41341966 why good managers make bad ethical choices case analysis

8/7/2019 41341966 Why Good Managers Make Bad Ethical Choices Case Analysis

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LOGO

Why good managersmake bad ethical

choices ??


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Contents

Introduction1

Manville Corporation Case2

Continental Illinois Bank Case3

E.F. Hutton Case4

Four Rationalizations5

Conclusion6


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Manville Corporation Case

Johns Manville is an American corporation based in Denver, Colorado thatmanufactures Insulation, roofing materials, and engineered products.

It was counted amongst the giants of American business.

The corporation faced major class action lawsuit in the 1980s based onasbestos-related injuries such as Mesothelioma and lung cancer.

Asbestos , the major product of Manville , was a fibrous amphibole; usedfor making fireproof articles; inhaling fibers can cause asbestosis or

lung cancer.

This information was made available to companys top executives 40 yearsback in 1940. Managers and the medical department suppressed theinformation.


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Corporate counsel clearly stated in an interview to their lawyer that theyvalued their profitability more than the lives of their employees.

They hid the truth from employees rather than looking for safer ways todo work.

It was a cold blooded business decision to take no protective or remedialaction.

Now the question arises that

How can we explain this behavior?

Was more than 40 years worth of Manville executive all immoral?


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Continental Illinois Bank

Problem faced by the Bank

1. On the verge of insolvency

2. 80% of equity taken over by FDIC

3. Brought down by managers who misunderstood real interest

4. Focused on pursuit of corporate ends ignoring the means to the ends


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What was wrong

1. Bought shaky loans that had been made by small banks that had lessmoney. These loans were given out to poorly capitalized oil producers inOklahama. When oil prices fell the bank lost its money.

2. Money lent at high interest rate without background check. Failure ofcontrol and judgment because officers buying those shaky loans gotsupport and praise from superiors.

3. Lack of documentation required for verification of purchased loans


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The Effect

1. Instability of banks portfolio leaked in public

2. Massive run on deposits

3. No other bank willing to rescue

4. Federal govt came to rescue

5. Loss to shareholders

6. 2000 employees sacked


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E. F. Hutton &Company

What was wrong??

1. In 1980, several Hutton branches began writing checks greater than whatthey had on hand at one bank, then making a deposit in another bankequal to the amount it wrote at the first bank. This strategy, known as

"chaining

2. It gave Hutton the use of money in both accounts until the checks cleared.In effect, Hutton was giving itself a free loan that also didn't carry anyinterest

3. Hutton shuffled money in this manner between 400 banks (mostly smallrural banks), gaining the use of an estimated $250 million a day withoutpaying a penny in interest.


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The Effect

1. Had to pay a fine of $750,000

2. Several officers lost their jobs

3. Tarnished its reputation

4. Couldnt find people for filling position of new directors due to bad publicity


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Four Rationalizations

The four commonly held rationalizations that explain why decision-makers(managers) behave unethically:

1. A belief that the activity is not really illegal or immoral. The perception is thatactivity is within reasonable and ethical limits.

2. A belief that the activity is in the individuals or the corporations best interest.

3. A belief that the activity is safe because it will never be found out orpublicized. Referred as classic crime and punishment issue of discovery.

4. A belief that since the activity helps the company, the company will condone it

and even protect the person who engages in it.

The issue in hand is complex and involves interplay between top managementsgoal and middle managers effort to interpret those aims.


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First Rationalization

When employees face an ambiguous situation, some may conclude thatwhatever has not been predetermined as wrong must be correct. This getsreinforced in case employees are rewarded for certain acts.

Example: In case of Hutton, Deliberate overdrafts were not proscribed. Sincethe company had not spelled out their illegality, it could later plead guilty for

itself while shielding its employees from prosecution.

When managers must operate in murky borderlands, their mostreliable guideline is: when in doubt, dont.

How can this be prevented??

Regarding the first rationalization, In order to avoid misunderstandings,companies must establish ethical guidelines for all employees.


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Second Rationalization

The second rationalization explains that managers take risks resulting fromtheir parochial view of companys benefits which ultimately gets the companyinto trouble.

In the second rationalization, ambition plays a key role.

Ambitious managers look for ways to attract auspicious attention by reachingthe expected results, even if it ultimately implies putting the organization atrisk. Many managers have been promoted on the basis of the results obtainedin those ways because of the lack of an objective review of their successeswhich leaves their inherent successors to face problems later.

How can this be prevented??

By making use of independent auditing agency that reports to outside directorsa convincing and effective review can be reached at. The real interest of thecompany are served by honest conduct in first place and same must beemphasized.


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Third Rationalization

The third rationalization is perhaps the most difficult to deal with because muchof the restricted behaviour escapes detection.

How can we prevent wrongdoing that is unlikely to be detected?

The answer lies in making it more likely to be detected.

This can be achieved by increasing the frequency of audits and spot checkscombined with other techniques, such as scheduling unannounced audits.

Further, trespass detected should not be dealt with discreetly and misconduct

should be announced to make an example of such cases.

Example: When Manville concealed the evidence of asbestoss they believedthat their actions will not be detected.


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Fourth Rationalization

The fourth rationalization a belief that the company will condone actions thatare taken in its interest is linked to the issue of company loyalty.

While executives have a right to expect loyalty from employees, they cannotexpect such loyalty to be against the law or against common morality.

What should Organizations do for this?

Organizations should instead formally and regularly stress that loyalty to thecompany does not excuse acts that jeopardize its reputation.


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Conclusion

The most extreme examples of corporate misconduct were due to managerialfailures.

A good way to avoid management oversights is to have effective controlmechanism in form of periodic surprise audits, perhaps as a function of board

of directors.

The main point is to ensure that internal audits and controls function asplanned.


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41341966 why good managers make bad ethical choices case analysis

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