by the employees, with management using taking the

largest cut so that workers can keep their jobs. Because there are so many different

cooperatives, Mondragon can move around excess employees from areas where they are

not needed to ones that might be struggling. For example, when one of Mondragon’s

cooperatives, Fagor, encountered financial difficulty Mondragon lent it over 700 million

euros to help it recover. When it became apparent that the company could not recover,

Mondragon did not abandon it however. It relocated 600 of Fagor’s worker-owners to

other cooperatives belonging to Mondragon. The actions of the Mondragon corporation

show that there are efforts that can be made to place workers and the public at the center

of a company’s operations. By having cooperatives that are worker-owner operated there

is a higher sense of accountability between various members of the organization.

Policy Implications:

Management ethics play a large role in how a company functions. It has been seen

that companies such as Enron or Sunbeam and the organizations involved in the housing

crisis and subsequent financial collapse were negligent in their actions. But there are also

companies who embody great management tactics and care about their workers. Examples

of each beg the question of what is the right way to manage an organization, and if there is

anything that can be done to fix current corporations. Shareholder and stakeholder

approaches are very popular styles of running a business. Shareholder focuses mainly on

the overall profit of the corporation, while stakeholder seeks to maximize the value for

consumers. Both Enron and Sunbeam were heavily focused on the shareholder perspective.

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Each corporation cared about making sure that important shareholders in the company

were getting rich, and they sacrificed ethics to do so. In contract companies such as TOMS

have focused more on a stakeholder approach, making sure that consumers are impacted

positively through the sales of their products. For companies like TOMS, the social impact

that they can provide is more important than their profits. Regulation has closed most of

the loopholes that made scandals such as Enron and Sunbeam occur, but it does nothing to

address the overall mindset of these types of corporations. There is no absolute solution

that would solve a shareholder centric approach. In fact, a shareholder approach is still a

valid way of running a company; it is only when a lack of ethics is present when it becomes

dangerous. It is easy to say that a company should reorganize itself to be more stakeholder

centric in order to avoid this potential conflict, but this may not be possible for most

companies. Companies can be too large to change their current business model, or simply

just unwilling to do so. Where the change needs to start instead is in school and society. By

placing more emphasis on ethics within business education, new workers can surround

themselves with an ethical decision making framework from the start. In addition, as more

businesses like TOMS and Mondragon begin to appear new business models can begin to

take shape. By focusing more on consumers and stakeholders, new corporations such as

these have the ability to change the way people think about business. In conclusion, past

companies such as Enron and Sunbeam along with all those involved in the financial

collapse have shown that having a shareholder focus with a lack of ethics is a dangerous

combination. Current companies such as TOMS and Mondragon show that when companies

are ethically focused they can achieve great things. There are numerous policy actions that

have been put in place to safeguard the accounting loopholes that made many of these

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scandals possible, but there are no policy actions that can correct this attitude within

businesses. Only by continuing to stress the value of management ethics can another Enron

or Sunbeam be prevented. In the future the United States may see a change in the

composition of its top businesses, companies like TOMS will continue to expand or

cooperatives like Mondragon may appear in America. Should this happen consumers will

see a large change in the way companies operate, and may see that their consumer

experience changes as well.

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Works Cited

Bratton, WW. "Enron and the Dark Side of Shareholder Value." Tulane Law Review 76 (n.d.): n.

pag. Print.

Bumiller, Elisabeth. "Bush Signs Bill Aimed at Fraud In Corporations." The New York Times. The

New York Times, 30 July 2002. Web. 08 May 2016.

Collins, Glenn. "Sunbeam to Halve Work Force Of 12,000 and Sell Some Units." The New York

Times. The New York Times, 12 Nov. 1996. Web. 10 May 2016.

"The Fall of Enron." NPR. N.p., n.d. Web. <http://www.npr.org/news/specials/enron/>.

Holt, Jeff. "A Summary of the Primary Causes of the Housing Bubble and the Resulting Credit

Crisis: A Non-Technical Paper." The Journal of Business Inquiry (2009): n. pag. Web.

<https://www.uvu.edu/woodbury/docs/summaryoftheprimarycauseofthehousingbubble.

pdf>.

Keller, Bill. "Enron for Dummies." The New York Times. The New York Times, 25 Jan. 2002. Web.

09 May 2016.

Leef, George. "One Bad Law Usually Leads To Others: The Housing Bubble and Dodd-

Frank." Forbes. Forbes Magazine, 10 Jan. 2014. Web. 10 May 2016.

"The One for One Company | TOMS." The One for One Company | TOMS. N.p., n.d. Web. 11 May

2016. <http://www.toms.com/>.

Petrick, Joseph A., and J. F. Quinn. Management Ethics: Integrity at Work. Thousand Oaks, CA: Sage

Publications, 1997. Print.

Tremlett, Giles. "Mondragon: Spain's Giant Co-operative Where times Are Hard but Few Go

Bust." The Guardian. Guardian News and Media, 07 Mar. 2013. Web. 07 May 2016.

"Why Sub-prime Lenders Didn't Cause the Housing Crash." Knowledge @ Wharton. N.p., 17 Sept.

2015. Web. 11 May 2016. <http://knowledge.wharton.upenn.edu/article/why-sub-prime-

lenders-didnt-cause-the-housing-crash/>.

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