Business Ethics Recent High Profile Bankruptcies in

Business Ethics Recent high profile bankruptcies in the U.S. corporate sector such as the ones filed by Enron, WorldCom, and Global Crossing in 2001 have highlighted the importance of financial ethics in business since lack of ethical practices were identified as the main cause of their failures. The business scandals underlined the importance of stricter regulation of the corporate sector and forced the U.S. legislature to pass the Sarbanes-Oxley Act of 2002 that contains a number of important provisions relating to business ethics.

This paper about business ethics focuses on the impact of financial ethics in business. Greed and an over-riding focus on increasing the profits and "share-holder value" usually leads managers and business leaders to disregard financial ethics in business. Although the impact of such "over sight" may be beneficial in the short run, it is invariably disastrous in the long run -- both at the individual as well as the collective levels. Examples of the negative effect of disregarding ethical practices abound.

At Enron, for instance, ethics was put on the back burner as the company's corporate culture was obsessively focused on making "deals" and increasing Enron's share value. Its Board of Directors disregarded the company's own Code of Ethics by doing business with thousands of Special Purpose Entities (SPEs), some of which were owned by Enron's Chief Financial Officer himself.

The BOD turned a blind eye as the CFO made use of the SPEs to "park" Enron's troubled assets that were falling in value and unethically received more than $30 million in management fees from the SPEs. (Thomas 2002). Kenneth Lay, Enron's CEO and later Chairman, unethically exercised his stock options and pocketed profits, even as he was promoting Enron shares as a bargain buy to the employees.

Since lower level employees emulate the behavior of their bosses, such cavalier attitude of the Enron managers towards ethics, created a culture in the company where "cooking of books" to hide losses and showing non-existent profits through dubious accounting practice became common practice. (Thomas 2002) Some business people also erroneously assume that adherence to high ethical standards costs money. Contrary to this perception, it has been repeatedly observed that ethical practice in business actually saves money in the long-term.

For example, improving the quality of a product or service may cost money in the short run, but saving money on quality is likely to result in more serious problems later such as loss of customer loyalty. Moreover, compromising on quality often leads to forced expenses on re-working, inspection infrastructure, and scrap materials. The success of Japanese auto and consumer electronics industries in the 1970s is an appropriate example.

By focusing on quality Japan was able to capture the markets the world over while the Americans lost ground due to shoddy quality of their products. (Hackworth 1999) Other unethical financial practices also yield similar results. For example, an important principle of macroeconomics holds that companies making an excessive of return invite competitors who drive prices down, eventually depressing profits. Similarly, companies that try to earn large profits by exploiting their workers, usually meet a sorry end due to lack of employee loyalty and low morale.

(Ibid) The short-term nature of individual financial gains due to unethical practices is also exemplified by the fate of the crooked Enron executives. While M/s Kenneth Lay (Chairman), Jeffery Skilling (CEO) and Andrew Fastow (CFO) may have made millions at the expense of Enron, its employees and the stockholders; they did not live to enjoy the fruits of their unethical practices. All of them have been prosecuted and.