Ethics in modern society

Ethics

AIG and Ethics: Lessons Learned

The exceptional lack of ethics during the first years of the 21st century immediately triggered an onslaught of global legislation that sought to enforce governance and compliance across businesses globally. Each nation has enacted their own governance, risk and compliance (GRC) initiatives, with the best known and stringent to adhere to being the Sarbanes-Oxley Act (Bradford, Taylor, Brazel, 2010). Legislating compliance and adherence to financial reporting requirements does not guarantee that ethical conduct will follow, as is seen in the mortgage and subprime mortgage crisis of 2008 to 2010. One of the most notorious companies who used credit swaps and eventually became so financially leveraged that they nearly collapsed was American International Group (AIG). In addition to needing government assistance on multiple occasions, the company held lavish parties at premier hotels including one that cost over $400,000 at the St. Regis Resort in Dana Point, California (Jakobson, 2009). This party was thrown the same week they received a $37B bailout from the U.S. Government. Despite the promises from their C-level executives to the U.S. Congress that AIG would amend its ways and would strive towards transparency to earn trust while drastically reducing company spending, lavish spending and large bonuses continued to be paid. The ethicacy of taking a $37B government bailout and continuing to spend at times lavishly is discussed in this paper. A definition of ethics is first provided, followed by how ethics produce profits, and finally an analysis of lessons learned by AIG.

Defining Ethics

Of the many different definitions of ethics the one that has the clearest and most concise meaning is from Josephson (2010) who states that "ethics involve first the ability to discern right and wrong, and second, the commitment to do what is good and aligning with what ethical conduct is. Ethics then requires action to be undertaken; to be ethical is to act in a consistently transparent and honest way." Dr. Josephson also states that the combined effects of a person's cultural, economic, religious, spiritual, and social interactions accumulated over their lives define their values (Josephson, 2010). Ethics place equal weight on the outcomes to each side of a decision and seek to create an equitable balance of interest (Josephson, 2010).

Ethics cannot be immediately turned on or turned off, or enforced from the outside so that immediate results occur quickly. It is the progression of change that occurs over time that makes ethical decision-making consistent, transparent, and impactful on companies.

How do companies quickly change their ethical climate from one of disregarding authenticity and transparency to embracing it and holding themselves accountable? Research shows the transformation of an organization to becoming ethical begins with the leader and the example they set. A study conducted by the Institute for Global Ethics (1996) interviewed 272 individuals were asked to identify the most important traits of the leaders. Out of the fifteen traits lists, the top three values of truth, compassion, and responsibility (Institute for Global Ethics, 2010).

When respondents to the survey were asked to cite the most important trait in a leader that most influenced their decision to pursue ethical, authenticity and compassion were tied for first place. The ethical behavior of leaders is directly dependent on their loyalty, honesty, fairness, caring, respect, tolerance, duty, and moral courage (Institute for Global Ethics, 2010). Considering the many scandals of the last ten to fifteen years and the fact that a whistleblower broke open one of the largest, Enron, the research cited by the Institute of Global Ethics is consistent and supported. The net result of the Enron scandal and many others is that employees are much more skeptical and questioning of their C-level executives. Employees are holding their leaders to a higher standard ethically and from a performance standpoint. This latter point is also being driven by the economic turbulence and global economic recession that has many employees looking to their company's leaders to guide their organizations through these challenging times. When the factors that survey respondents mention as inspiring the greatest ethical behavior are combined with leaders who take on the responsibility of guiding their firms through difficult times one single value emerges. It is trust. Trust is the catalyst of ethical behavior and without it, a leader, and an entire company will fail. For AIG they are playing a dangerous game with the public's trust, the governments' and their own employees and customers. If they do not navigate through these times and focus on how to retain and grow trust not amount of a bailout will help.

The Need for Ethics: Why Doing Well by Doing Good Produces Profits

When there is equitable treatment of both sides of any relationship the capacity for ethical decisions and behavior increases exponentially over time (Josephson, 2010). The bottom line is that strong ethics in any company is going to set the foundation for consistent, profitable earnings growth. Strong ethics make a company trustworthy. Customers buy from whom they trust. The entire cycle of attracting, selling, and serving customers begins with a strong foundation of ethics. Without it, a company will fail and many are today as a result. For a new company just launched the ability to move from early adopters who first purchase their products to attracting mainstream customers, the journey begins with strong trust. For AIG, this is going to be a long journey. Their lessons learned are described in the next section of this paper.

AIG Ethics lessons Learned

Beginning with the loan swaps and the use of highly leveraged debt to continue investing, the AIG management team clearly believed that the business model they had created would not fail (Efrati, Pleven, 2008). With over 50% of the company's liquidity tied up in these highly risky investments, the potential for default was exceptionally high (Harrington, 2009). As the economic condition worsened, it became evident that the highly leveraged investments over time would eventually fail and the company would lose a sizeable amount of its liquidity. From an ethics standpoint, AIG had overbalanced the scales of their investment so far in their favor that when the economic conditions globally worsened they would have no choice but to cease operations without a bailout from the U.S. Government. "Too Big to Fail" was the rallying cry in Congress to say AIG, yet it could have just as likely been "Too Greedy to Stop" as warning signs was ignored and the investments gradually became worthless due to their highly leveraged status (Harrington, 2009). This first lesson learned of business models that have unethical aspects to them eventually forcing an entire company into bankruptcy further underscore's Dr. Josephson's point about ethics. The fact that for ethical operations of a company to succeed there needs to be a balance between everyone is often illustrated when this is not the case (Josephson, 2010). For AIG, the need to balance the riskiness of their investments with the needs of their investors for a stable, realistic rate of return and the need to keep their company liquidity positive would have led to an entirely different set of decisions and strategies.

The second lesson learned for AIG is the need for accountability and transparency company-wide. The same day the U.S. Government wires the company $37B to keep them solvent, the executives and top sales teams are at an exclusive Southern California resort for a sales celebration costing over $400,000 (Jakobson, 2009). This is a glaring example of how badly governance and oversight is in AIG. Imagine if the CEO of AIG was at the U.S. Capital lobbying for the funds and thanking lawmakers and CNN reported about the lavish party happening at the St. Regis Resort in Dana Point, CA? That would have forced the issue wide open. This is not mean-spirited; it is the truth of the company and its lack of governance. For AIG, the need for a corporate wide governance, risk, and compliance (GRC) framework is clear. The use of a GRC framework can ensure a higher level of corporate-wide compliance and accountability to ethics initiatives, and is much more effective than individualized strategies (Verschoor, 2005). The lesson learned for AIG is that despite being a multibillion-dollar organization with many different divisions, as far as ethics is concerned it needs to present a unified identity to the public, shareholders, and its latest creditor, the U.S. Government. When one considers the change, at the organizational culture level, that AIG needs to make, the need for consistent and thorough governance, risk, and compliance (GRC) framework is clear.