Ethical Dilemmas of Fannie Mae

Business Ethics and Corporate Social Responsibility Page |

Fannie Mae

Outside Evaluation Related to Corporate Governance and Business Ethics

Corporate social responsibility is the corporate conscience of the company that provides corporate self-regulation combined with business models (D Wood, 1991). The CSR policy framework provides guidelines for businesses to have active compliance with the corporate laws, ethical standards and international norms if the company is doing business globally. The objective of CSR policy guideline is to encourage company towards activities that supports positive work environment, consumer care, employee development, community responsibility, stakeholders concerns and external public affair. CSR proactively augment the public interest (PI) by encouraging community growth and development, and voluntarily eliminate actions that harm the public interest, regardless of legality (Saether, Kim T. & Ruth V. Aguilera, 2008). The corporate social responsibility is the model of Creating Shared Value. The shared value model is built on the idea that corporate success and social welfare are interdependent concepts. A business needs a healthy, educated workforce, sustainable resources and adept government to compete effectively (Porter M.E & Kramer M.R.). Lot of companies applies the strategy of benchmarking to compete in the industry in CSR policy formulation, implementation, and effectiveness. Benchmarking involves reviewing competitor CSR initiatives, as well as measuring and evaluating the impact these policies have on society and the environment, and how customers understands competitor's CSR strategy. Outside or external evaluation of the company sets this benchmark and compares it with the internal assessment of the company. However, for ethical business operation it is very important for the company to set its ration based on transparent accounting practices adopted.

2. Fannie Mae's Financial Misrepresentation and Barnes Response

Fannie Mae was found to ignore the financial reporting standards and market practices for the purpose of gaining their desired level of profits per year and targeted EPS which was set to be $6.24 by 2005. In this respect the areas identified by Roger Barnes, employee in the Controller office had investigated certain flaws and put it forward for management concern. But all his investigations were ignored by the management until it was identified by local newspaper and OFHEO reports, but by then he had left the company. The areas of financial reporting flaws were identified: Profits and losses on high risk derivative instruments were kept off the books by treating them as hedges. This decision was taken by the company without taking into consideration whether such treatment qualifies under accounting rules for exemptions from earnings statements. The result was that these losses were eventually brought back into earnings with a multibillion impact when these types of risky instruments were uncovered in 2005.

The other area which was identified was over the amortization policies. The aspect of amortization in financial reporting is very critical areas it reflects the profitability and capability of the company to bear financial losses in future. Fannie Mae's amortization policies were not in accordance with the GAAP. The amortization policies were depended on the computerized model that would shorten the time of loan in order to increase earnings and company's performance with higher yields.

No steps were taken by Fannie Mae's management in response to the alert given by Roger Barnes based on his investigation and Ethics and compliance office had turned deaf ear to this investigation. The primary purpose of this department was to defend the company from any allegations and suits by employees. They were not providing complete information to the audit committee for further investigation and the issue was not taken seriously until it came black and white in local newspapers and OFHEO reports.

Socially responsible firm's foremost duty is to taking into consideration all the justified and legal means of business operation and brings to public notice if any anti-social or anti-economical activity is come across the business operation. Instead of concealing it in four walls of business entity it should be brought to public notice (Gray, R.H. Owen D.L. & Maunders, K.T. 1987).

3. Incentive Plans and Internal Control

Planned and controlled incentive program contributes to the productivity of an organization by encouraging competitiveness position in the market place and by motivating internal staff to work best for the company profitability and sustainability. An important element of the incentive plan is the executive bonus strategy that can attract and retain professional and experienced personnel in the organization. However, if the bonus plan is not properly implemented within organization it can result in even intensified drawbacks than the benefits a firm can reap for its proper implementation. One such critical element is the corporate fund spent to provide incentives attractive enough to motivate executives and improve their performance. Lesson for management to learn here is that, successful plan is the one that has internal control framework and strategic implementation of this framework. This can only ensure reasonable, justified and logical bonus distribution among the employees of an organization.

As a matter of recruiting and retaining the best executives, the program must be externally competitive and internally justified. The bonus program must be considered from the perspective of the total executive compensation package. The significant parameters of best laid incentive plan is 1) effective internal control system, 2) Prudent structural design of the plan, 3) Sensible and justified bonus reward system and, 4) Proper administration to ensure rational implementation (Heiman, Frederick D. 2008).

4. Volatility Concerns

Volatility, called as arbitrary volatility was just literally concept for the company based on views and expectations of interest rates and its contribution in modeling the premium and discount rate. It is not very much reflective of the fundamental financial performance of the company. The reason for this rational was that Fannie Mae had a fixed rate mortgage in its portfolio. Market fluctuations on the interest rates will not affect the portfolio of the company.

5. Recommendations for building Corporate social responsibility and ethical financial reporting

The company when decided to take full responsibility of their own actions are considered to be completely accountable. Social accounting is the concept that describes the communication of social and environmental concerns of the company, strategic actions, and responses to the needs of the particular group within the society at large are important parameters of the CSR policy guidelines. The framework of CSR policy for its best implementation by the firm can be modeled below in fig1.