The Criticism Of Simpson And Brown Finance Essay - Free Essay Example

1. Simpson and Brown presumably acted in what they thought were the best profit interests of their companies. Nothing they did was illegal. On what grounds if any, are their actions open to criticism? Indeed the role of a financial manager in a corporation is key for a companys success. He has the responsibility in ensuring the proper workflow of the financial management process in the company including financial analysis, financial decision making and financial control which contributes fully to the successful management of the business. He has to make sure that there is effective funds management in which all the funds are properly allocated and utilized for organizational objectives. He is also in charge of making sure that the firm is exposed to minimum financial and foreign exchange risk and tax liabilities. He needs to interact with the financial market and other financial institutions to find more investment and financing opportunities for the company. He also has to be involved in handling the companys image and its good relationship with the financial community. Balancing the profitability of a company versus de aling with ethical issues surrounding a companys project is also part of a financial managers task. The financial manager is not only a financial specialist but is also involved in being part of a team. He is the key member of the senior management team who is required to have good interpersonal skills to be able to communicate among his colleagues, as well as have technical skills which is important in contributing to the overall management of the organization and its goal of value maximization. (McNemanin, 1999) In the case of Mr. Sumner Simpson, President of Raybestos-Manhattan and Vandivar Brown, Secretary of John-Mansville, financial managers to two different asbestos companies, they were only thinking of the long term value and benefit of their product and its impact to the company. As financial managers, their main goal is the maximization of value for shareholders. They have to ensure that the owners of the company are gaining significant profit from their investment i n the company. And Asbestos being in demand and a necessity in different manufacturing areas such as fireproofing, electrical insulation, building materials, brake linings and chemical filters, they knew that income will continue rising thus, overwriting its negative effects. The potential liability of the inhalation of asbestos was not a cause of immediate concern for Mr. Simpson and Mr. Brown. As stated in the article, only people who are exposed to this chemical for long periods of time, usually 10 years or more are the ones who develop asbestosis and mesthelioma. So the link between these illnesses and the asbestos product cannot be proven in a short span of time. In line with this, if the asbestos companies can prove through research that asbestosis was milder than silicosis, an illness which causes shortness of breath caused by inhalation of silica dust, they knew that they can give compensation to workers who will develop this disease. But the thought that asbestosis ca n be a compensable disease is also what made these financial managers bring their companies to financial ruin. Even as the link between asbestos and the lung diseases asbestosis and mesthelioma is not immediately apparent in the first year, the cases of workers who developed this sickness boomed after a few years. With so much sick workers filing for compensation, reaching almost 500 workers a month, Raybestos-Manhattan and John-Mansville corporation were spending more than they were earning to the point of filing for bankruptcy. They didnt think of the long term effect of this illness not only to the workers but to the company. Mr. Browns justification of concealing the true state of a workers health as long as he is not disabled to be able to happily work in the company shows the selfishness of the company towards the welfare of its workers. A caring company should make sure that their workers are in their best health condition to be able to work properly. In times of sickness, they should provide their employees proper health care. These are mandatory obligations of a company to their employees, who are major players in the success of a company. Mr. Simpson and Mr. Brown were too focused in thinking of maximization of wealth. They have forgotten that a company is made up not only of the owners but of all of those affected by corporate behavior such as the general public, workers and consumers. The Stakeholder theory states that in making corporate decisions, the company should always think of everyone involved in the company including the workers and consumers. In the Stakeholder theory, the owners are the primary stakeholders. Employees, lenders and others who are with a direct economic interest in the corporation are the secondary stakeholders. Stockbrokers, tax authorities and potential investors are the tertiary stakeholder. Maximization of wealth of the shareholder is not the only goal of the financial manager but the over-all welfare of all stak eholders. (McNemanin, 1999) This management theory believes that healthy relationship among all the stakeholders will produce long term benefits for the company. For example, giving workers additional bonuses and proper health benefits will boost their morale and make them more enthusiastic in working for the company. They will feel they are being taken care of by their employers and in return, they will be committed and give their best for the benefit of the company. Giving additional rewards to customers also produces customer loyalty to a companys product. The stakeholder theory recognizes the rights of all the different parties involved in the companys function and not only the shareholders interests. If Mr. Simpson and Mr. Brown have given more value to their employees, the worker should have not gotten sick and filed complaints. Mr. Simpson and Mr. Brown have also clearly violated corporate social responsibility. Companies have major areas of social responsibility. First of all is the full compliance with all the laws where the company functions. It should abide by all international, federal, state and local legislative laws and acts. Asbestos companies have undoubtedly violated the law by putting in danger the lives of its workers. By concealing the hazardous effects of the inhalation of asbestos, these companies have put thousands of civilians lives at risk. The litigation of asbestos companies has been the longest running mass tort in U.S. History.