The Bailout Plan: Bailing out corporations or top executives?

The recent financial turmoil has undoubtedly put the world in chaos. With multi-billion dollar corporations filing bankruptcy and announcing mergers that are critical in order to maintain existence in the business realm, the government is throwing out billions of dollars at the expense of taxpayers to avoid the demise of those bulge-bracket corporations. Amongst the heated discussion with bailout plans for the collapsing corporation, top executives were found running away with millions in compensation and living lavishing life amidst the crisis their companies are facing. With regards to this, Obama imposed a $500,000 mandatory salary cap for top executives. This generated another heated wave of complains from top executives, demanding to be compensated with better terms. In this blog, I examined a post entitled “Shameful.” by Andrew Crane and Dirk Matten, two business professors in York University, Toronto, who compared the idea of corruption in poorer countries to executives demanding additional compensation with regard to Obama’s $500,000 mandatory salary cap proposal. Next, I responded to a post entitled “So, you really can’t manage on half a million?” by Lauren Bloom, founder and CEO of Elegant Solutions Consulting, where she heavily criticized on the executives’ threat against Obama’s limit on their salary. My responses to the posts and links to the two blogs can be found subsequently.

‘Shameful’.
Comment

The example brought about with the corruption perception index is a very stimulating idea. How shameless it is for bankers to take home bonuses from bailout funds financed by the government, which came out of taxpayers’ pockets, when the bankers were the ultimate culprit of their companies’ failure. You mentioned, “This ‘height of irresponsibility’ (Obama) will ask for new rules for the game. Obama will hardly avoid addressing this problem of executive compensation.” Obama certainly took a firm stance in the issue fairly swiftly. He imposed a mandatory salary cap of $500,000 a year for top executives who resides in companies that receive funds from the bailout plan, whereby additional compensation to come in the form of stock.

I agree completely with the idea that, “Being rewarded for success – fine. But more often than not, the link between stock prices and individual managers’ performance is more than tenuous.” Yet, as this compensation issue continues to unfold, it is all the more upsetting, and shocking, to read news reports that these executives are actually exploring ways to go around the salary cap that Obama imposed. They threaten to pull out stakes and resign from their positions if the Obama administration formalizes those limits. Honestly, how much more shameless can these executives be? In fact, most of my friends who just graduated make around $50,000 annually as they enter the workforce, one-tenth of the proposed half-million dollar annual limit. To think these top executives would be about to find a position with better pay in this market is like kids believing that Santa exists.

I believe people who should be running corporations should not be these bankers who seem to be motivated solely by the instrumental satisfaction of attaining great financial compensation. There are abundant amount of qualified people who are willing to put in a hard day’s work for the opportunity to be part of a multi-billion dollar, bulge-bracket corporations, for reasons that go beyond financial satisfaction. These people understand that there are times when money cannot trade for satisfaction. They understand that past a certain threshold, money provides little satisfaction. What they want is to make a difference in the world. And I believe these people, who have a far more profuse and concrete prospect of the company, should be the very ones running multi-billion dollar corporations. Perhaps this issue will have a cleansing effect in the highest reaches of corporate power, as the greedy step down to make room for the virtuous.

So, you really can’t manage on half a million?
Comment

I am in complete agreement with your position in this compensation issue. Like you said, “running your business into the ground was a firing offense, not a reason to demand a higher salary.” I was doing some research on the web, and I came across the Stakeholder Theory. Allow me to share it here with you. The Stakeholder Theory is a business ethics theory that addresses the morals and values in managing an organization. In general, it suggests that when making decisions, whether major or minor decisions, companies should consider the interests of its stakeholders – that is, the interests of individuals who have invested in the fortunes of the company. If we adhere to this theory, all taxpayers are now stakeholders of companies which received bailout funds from the government. Those top executives who are compensated with the bailout funds should be reporting to the taxpayers. And by demanding for more compensation, they are being irresponsible and inconsiderate with the interests of their companies’ stakeholders.

Without a doubt, those top executives whose morals are blinded by attaining the greatest possible financial rewards should be heavily criticized. And I agree to Obama’s $500,000 mandatory salary cap proposal. However, I suggest Obama to make amendments to the proposal. As with the current proposal, a $500,000 mandatory salary cap for top executives might put pressure on the recruitment of talented individuals that are capable to lead corporations out of the financial crisis. In addition, potential investors might be reluctant to lay their money on corporations without a sound management team. This in turn, transfers the pressure to taxpayers, as the government continues to bailout companies with funds from taxpayers. I believe executives should be rewarded by success, possibly in financial terms. Hopefully, the economy turns around soon enough, and my suggestion is that those executives who have the ability to rescue their firms out from the turmoil should be rewarded with a certain percentage of the company profit, while the rest goes to repaying taxpayers. This sounds more like a fair deal, right?

The Peanut-Salmonella Oubreak: Who's the culprit?

Every CEO talks about how his company practices ethical business practices; every company website has a page dedicated to promoting corporate social responsibility and explaining how the company plans to take a role in it. Yet, with the recent news of milk powder produced in China caused kidney failure in over a thousand babies; the issue of miniature bonds in Hong Kong from Lehman Brothers without clearly explaining the risks to investors, mostly middle-aged men and women, left investors without a penny as the company filed for bankruptcy towards the end of 2008; Two partners from PricewaterhouseCoopers in India was arrested for knowingly approving an overstated profit statement and creating a fictitious cash balance of more than one billion for Satyam Computer Services Limited; the Salmonella outbreak in peanut butter that sickened hundreds and caused the deaths of nine; and so on, the term “business ethics” rises to fame once again.

