Think Macro, Act Micro: Finance Capitalism and Ethics Action Methods

1. Think Macro, Act Micro: Finance Capitalism and Ethics Action Methods Prepared by Saad Alshammari Course Study of Organizations Date October 4, 2011

2. Background of Author • Richard P. Nielsen • Professor in organizational Studies Department: Boston College • More than 75 publications • Author of renowned book “The Politics of Ethics: Methods For Acting, Learning, and Sometimes Fighting, With Others In Addressing Ethics Problems in Organizational Life” • Served on Editorial board of Business Ethics Quarterly

3. Introduction to article • Organizational & political economic systems cause unethical behavior • Linkage between capitalism and unethical behavior • Currently, finance capitalism triggers unethical behavior • Think at macro level & apply at micro level • Solution is effective ethics actions & intervention methods

4. Capitalism “The system in which people are free to use their private without outside interference. It is known as free enterprise (or free market) system” (Robert Patrick Murphy, 2007)

5. Types of capitalism • Small family owned business capitalism • Large family owned business capitalism • Managerial capitalism • State-owned enterprise capitalism • Finance capitalism

6. Modern finance capitalism • Current era is of finance capitalism • Begin in 1980 and dominant in 2000 • Financial institutes own individual & family shares indirectly • Examples are mutual funds, pension funds & investment banks • Governments are trying to increase social & political control over financial institutes

7. Forms of Finance Capitalism • Shareholder value capitalism • Hedge fund capitalism • Private equity leveraged buyout capitalism • High leveraged banking

8. Shareholder value capitalism • Shareholders have great influence upon management decisions • Focus upon shareholder value maximization • Managers cannot satisfy all shareholders • Dissatisfied top shareholders can replace management • Short term high performance pressure upon managers

9. Hedge fund capitalism • Highly leveraged companies • High risk high return (either profit or loss) Risky investments such as; • High risk & high yield corporate bonds • Credit default swaps • Securitized investment vehicles

10. Private Equity-Leveraged Buyout (PE-LBO) capitalism PE-LBO firms operate this way; • Buy publically traded companies with borrowed money • Change it into private and make it highly leveraged • Restructure acquired company in one to four years • Resell the company

11. High leveraged banking • It is ‘originate and distribute’ model of banking • Banks borrow from depositors and other financial institutions • Banks lend from 5 to 10 times their capital • Many debt products contain high risks

12. Ethical Issues Finance capitalism has negative affects upon • Financial & Economic System • Transparency • Social control • PE-LBO normally cuts employment costs • PE-LBO destroy wealth producing and economic development capacity 1

13. Ethical Issues • Misrepresentation of sales, costs and profits • Delay expenditures to enhance short term profits • High debt borrowings and debt assumptions • Sacrifice long term strategic goals

14. Ethical Actions and Intervention Methods

15. Win-Lose Forcing Methods • Top down Ethics Codes • Publicity Blow the Whistle • Secretly Below the Whistle Outside the Organization • Secretly Blow the Whistle Inside the Organization

16. Win-Win Methods • Win-Win Negotiation • Ethical Networking

17. Dialog Methods • Ethics Arguments/Reasons • Dialogic Conversation Structures • Dialogic Organizational Structures

18. Internal Due Process System • Investigation & Punishment System • Grievance and Arbitration System • Mediation System • Employee Board System

19. Alternative Institution Building • Hiring New Management • Hiring New Lower Level Employees • Constructing Ethics Based Judgment System

20. Social Movement Methods • Win-Loose Actions Against Anti-Reforms • Dialog to discover reform opportunities • Win-Win Development of support for reform movement

21. Future Trends & Applications • Recent economic crisis was result of finance capitalism • Restructuring the economic system 2 • Governments are intervening in their financial systems • No strong focus upon identified ethical issues’ resolution 3 • Trends are changing towards customer-driven capitalism4

22. Personal Experience & Observations • Companies still behave unethically to increase shareholders’ wealth • Private companies believe in high risk and high return • Companies have high risk appetite • Companies follow ethics only to increase business value

23. References • O'Toole J. and Vogel D., (2010). Two and a Half Cheers for Conscious Capitalism. California Management Review. Vol. 53, No. 3, pp. 60-76 • Dorre, K., (2011). Capitalism, Landnahme and social time régimes: An outline. Time & Society. Vol. 20, No. 1, pp. 69-93 • Bageac, D. Furrer O. and Reynaud E., (2011). Management Students’ Attitudes Toward Business Ethics: A Comparison Between France and Romania. Journal of Business Ethics. Vol. 98, No. 3, pp. 391-406 • Heracleous, Loizos & Luh. L. L., (2011). The Myth of Shareholder Capitalism. Harvard Business Review. Vol. 88, No. 4, pp.21