(Carpol, 2002) Every year, the number of people who file for claims is growing. Asbestos companies have not been able to give all of these victims proper compensation. Different arrangements have been planned to pay all the plaintiffs, however, due to lack of funds, improper allocation of funds is happening. The fall of the asbestos companies clearly show the drastic effect of not following proper corporate social responsibility. The second area of social responsibility is creating moral and ethical standards on which the company will operate. These standards vary from one company to another. Something is considered ethical if it abides by the principles of conduct given by the group. Much problem arises in developing a companys set of ethical and moral standards. Answering the question what is the right thing to do? is not easy especially since each and every person in the company have different backgrounds and perspective in life which means every judgment differs from another. Ethics in business provide a moral framework where financial managers may evaluate their decisions and judgments when faced with a difficult business dilemma. Unethical behavior does not equate to illegal behavior. An unethical behavior usually breaches an accepted code or conduct of behavior in a certain group of people but not necessarily break a law. Common ethical issues in business are usually giving consumers misleading information about a product or service, not disclosing company policies and practices and not telling how a company deals with environmental matters. Also non-disclosure of pertinent information regarding a product is also one ethical pitfall. (Anderson, 1989) In a financial managers point of view, there is nothing illegal in what Mr. Simpson and Mr. Brown did to preserve the interest of their company. They continued promoting asbestos as it evidently gave the company huge profit. However, it was unethical for them to not disclose the hazardous effects of the inhalation of asbestos to the public. They mislead the people in believing that their product is safe to use, they did not give the people the true information regarding this product. Mr. Simpson and Mr. Brown may have benefitted from this omission for a short term, but in the long run, they lost the publics confidence and trust resulting to massive law suits to their disadvantage. Because of this disgrace, their companies have lost millions of money eventually leading to bankruptcy. In concl usion, Mr. Sumner Simpson and Mr. Vandivar Brown should have re-evaluated their companies project in using asbestos. They should have seen the long term effects of the disclosure of information regarding asbestos and giving their workers proper knowledge about the product that they were exposed to while working. Despite maximization of wealth being a primary goal, financial managers should never forget the companys social responsibility to the people. Investing in the welfare of the people workers, consumers and other diverse parties provides future long term benefits to a company. 2. Does Dr. Smiths explanation for concealing from workers the nature of thir health problems illustrate how adherence to industry and corporate goals can militate against individual moral behavior? Or do you think Dr. Smith did all he was morally obliged to do as an employee of an asbestos firm? What about Lanzas suppression of data in his report? Deciding whether or not to follow ones moral duty or abide to industry corporate goals is not an easy decision to make. Sometimes, the goals of the corporation may not be in accordance to an employees morals and ethics. There is an ethical conflict between what is best for the company and its workers. In this case, whether or not to pertinent information regarding the effects of the inhalation of asbestos to the public is a hard decision for an employee to make. By exposing the studies, shareholders wealth will surely suffer, but at the same time concealing the effects will be harmful for the workers who are employed in the company. Who should be given utmost importance in this scenario- the profit of the company or the welfare of workers? Who should sacrifice? The company who can suffer future financial loss? Or the workers who can die of cancer because of their continued exposure to asbestos? Discussion of the conflict between maximization of wealth and the moral and ethical v alue of decisions within a company can be linked to two concepts in making crucial decisions in financial management. The first concept is Corporate Governance. Corporate governance is the group of customs, policies, laws and processes that affects how a company is controlled and managed. This is also the standards of behavior and conduct expected from the directors and other senior executives in running the affairs of the company. This involves the relationship among various participants in determining the direction and performance of corporations (Monks and Minnow, 1995) Corporate governance also refers to the relationship of the senior executives to shareholders and other stakeholders such as the employees, consumers and suppliers. Some of the important themes discussed in the corporate governance are the principal-agent problem where the interests of the manager in practice may be in conflict with the goal of maximization of the share holders wealth. Another theme in corpo rate governance is always acting for the best interest of the shareholder and one more popular model is the stakeholder theory which gives importance not only to shareholders but also to other stakeholders who are part of the company. Corporate governance practices have been given renewed interest as the decisions of financial managers and directors in the past, such as in the case of the asbestos company, has shown to be crucial in the success or downfall of a company. Dr. Smiths explanation in concealing from workers the nature of their health problems indeed illustrate how the goals of the companies manipulate the individual moral behavior. As said in the article, by not telling their true condition, the workers could continue to live happily in peace and be more beneficial for the company. They have manipulated their employees in believing that they are healthy and have deprived them of their right to take control of their health. When workers who had cancer filed lawsuits already in the 1950s, he also suggested Health Industrial Health Foundation be retained to conduct a cancer study that would destroy the link between asbestos and cancer, however, companies refused believing that such a research would only give bad publicity to their product. His only goal in suggesting this was to disprove the asbestos-cancer connection, and protect the brand name of his company. He was not thinking of the workers