Jerry Greenfield, along with his partner Ben Cohen, were the founders of the all-time famous ice cream shop Ben & Jerry’s (see right). The company is considered by the public as one that exemplifies corporate social responsibilities. During an interview with Greenfield, he explained that the mission of Ben & Jerry’s was “to make quality ice cream, always conduct business responsibly and have fun doing both.” Every year, aside from financial profit and loss statements, the company produces an equally scrutinized report that measures its philanthropic work. When he was asked to comment on the recent outbreaks of unethical practices in the business realm, he said, “Traditional businesses measure success by how much money they make. Even in business schools today, students are taught that the only legitimate purpose of business is to maximize profits. I think that’s what leads to companies doing essentially anything, whether legal or unethical, in their single minded pursuit of profits.” As with the scripture of Confucius, greed, among other emotions, “dominate the soul, causing blindness and leading to destruction.”

But is that the whole story? Should the company involved in unethical business practices be the sole culprit for causing societal disruption and breach of customers’ trust? Take the Salmonella outbreak in peanut butter case as an example. It is definitely one of United States’ most high-profile tainted food cases in decades. The outbreak began on December 21, 2008 when Shirley Mae Almer, 72, died in Brainerd after eating peanut butter tainted with salmonella. Her relatives filed a lawsuit against the distributor King Nut Cos. saying Almer’s death was a direct result of eating peanut butter infected by a salmonella strain linked to the nationwide outbreak. In the weeks following, the Food and Drugs Administration and other federal agencies immersed in vigorous investigation and were able to trace the contamination source to the Peanut Butter Corporation of America (PCA), a peanut processing (see left) company and maker of peanut butter for bulk distribution to institutions, food service industries, and private label food companies. Evidence showed that Stewart Parnell, president of the PCA, emailed his employees and urged them to ship out products that he acknowledged as salmonella-tainted foods. As Greenfield said, it was his “single minded pursuit of profits.” With no doubt, such unscrupulous act by the PCA was heavily criticized. Numerous lawsuits were filed against the PCA and the company eventually filed a Chapter 7 bankruptcy petition in the U.S. Bankruptcy Court for the Western District of Virginia.

This might be the story most people know about. However, there is another side of it. In fact, dating back to 2006, there were already issues concerning the PCA. Four inspections by the Georgia Department of Agriculture cited repeated violations at the Georgia plant of the PCA. The violations included food residue buildup and improper storage on floors. In 2008, seven samples taken at the PCA were tested positive for salmonella. In both cases, in addition to various minor issues discovered during the period, the Georgia Department of Agriculture did not take concrete actions or report the PCA’s violations to a higher level of bureaucracy. In cases where samples were tested positive for salmonella, the products were shipped out after a retest of negative. The nationwide salmonella outbreak exposed the fact that nobody was required or believed it was necessary to notify health officials at the sight of deadly salmonella turning up repeatedly at the Georgia plant. It is definitely an imperative loophole that needs to be addressed before worse happens. In addition, the outbreak brought about attention to the responsibilities and efficiencies of health officials. It was discovered that some food manufacturing plants were almost never inspected. Health officials were insensitive to shady operators who tried to keep dangerous outbreaks confidential and lack the authority to order recalls. Various health related agencies also failed to carry out their roles effectively.

In all likelihood, companies committing in unethical practices are not to be defended, yet it is crucial to acknowledge the fact that they might not be the sole culprit who brought upon various societal impacts. In the peanut-salmonella case, the PCA received its punishment of filing bankruptcy. For health related agencies, the case is a wake up call. A call to step up and take actions with respect to food plant quality control, the autonomy agencies should have when coming across food contamination issues and violations in plant operations. In the world of business, suppliers are responsible to satisfy customers’ needs. Governmental agencies should act as a support to assure customers’ needs are adequately satisfied and that their rights and well-being are protected. The two need to work hand-in-hand. With respect to corporate social responsibility, as suggested by Greenfield, it ultimately boils down to how a company measures success, and social responsibility should be as high a priority as corporate profits.

Reference research: Utilizing the Web

This blog wishes to bring forth attention to recent ethical issues occurring in the business realm. There seems to be an increasing trend in which corporations engage in unethical business practices in order to secure corporate profits and deceive customers, especially during the recent financial turmoil. In a social perspective, such unethical practices have caused great disturbance to the general public, either directly through the failing products customers are using, or indirectly increasing their skepticism for other products in the market. On the other hand, in the corporate perspective, there has to be valid reasons as to why they choose to engage in such unethical practices. Hence, this blog will look into and discuss the various perspectives behind unethical practices and the effects they have on society. As a new entrant in the blogosphere, I am planning to utilize resources mainly from the Web to support my discussion on recent ethical news. On the right under “linkroll”, are some of the websites I find useful as reference. The websites chosen are extracted based on the Webby Awards criteria, which contains knowledgeable content, consistent and transparent structure, good visual design and high functionality. Adhering to the IMSA criteria, reference blogs are chosen by the reliability and insightfulness of its content, in other words, the level of authority of its writers. In addition, the blogs should be alive and frequently updated. Keeping such criteria in mind, I went on Google and Yahoo directory and search with terms relating to business ethics, such as “white collar crime”, “corporate social responsibility” and so on. After vigorous scouring of the Web, I found websites documenting recent news particularly on business ethics, such as Business Ethics Magazine, China Daily and Corporate Social Responsibility Newswire; governmental websites such as the Federal Bureau of Investigation; authoritative websites that explains the correct approach to business ethics, such as Knowledge @ Wharton, Institute of Business Ethics and Markkula Center for Applied Ethics; the White Collar Crime Prof Blog that discusses recent white collar cases in a certain perspective; and so on.