Collective and Corporate Responsibility
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The economic meltdown, witnessed first in the U.S. and later in Europe, wreaked havoc not only on the affected economies, but on the global economy as a whole. No single, particular factor can be attributed to this grave condition. A number of factors, however, have been identified as having contributed to the crisis which caused economic shock. Many livelihoods were destroyed, families lost massive investments, which they had taken years to build, and governments were scrambling to come to the aid of corporations to keep them afloat. Even before the real effect of this crisis had hit home, blames, accusations and counter-accusations had made enough headlines (Witzel 34). Both the governments and corporations were trading accusations on who should be held accountable for this crisis. However, the government and corporate entities were equally blamed for the financial crisis. Governments failed in their regulatory and supervisory role to guard against business malpractices by corporations. On the other hand, corporations resorted to unethical and unprofessional ways of doing business.
Governments committed billions of dollars to bail out many giants in the business world to avoid further damage. This cheated the tax payers twice; the same culprits who had caused this crisis were given tax payers’ money to keep them alive. As if corporations had not learnt from their mistakes, some opted to pay heavy bonuses, while others benefited from their executives out of the same funds (O’Brien 56). This has caused uproar even among those in governments. The question of ethical and professional aptitude concerning these executives has also been raised. This paper looks into the ethical aspect of awarding huge bonuses or dividends to executives of bailed out corporations. It will also endeavor to analyze how to tackle this ethical issue.
Effects of Financial Crisis
Many commentators of the financial crisis have tried to analyze the root cause of the financial crises. There are many different explanations as there are many different commentators. The consequences, however, are evident and real to quantify. The financial crisis caused winding up of some of the leading financial institutions; many banks were bailed out by the state to stay in business, and an enormous downward spiral was witnessed in stock market across the world. The housing sector suffered heavily, leading to foreclosure and evictions. Citizens lost employments, and there was general decline in the economy and wealth. These have led to a lot of social, psychological, and economic suffering of millions of people around the globe. The governments provided massive bailouts in dollars, plus there were taken other austerity measures to stir these ailing corporations to financial independence and profitability. Many of these corporations could not have been able to meet their financial obligations, were it not for this bail out.
The austerity measures stipulated general prudence on spending by those corporations which had received government monies. Among the bills these corporations had to clear were huge payments for their executives in terms of bonuses and other benefits. It is these payments which left many wondering whether executives’ bonuses were necessary payments under the current circumstances. Many corporations, of course, insisted that these payments had been agreed on even before the crisis became apparent. They reasoned that this was a part of their core financial obligations they had to meet. However, many read greed, insincerity, and unethical practice in the actions of these executives.
Ethics and Leadership
The reports that large corporations benefited from government bailout were spending millions to pay their executives bonuses were met by the general public with outcry and dismay. This is a case of ethics in leadership. Many would have expected the leadership of these corporations to show concerns about the plight of their corporations. They could have probably waited until conditions improve before awarding themselves these huge bonuses. Moreover, the leaderships of these corporations awarded the bonuses to their executives in full, and they did that almost immediately the bail out money was received.
The ethical question is, therefore, whether or not the management had acted in a reasonable manner having executed these payments. In early 2009, The American International Group (AIG) was planning to pay close to $165 million in bonuses to its executives (Andrews and Baker). According to Andrews and Baker, few months earlier, AIG had received a whopping $170 billion in bailout from the government. Was AIG leadership acting in the interest of the organization? Most people did not find it so. The government of the United States found this move “unacceptable” and requested AIG to renegotiate these payments. However, lawyers argue that the firm was legally obliged to pay. AIG leadership, however, views it beyond legality. It sees it in the wider spectrum of business strategy of attracting and maintaining a competent and skilled labor force. It reasons that current and potential employees will shy away from the corporation if treasury consistently keeps adjusting their compensations. Other major recipients of government bailouts are the Citigroup Inc. and Bank of America Corp. The two giant banks were also planning to award bonuses to their employees. The logical reason of hard economic time was superseded by legal and business strategy when it came to paying out bonuses by AIG, Citigroup, BA and other bailed out recipients. Moreover, some of the recipients of the executive bonuses belonged to the division which initiated flawed financial programs, as it was the case with AIG.
However, there is no logic behind legal and business strategy reasoning. These executive bonuses’ payments are a sign of greed in the corporations’ world. Bonuses should be earned based on performance and rewarded for hard work. Bonuses are paid for good performance of the entire organization and not because it is legally abiding even in case of losses. Bonuses are not necessary business expenditures and, thus, should be among the last in the list of priorities. Furthermore, the payment could have waited a little longer for the condition of the companies to improve. Paying later would not have been illegal as long as there were enough reasons to support this.
The financial elites in the corporate world are increasingly becoming corrupt. The level of trust which the society has in this group is decreasing further. As a show of concern for millions who had suffered due to the financial crisis, corporations should have deferred to pay these bonuses. Families had lost their homes and jobs among other losses. Ethically, it was wrong to be seeing gaining while everyone else is losing. This is despite the fact that it is legal. Paying bonuses in such a time was a wrong public relation move of the corporations. Deferring these payments would have helped in mending an already deteriorating public trust in corporations’ executives. As Milton Friedman put it, “This decline in public trust will be accelerated when people really grasp the enormity of the disaster created by Wall Street”. Ethical considerations should oblige business leadership to consider their actions in the light of public opinion. Waning public confidence will go a long way to hurt business strategies of the corporations for many years to come. The cost of damage control for their actions is also costlier.
Business Ethics and Individuals
From a legal perspective, a corporation is a person distinct from the persons who formed it. But the ethical responsibility of corporations lies with their shareholders, managements, and workers. Corporations which observe ethics have the potential of gaining financially in the long run. Many corporation executives will only tend to be ethical where there are rewards. This means that where there are no rewards, or where there is need for self sacrifice, these executives will deviate from ethics (Gomez-Mejia 43). The business executives’ mandate is to make as much money as possible while conforming themselves to achieve this within the fundamental societal rules, both legal and ethical. The individual carries the responsibility expected of a business entity. The custodians of business ethics are, thus, all its stakeholders. This responsibility is put in practice when it comes to voting of the best business decisions, either by the Shareholders, Directors or Executives. If a business makes poor decisions, the image of the company is hurt.
The business executives carry the bulk of the responsibility. It is them under whom the critical decisions of the business are made. They are supposed to respond back to the confidence which the shareholders and the public bestow on them. They should act in a manner beyond reproach on matters concerning ethics. This is the human face of the business. Whenever issues of legality and ethics compete, ethical considerations take a leading importance since they are part of the corporate social responsibility. Whenever there are ethical issues, the interest of the many takes the center stage. An ethical issue in business which takes into consideration only interests of the few at the expense of a majority fails in its goal. Many corporations show ethical tendencies not because they care much, but because of the importance of their actions in light of the public and image of the corporation. Ethical matters can help create a good or bad image of the company.
The economic crisis has led to the question of how far corporations can go to show remorse for their hurting actions. Many corporations, including their executives, have not come out to ask for forbearance from the public for what happened. They seem to point the finger else where. They are adamantly silence that they are involved in causing this crisis and instead, play the victims as well. The general public is resentful about this stand by corporations. Yet, many feel bitter for suffering so much and having done nothing in causing this crisis. Many citizens believe they shoulder more responsibility than the culprits. According to Geithner, US Treasury Secretary, “There is a deep sense across the country that those who were not ... responsible for this crisis are bearing a greater burden than those who were.”
Just like in dividends which are awarded after an outstanding performance, bonuses should be issued if the business performance is impressive. It was unethical to pay from what the company had not earned. Again, the whole essence of receiving government bailouts was to enable them stay afloat and avoid closure. The bail out was not received to pay bonuses. The executives should have been made to work hard to realize their bonuses. By setting aside huge amounts for this purpose, many critical areas of the business were left with no funds or remained under funded. These underfunded areas were actually critical to The question is whether issuing of bonuses was simply a lack of ethics or was a management failure to keep its priorities right. If the latter is the true, these corporations can be said to lack professional integrity. Prioritizing is a key feature of prudent business spending. Spending of limited amount of borrowed capital to award huge benefits to the executives was ill advised. Not only does it hurt the corporation financially, but also in the face of the public opinion, the image of the corporations is dented.
Controls in Absence of Ethics
When business executives demonstrate lack of ethics in their dealings, the necessary government controls and other measures should be put in place to protect citizens from exploitations. In terms of the controls, the U.S government tried to restrain the huge bonuses paid to executives by imposing a cap. This means that the corporation can only award bonuses not exceeding a statutory limit. In 2009, the Obama administration imposed a cap of $500,000 on executives for financial unstable corporations. But such a measure is limited in its application for the floundering corporations only.
A permanent solution to this unethical practice would be to instill a strong sense of ethics. This would be mainly carried out by the corporations themselves. Realizing the important role ethics plays in their business and profitability would instill a strong sense of responsibility and discipline. This in turn will nurture ethics among corporations. In many corporations, social responsibility and ethical practices are normally some of the core values. If many corporations lived up to their values, there would be There should be also change of corporations’ legislations governing the issuance of bonuses to executives. This should be such that they will be entitled to bonuses only when their businesss plans have been successfully tried and the results have been determined. Agreement signed even two years prior to paying should be eligible to revision to avoid paying out even when the executives’ decisions have failed. Thus, paying should be pegged to successful results rather than agreements. The current system is rewarding failures. This gives executives little or no initiatives to take responsibility of their actions. All corporations which had received government hand outs and paid dividends to the executives were rewarding mediocrities.
An important aspect of avoiding the mistakes of the economic crisis is to ensure that the factors that led to it are not allowed to occur again. Many of these factors are hard to control, but there those that are relatively easy to control. One of the main reasons of financial crisis was business competition, which lured some businesses not to disclose all of their financial details. This was aimed at portraying them as financially stable. In reality, this was not the case. Therefore, federal and national laws which would guide on such matters should be enforced. Proper and full financial disclosure is an important and compulsory requirement of law.
Prosecuting the culprits who bear the greatest accountability for the financial crisis can also act as a deterrent to those who may use unethical and unprofessional methods to profit themselves. Much of what happened during the economic meltdown is likely to happen again, since there has never been a single prosecution of the culprits of this crisis. Furthermore, it turns out that the crisis not only benefited some few individuals, but rewarded those whom it was supposed to reprimand. This set a bad precedent for such future cases. Thus, prosecutions and amending legislations can be used as a deterrent.
The Board of Directors should adopt policies aimed at controlling spending on particular areas, such as entertainment, for example. These will mean fewer claims by employees. The overall goal is to minimize the overheads accruing from business executives as much as possible. This would also give shareholders more say in determination of business executives’ remuneration. This will ensure a balanced and a non-wasteful remuneration.
In addition, top executives of financial organizations should be made to hold stocks in the institutions for several years. This will ensure that they have the interest of the institution at heart. It will also ensure that they have more stakes at the institution than employment. Such a legislative solution to this menace will be the most appropriate.
Most of these measures were put in place at the height of the public outcry about these payments. This was aimed at controlling more payouts in the form of “golden parachute” for executives who were leaving failing companies. It is noteworthy that the same executives who caused untold suffering to their corporations and beyond were entitled to bonuses. Moreover, they were entitled to receive severance package for leaving the collapsing firms. This was a classical case of rewarding failure. But some of those legislations came too slow and too late. By the time the government was announcing the “capping” measures, many corporations had already made these payments or were in the process. Consequently, corporations such as AIG, Citigroup Inc, and America Corp Bank, were not affected by these rules since they had already kicked off the bonus process by the time this directive was given (French 65).
The control by the government, much as it was deemed as the only way to control further exploitation, can still be avoided. The shareholder can pass a majority to decide to re-adjust the capping limit upwards. This provision gives the unethical business leadership the go ahead in executing their exploitive policies.
Furthermore, the new control measures require an overhaul of the executive bonuses. This will make sure that future payments will conform to rules and will be guided by prevailing economic condition of the time. Although there have been oppositions to these controls, it was the only way the government could have flexed its muscles to rescue the tax payer from this exploitation (Donaldson 54). It is known that too much government intervention can cause more harm than good; however, these measures were a wakeup call to the corporate world: shape up or be ready to be shaped. It is for the benefit of corporation when they uphold integrity and ethics in their dealings.
The economic crisis and the numerous negative effects it had on individuals, corporations, governments, and global economy as a whole will live for a long time. Many big corporations, which earlier on had been thought to be very stable, crumbled. Many people lost their hard earned fortunes. Jobs were lost as well as further suffering of the vulnerable was caused. However, a few individuals benefited from this crisis. These are the executives who were rewarded for presiding over the collapse of their corporations. They had to receive what was rightfully promised to them, while everyone else lost what had been painstakingly earned over the years.
The moral and ethical implications of these corporations to reward their executives’ huge bonuses at these critical times were profound. Although the legal obligation of paying these bonuses stood, receiving these hefty bonuses while everyone else was suffering was unethical. Deferral of these payments to future dates after conditions improved would have helped to save the image of many of these corporations (Baumhart 67). This is because they had just received bail out cash from the government, and in the eyes of the citizens, they ought to have first stirred their companies out of the crisis. They should have spent the bail out money wisely. Certainly, this was not wise. Most of unwise business actions should be avoided. If something is not necessary to do, it is mostly unethical.
Legally, the executives were right in their insistence on their benefits. But morally, it was ethically wrong to receive hefty amounts from ailing companies. Moreover, they lacked remorsefulness in their part as co-perpetrators of this crisis. Many of the policies which they had formulated did not work well; instead, they led to huge losses. Someone ought to have taken economic responsibilities. At least, they could have declined their benefits.
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