Essay Assignment Assessment Task 2 BUS 103 Business Law and Ethics Description: Students are required to research and write on the following topic - In the context of the current global financial crisis, analyse and assess the ethics of recent corporate behaviour in relation to the payment of bonuses and other ‘incentives’ to corporate executives and directors. In your analysis refer to relevant cases and law (or changes to law) where and if applicable. You are to come to a conclusion as to whether the behaviour is ethical or not based upon the arguments presented and the theories you refer to. Prepared by: Brett Sweeny Student ID: 1046794 Tutor: Nathalie Wharton Blaga Tutorial: T1 Building C G.50 Submitted: 6 January 2009 Due Date: 6 January 2009 Word Count: 1507 The global financial crises, and its aftermath, have focused the attention of society on the relevance and implications of performance-based pay practices within the corporate world. The absolute magnitude of remuneration packages, that Chief Executive Officers (CEOs) command, and the obscure relationship to long-term firm performance, has catalysed a response from governments to address ethical considerations and inconsistencies, prevailing in an opportunistic compensation regime driven by market forces. Shareholders are demanding tangible input into the processes of distributing executive remuneration, and policy makers are shaping legislative frameworks to counsel transparency in corporate governance. The comparative magnitude of CEO earning capacity, to the average salary earner, is also ethically of great concern, as wage inequality has widened since the 1980s, due to accelerating productivity growth accompanied by a restrained growth in pay. However, the primary critique, in relation to the payment of bonuses, questions the distributive justice and fairness that surrounds the current, accepted business practices of determining executive placement and elucidating the appropriate remuneration packages. Opinions are divided on the most effective means to guide executive behaviour, in a quest for robust sustainable performance outcomes, to strengthen the causal relationship between incentive-based remuneration packages and business efficacy. In recent years many of these packages appeared to have a narrow focus, in regards to rewarding desirable levels of performance, perversely allowing CEOs to attract incrementally larger salaries and bonuses, whilst they simultaneously were damaging their firms. It is generally accepted that many CEOs were rewarded for excessively risky investment behaviour, in the financial services sector over the last decade, precipitating the global financial meltdown. Society has suffered significant hardship, as a result of this culture of bonuses, with employment, superannuation, savings and investments depleted; resonating in a public outcry of condemnation accompanied by a shareholder backlash. The first objection to executive compensation is that the gross magnitude of salaries and bonuses has breached the bounds of the morally defensible. CEO of Goldman Sachs Investment Bank, Lloyd Blankfein, accrued $US68 million in 2007 (Harris 2009). After faltering in 2008, Washington’s Troubled Asset Relief Program (TARP) bailed out Goldman with a $US10 billion emergency loan. Following the resurgence of global markets, Goldman have scheduled the dispersal of $US16.7 billion in salaries and bonuses for the first nine months of 2009 (Papini 2009). ‘As many Americans continue to struggle ... banks that took government bailout money after throwing the entire world into crisis … will dish out $US30 billion in bonuses’ ; these contrarily, successive events, clearly exposing the disconnect between absolute magnitude of bonuses and firm performance (Dowd 2009: 31). Following the $US182.5 billion rescue package of American International Group (AIG), they then proceeded to use these bailout funds to finance $US165 million in bonuses. The economic collapse of AIG, and the bonuses that subsequently flowed to its executives, appears to be the pivotal moment that coalesced nascent disenchantment in the minds of the ailing public, and revolt within company shareholders’ meetings -- surfacing dormant ideals of fair mindedness and moral goodness (O’Rourke 2009). The second ethical objection to executive compensation is that the comparative magnitude of CEO salaries and bonuses, to the average salary earner in the company, is excessive. In the mid 1980s Peter Drucker accurately predicted that this increasing disparity would create social disharmony (Dillon 2009). A study by Hall and Murphy (2003) found that ‘CEO pay [had] leapt to between 350 and 570 times the pay of a typical worker.’ Harris (2009) explains that this compensation differential is a natural consequence of the free-market economy rewarding diverse levels of expertise and responsibility. Market forces are therefore responsible for the resultant social disharmony, and not the ethical decisions of the CEOs. Harris proceeds to illustrate that, as with objection to the absolute magnitude of CEO pay, any objection is relative, depending on the objector’s frame of reference, and as of its nature being self-referential ‘is indistinguishable from one’s envy of it’ -- therefore constituting a subjective evaluation (Harris 2009). The final ethical objections are, that the processes of hiring, and rewarding executives, violates principles of distributive justice and fairness. These violations are contingent on the ‘no vacancy’ rule which questions: ... whether the CEO position, is truly accessible to all, [with] the largest firms in corporate America overseen by a relatively small network of executives… themselves routinely sitting on their own compensation committees (Harris 2009: 150). Harris (2009) argues that these processes are opaque, and not indicative of advancement and just entitlement based on merit and ability, but of using an ‘insider’s advantage to enrich themselves at the expense of other stakeholders’. In addition, incentive-based pay practices, rather than encouraging managers to build strategic value into their firms, serve as an ‘enticement to fabricate the levels of corporate performance that will trigger the payoff’ (Harris & Bromiley 2007: 355). In respect, of these unconscionable practices, principles of conduct are distorted to embrace the ignoble purpose of providing for one’s self-interest, and proving successful these transgressions have been reinforced by conformity. In defence of the bonuses paid with public funding, the current wave of executives at AIG insist that they were not responsible for previous financial mismanagement and that bonuses were necessary to attract the best people to resurrect the ailing financier. Blankfein adds succinctly that ‘performance-related pay is a guarantee of high quality, responsible banking ...’ and that they are effectively ‘doing God’s work ...’ Goldman’s CEO then proceeds to sagaciously illuminate the virtuous cycle of wealth creation, that they are instrumental in providing: their social purpose (Dowd 2009: 31). However, Aristotle’s cardinal rule regarding the virtues is that ‘right conduct is incompatible with excess…’ (Thomson1955: 94). $US68 million is clearly an excessive salary for one individual to accrue. The net social benefits that were to flow on through society, to justify this compensation would have to be proportionally grand; and most observers are in accord, regarding the extent that CEOs’ successes were not apportioned to benefit society. Moreover, Aristotle (cited in Thomson 1955: 95) offers: ‘acts that are incidentally virtuous are distinguished from those that are done knowingly, of choice, and from a virtuous disposition.’ Lloyd Blankfein et al may be merely rationalising their objectionable bonuses with virtuous intent. Their overt displays of conspicuous privilege and rigorous absence of regret, subjugates the plausible stance that CEOs are operating in a just manner for the public good, to simply behaving sporadically to enhance their personal fortunes. Michael Sherwood, CEO Goldman Sachs (Europe) boasts that ‘money is the way you define your success’ (Dowd 2009: 33); and one could contend that this statement of intent is a more accurate embodiment of the CEO ethos on moral goodness, as opposed to performing just acts for the public good and the advancement of society. In an attempt to pacify the discontent and restore moral rigour, the US senate recently introduced measures to restrain bonuses in firms with outstanding TARP debts, and has appointed Kenneth Feinberg as US ‘pay czar’, to administer government oversight to the payment of bonuses (Pitman 2009). Additionally, a bill on shareholders’ rights is currently being pushed through Congress, which provides a mechanism to govern payment of performance bonuses, mandated to being subject to shareholder approval (Dillon 2009). In contrast, the report from the Productivity Commission to the Australian Government on executive remuneration, has cautioned against shareholder-endorsed pay arrangements, preferring to make its recommendations towards improving disclosure, and ‘removing scope for conflicts of interest in pay-setting, for example, by prohibiting executives from sitting on remuneration committees and from voting their shares on the remuneration report’ (Productivity Commission 2009: 14). The fact that this issue is attracting a great deal of domestic policy debate in the US, Europe and Australia, is an indication that current executive remuneration practices are posing a complex ethical dilemma, unlikely to be solved by self-regulation; legislatures being divided on effective constitutional amendments to tighten corporate governance. Interplay of market dynamics dictates tangential growth of remuneration packages, in both absolute and comparative magnitudes, and any felicitous concerns are negated by the rigours of objective ethical analysis. The valid ethical objections, which hinge on the fairness, distributive justice, and efficacy of bonuses and incentives, are more difficult to justify from the CEO standpoint, as they clearly breach moral boundaries. Aristotle expounded his system of ethics in the fourth century B.C., eliciting the theory of moral virtues, that as one becomes just from performing just acts, one also becomes unjust, from performing unjust acts. Recent studies suggest that CEOs within the financial services sector have engendered a culture of immoral conduct, constituted by habituation. The symbolic potential flowing from these unbalanced actions, are having serious negative consequences on civilised society, within which these unjust actions are tolerated. If the public perceives, and accepts, that this is the way that the most highly valued and esteemed members of society conduct themselves, than this culture of distributive injustice, unfair practice, and fabricated performance, will permeate the societal fabric; with the aspiration to acquire wealth, and create a valuable life, undermined by the requisite unjust acts to achieve these ends. Word Count: 1507 References Dillon, K 2009, ‘The coming battle over executive pay’, Harvard Business Review, vol. 87, no. 9, pp. 96-103, Business Source Premier, viewed 7 December 2009. Dowd, M 2009, ‘Virtuous Bankers? 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C.3, ProQuest ID: 1898095741, viewed 11 December 2009. http://proquest.umi.com.ezproxy.usc.edu.au:2048/pqdweb?did=1898095741&sid=2&Fmt=2&clientId=20906&RQT=309&VName=PQD Pitman, J 2009, ‘Bonfire of the bonuses’, Management Today, London, July 2009, pp. 47-51, ProQuest ID: 1797211501, viewed 11 December 2009. http://proquest.umi.com.ezproxy.usc.edu.au:2048/pqdweb?did=1797211501&sid=1&Fmt=2&clientId=20906&RQT=309&VName=PQD Productivity Commission 2009, Report: ‘Executive Remuneration in Australia’ 19 December 2009, Australian Government, Viewed 22 December 2009. http://www.pc.gov.au/ Thomson, J 1955, The Ethics of Aristotle: The Nicomachean Ethics, 517th Edn, Penguin Books, Middlesex, England.