Case Studies in Organizational Communication

Ethical Perspectives and Practices

Steve May

• Publisher: SAGE Publications, Inc
• Year: 2012
• ISBN:
  9781483332758
• Edition: 2
• Topic: Languages & Linguistics
• Subtopic: Communication Studies
• Index: Languages & Linguistics

The Second Edition of Case Studies in Organizational Communication: Ethical Perspectives and Practices, by Dr. Steve May, integrates ethical theory and practice to help strengthen readers' awareness, judgment, and action in organizations by exploring ethical dilemmas in a diverse range of well-known business cases.

PART I

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Alignment

CASE STUDY 1

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Ethical Dilemmas in the Financial Industry

Katherine Russell, Megan Dortch, Rachel Gordon, and Charles Conrad

This case explores the recent global financial meltdown as an example of unethical behavior among U.S. corporations. The case notes that such corporate scandals are much more common and cyclical than the general public might believe. It challenges the commonly held notion that a few individuals are responsible for the misconduct. This case, by contrast, offers a more complicated interpretation, both of financial crises and of organizational ethics in general. While the home mortgage ideology and related systems did provide opportunities for exploitation by excessively greedy individuals, it also created impossible situations for honest actors who were struggling to meet the contradictory needs of multiple groups of stakeholders.

If a reward system is so designed that it is irrational to be moral, this does not necessarily mean that immorality will result. But, is this not asking for trouble?

—Kerr (1975, p. 770)

Since 1900, the United States has repeatedly experienced a cycle that begins with the development of an investment “bubble” in the financial industry, which eventually explodes. It is quickly followed by a government (taxpayer) bailout of the organizations whose members took on far too much risk in pursuit of massive individual rewards and organizational profits.¹ Almost every generation has lived through one of these cycles, but today’s “twentysomethings” have experienced two—the savings and loan (S&L) crisis of the late 1980s and the financial industry meltdown of 2007 and beyond. Young adults, who are notoriously uninterested in economics and only sporadically interested in politics, now have trillions of reasons to be interested in these seemingly esoteric topics. This is because they will be paying for the current crisis and bailouts for decades to come in increased taxes, limited economic growth, frustrated career aspirations, and reduced retirement income. And that picture is becoming even bleaker. The modest regulatory reforms enacted after the 2008 crash (usually called the Dodd–Frank Act) did very little to change the underlying factors that created it (Blake, 2010; Cohan, 2010). Banks that were “too big to fail” are even larger now; the campaign contributions and industry lobbying efforts that undercut meaningful regulatory reform have grown astronomically, and the processes that create cycles of economic bubbles, crashes, and bailouts still are in place (Cohan, 2010; Johnson, 2010; Morgenson, 2011b; Posner, 2010; Stiglitz, 2010). Regulators charged with implementing the Dodd–Frank act are doing so in ways that exacerbate those problems (Davidoff & Henning, 2010; Johnson, 2011; Krugman, 2011; Puzzanghera, 2011), and leaders of the Congress elected in 2010 have vowed to roll back regulatory reforms and cut the budgets of regulatory agencies (Fram, 2011; New York Times Editorial Board, 2011). Of course, politicians now claim that they will never again bail out financial institutions, but they made the same claims after the bailouts of 1907 (J.P. Morgan), 1974 (Franklin National Bank), 1984 (Continental Illinois Bank and Trust), and the S&L crisis.

The easy response to these events is to condemn all of the individuals who were involved—that is, to criticize the ethics of homeowners who took on loans they eventually could not afford, financial officers who persuaded them to do so, Wall Street operatives who found innovative ways to obscure the level of financial risk contained in the products they were selling, lobbyists who persuaded Congress to weaken regulations and ham-string regulators, and politically appointed regulators who actively suppressed dissent by some of their employees and ignored warnings from others (see Fox, 2010; Jackall, 2009; Posner, 2010). Of course, this response is easy to understand. In highly individualistic cultures such as the United States, “morality” is treated as an attribute of each person, and “ethics” is viewed as a process through which individuals draw upon their own moral codes to make decisions about how to act in concrete life situations. But, as noted in the introduction to this book, this individualistic, “foundational” perspective is problematic in a number of ways.

First of all, it ignores the need to carefully and realistically examine the contexts within which people make ethical choices—to “walk a mile in their shoes” as the old adage suggests. All cultures strive to teach their members the difference between right and wrong. They also teach their members how to interpret the situations they face and how to act ethically in response to them. But many situations are ethically ambiguous, and others reward people for acting unethically and/or punish them for acting ethically. Individuals are responsible for the ethicality of their choices, but they make those choices within situations that were constructed over long periods of time through choices made by other people. Expecting individuals to make ethical choices within unethical systems and situations is unrealistic and unfair. In addition, individualizing organizational ethics shifts attention away from situational factors, making systemic reform less likely, and ensures another round of bubbles and bailouts.

The second ethical dilemma in “foundational” views involves the disparate interests of multiple stakeholders. Because stakeholder interests often conflict with one another, making an ethical choice usually requires a decision maker to privilege the interests of some stakeholders and violate the interests of others—for example, a choice that treats workers in an ethical manner may unfairly penalize stockholders and vice versa. From a purely legal perspective, this is not a problem—a manager’s legal responsibility is to maximize the income of the organization’s owners (individuals, or stockholders if the organization is a publicly owned corporation) through maximizing the firm’s profits. Privileging any other stakeholders’ interests violates this fiduciary responsibility and thus is “unethical” from a purely legal perspective (Friedman, 1970). Moreover, engaging in socially responsible activities (that is, privileging the interests of other stakeholders) costs money so it puts the firm at a disadvantage compared to competitors that only seek to maximize profits. Doing so threatens the survival of the firm, which punishes its owners/stockholders, employees, and the communities within which the firm operates.² Even if the firm survives, applying “multiple stakeholder” models of organizational ethics can lead decision makers to violate their employment contracts and impose their own ethical values on the firms they have been hired to manage. Both of these dilemmas are illustrated powerfully by recent crises in the financial industry.

CONSTRUCTING THE ETHICAL SYSTEM FOR HOMEOWNERSHIP

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Recent financial industry crises were grounded in an assumption that has been taken-for-granted in the United States for more than a half century—that homeownership is virtuous. The concept may have been part of the “American dream” from the country’s beginnings, although early immigrants wanted to own property more as a means of escaping the abusive landlords and debtors’ prisons of their countries of origins than as an end in itself (Cawelti, 1974). Owning land also was a means of gaining financial independence through farming and ranching. But homeownership as a desired end in itself was an alien concept. In fact, when historian James Trulow coined the phrase “the American Dream” in 1931, it did not include homeownership at all, much less depict it as the key component. But by the early 1900s, politicians of all stripes, as well as spokespersons for the home construction and sales industry, were elevating the concept to a core cultural value—an end in itself—and creating structures to encourage it.

Over time, the rhetoric of homeownership has been remarkably persuasive. