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Ethics: Complexity And Transparency In The Business World

2029 words - 9 pages

 

Fall
 

16
 

AFM
 431
 -­‐
 Essay
 
Group
 9
 
Neeraj
 Venkatraman,
 Rahul
 Bhambhani,
 Steven
 Yang,
 Ahmed
 Husain,
 Dilraj
 Dhillon
 

In today’s world, businesses have moved from complicated to downright complex. Firms, industries, and global business systems continue to invest in, employ, utilize, and revolve around many varying, technical, formal tools and mechanisms in the business world. In the context of global business, complexity can be loosely defined as the state of intricacy of interactions of people, objects, events, and transactions. The modern business world and the business environment is highly complex in ...view middle of the document...

Although “companies legitimately use SPEs to access capital and manage risk, Fastow’s sophisticated and complex use of SPEs was abusive and resulted in misleading financial information about Enron”.1 The main issue was that the ownership structure of the SPEs and business transactions were so complicated that no one was able to uncover the conflict of interest or ethical issues behind these transactions. This included creditors, auditors, and even potential investors. Despite public reporting of financial statements, Enron was never completely transparent with their business operations and transactions to their shareholders. If the firm had been more transparent to the public regarding the use of SPEs and the main purpose behind the usage, the scandal would not have reached such damaging heights.


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
 

Henderson et al., 2009
 

Another similar instance regarding complexity was uncovered in the late 2000’s when executives of RIM were accused of backdating stock options. According to the SEC, agreements and offer letters of the executives failed to acknowledge the fact that options were granted in-the-money. Although using stock options as a method of compensation is legal, granting in-the-money options is illegal. Crucial details from documentation such as issue date and price of options is essential in transparent reporting, which in RIM’s case were missing. This is a clear example of concealing information to benefit parties other than shareholders. Additionally, this goes against the SEC code of conduct and the “SEC’s resolve to assure full and accurate disclosure to U.S. investors by foreign issuers”.2 It is a requirement for all executive compensation to be declared, with the value of stock options needing to be accurately represented. With the lack of transparency, shareholders did not get an accurate picture of the compensation levels as the stock options were backdated. With stronger transparency, such an event could be prevented since executives would have to report all details regarding compensation. If all details are made public including stock option grant date, vesting periods, and option prices, management would be discouraged from participating in unethical behavior. Next, lack of transparency is not just a firm-specific problem. Occasionally, this issue can permeate an entire industry, leading to a far greater damage than what any individual firm could cause. The 2008 financial crisis, for instance, cost the U.S. economy an estimation of $12.8 trillion dollars while inducing a recession that the world is still recovering from.3 The largest contributor to this financial meltdown is arguably the extremely complex yet grossly opaque credit...

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