welfare. Also, by not recommending to John-Mansville officials to put warning labels on insulation products containing asbestos, he was again thinking only of the reputation of the brand name of his asbestos firm. He was only thinking of the potential future financial loss of putting such a warning and therefore never suggested the idea to the company. His acts were fully in the interest of maximization of shareholders wealth and completely disregarded his moral obligations to the other stakeholders. However, these selfish decisions evidently backf ired because in the long run, his asbestos firm suffered. It only proves that choosing the right corporate governance practice is beneficial not only to the company but to social-economic progress as well. Ethics is another principle which is crucial in financial management decision making. According to Charles Handy (1995): An ethical company is one that does what it believes in, and if it does well, then shareholders will benefit. People will work better, and the company will be respected by everyone including customers and clients. In business, Ethics is a yardstick for evaluating managerial decisions and actions in relation to moral standards. In making complex and critical decisions, ethics provide a moral framework in which the employee can gauge his decisions. Unethical behavior is not equivalent to an illegal behavior. An unethical behavior may violate a standard conduct of a certain group but it does not mean that it is illegal. A firm who has good ethical behav ior can be linked to have a long-term shareholder value. That is why a lot of companies make sure that they have a solid code of ethics which guides their investments. Enhanced corporate image, greater investor confidence, less risk of expensive litigation and loyalty from workers and customers are some of the strategic benefits of having a sound ethical code of conduct and practices. In contrast companies who have bad ethical values are destined to fall. Unethical behavior made by companies can clearly lead to significant loss of value or wealth for the shareholders. A company who gains a poor ethical track record will lose public trust and confidence and therefore will have a difficult time to re-establish connection with potential investors making it a tough task to raise new capital. In the case of the asbestos companies in the article, they have definitely failed to establish solid ethical values and code of conduct. Because of their drive to raise profit, they didnt cons ider the welfare of the employees and consumers. The directors and managers failed to review the moral consequence of their actions. By following their corporate goals in maximizing shareholders wealth, they have completely forgotten their responsibility to the other parties involved in the function of their company. Dr. Smith has committed a grossly unethical behavior by disregarding the health of the workers just to implement the corporate goals of the company. And because of this, their company extremely suffered. The asbestos companies had many options rather than conceal the hazardous effects of asbestos. They should have reviewed their capital budget and determine if such product is worth pursuing. If they gauged the long term effect of their actions, they should have opted to restructure the company. They also had the option to abandon the use of asbestos and find new materials to use in the different industries in manufacturing. They should have weighed the potential liab ility of using this hazardous product in the long run rather than make an unethical behavior and conceal such important information to the public. Financial journalist also plays a huge part in corporate governance.(Borden, 2007) Through their coverage of legislative initiatives and affecting corporate governance and securities regulation, the people become aware of the important information regarding companies that are sometimes deliberately hidden from the public. They become the publics gatekeeper of information exposing scams and frauds that are sometimes committed by companies. However, these gatekeepers are sometimes not successful in preventing managers from engaging in inappropriate self-serving conduct. This happens when these journalists also have their own personal interests and are paid by the same companies that they are researching on. Instead of becoming the gatekeeper of important information, they can spin and tweak their journals to serve the interest of the com panies they are working for. They forget their moral obligation to the public and become a tool for companies to provide them a good image. This has been the case for Anthony Lanza. The research he conducted from 1929 to 1931 on 126 workers with three or more years of asbestos exposure has served no use because the asbestos companies did not approve of his initial findings. Since his review failed to prove that asbestosis was milder than silicosis, a lung disease caused by inhalation of silica dust which was then a compensable disease, he was ordered to manipulate the review and claim that asbestosis was milder than silicosis. In addition to that, he omitted the important fact than among the 126 workers that were examined, 67 of them were already suffering from asbestosis. He completely manipulated his review and published fraudulent information. He acted completely in accordance with his bosses command and abandoned his responsibility as a gatekeeper of information that improves corporate governance. Dr. Smith and Mr. Lanza have both failed to practice ethical behavior. They solely acted upon the corporate goals of their companies. Their actions clearly illustrate how adherence to the industry and corporate goals can militate individual moral behavior. They were certainly puppets of the company who didnt think of the well being of other stakeholders. Their companies have showed poor corporate governance by choosing only the maximization of shareholders wealth and not the overall welfare of all its stakeholders. Â Resources: Anderson Jr., Jerry W. (1989). Corporate Social Responsibility: Guidelines for Management pp. 15-17. New Yor: Quorum Besser, Terry L. (2002). The Conscience of Capitalism: Business Social Responsibility to Communities pp.14. Westport CT: Praeger Borden, Michael (2007). The Role of Financial Journalists in Corporate Governance. Fordham Journal of Corporate Law and Financial Law Carpoll,S.J. , Hensler, D., Abrahmse, A., Gross, J., White, M., Ashwood S., Sloss, E. (2002) Asbestos Litigation Costs and Compensation: An Interim Report pp.2. Santa Monica, CA: Rand Institute for Civil Justice McNemanin, Jim (1999). Financial Management: An Introduction pp.40-55. London: Routledge Â