Merrill Lynch Barge Scenario Case Summary --

Merrill Lynch Barge Scenario

Case Summary -- Enron, a Texas-based energy company, was created in 1985 and had such phenomenal growth it was soon the seventh largest company in the U.S. until its bankruptcy in 2001. Enron was involved in a number of scandals, among which was the Nigerian Barge Case. Essentially, Enron attempted to sell interest in three power-generating barges off the coast of Nigeria, but was unsuccessful. By December of 1999, Merrill Lynch agreed to buy Enron's interest. Enron "loaned" ML 75% of the money, offering ML a guaranteed return of 15% on 7 million dollars ($1.05 million in 6 months). Essentially, the entire deal was a fraud, designed only to make Enron appear more profitable than it was. Most of the Enron promises were verbal, and the situation was never really a "sale," but a short-term leverage loan. Enron's objective, in fact, was to improve the way its income statement looked, so that it could borrow money at a lower interest rate, pay higher bonuses, and retain its momentum. Enron was unable to find a purchaser within the agreed upon timeframe, so its CEO, Andrew Fastow, arranged for another Enron company, LJM2, to fulfill the deal. As a result, ML executives were accused of obstruction justice, conspiracy, fraud, and lying (Flood, 2005; Ethics in Finance, Chapter 11).

Kantian Ethics - "To tell the truth is a duty, but is a duty only with regard to one who has a right to the truth. But no one has a right to a truth that harms others" (Immanuel Kant, "Grounding for the Metaphysics of Morals"). To many, Kant is the father of modern ethics, developing the view that morality is derived as an absolute -- or categorical imperative, necessary for human society to live appropriately. There are two types of concepts: 1) empirical, or ideas we learn about through our experience, and 2) a priori ideas that we reach because they simply exist in nature. Moral actions, to Kant, are a priori - "Reason's function is to bring a will that is good in itself, as opposed to good for some particular purpose"(Flikschuh, 2000). Kant then says that there are at least three propositions about duty that speak to our situation: 1) is the action to be taken morally good and done from duty? 2) is the action judged by a principal of a moral maxim for society, or 3) is the action not in respect for morals or law, but for the imperative of reason that goes beyond our other interests.

Virtue Theory -- Since humans began living in cities and organizing social and political organizations, they have debated what is good, what is evil, what makes one action moral, the other immoral, and how the philosophy of ethics balanced with virtue helps both society and the individual. For many, virtue is the theory of how each individual should be moral so that we can not only get along with others, but form a more positive and productive society. In fact, one assumes that part of being human in an advanced society is knowing the difference between what is right and what is wrong and then acting upon it. One way to think about this from a philosophical perspective is to use deontology, which emphasizes causes and effects through rules and duties, not just as amorphous laws set down for no reason, but for sound and practical reasons so that people can live together. Thus, the principles of virtue theory take the most admirable characteristics in humans and focuses them on ways to get along with others, find win-win situations in all aspects of life, and be proud of what we do with our lives (Virtue Ethics, 2012). "To experience these emotions [fear, courage, desire, anger, pity, and pleasure] at the right times and on the right occasions and toward the right persons and for the right causes and in the right manner is the mean or the supreme good, which is characteristic of virtue" (Aristotle, Nicomachean Ethics, II).

Corporate Social Responsibility -- To the ideas of Kant and Aristotle, we must also add the notion of Corporate Social Responsibility (CSR). While not mandated by enforceable law, per se, it is nonetheless an important component of modern organizational expectations. Certainly, no one can argue that international business causes more complexity as globalism increases. This complexity often increases when dealing with different ethical values between countries and cultures. However, the essence of CSR is that organizations must take a self-regulated approach to their actions so that governments do not need to over-regulate or legislate. CSR does this by using what stakeholders want -- fair profits, a win situation, and transparency in business. CSR encourages community growth, public disclosure and eliminating practices that harm or have the potential to harm society -- whether legal or not. The basis of CSR is doing what is right -- in the public interest while still maintaining corporate growth and profitability (Kotler and Lee, 2005).

Analysis -- Ethical Theory and Practical Reality -- If we analyze the Nigerian Barge situation from the ethical point-of-view, including virtue ethics, deontology and corporate social responsibility, we find the following:

Issue

Ethical Precedent

Result/Analysis

Enron's Purchase of the Barges

Kant, Virtue

Enron misrepresented the sale to ML simply in order to make its financial statements look better; this was unethical because it was a lie, could harm others, and was not transparent.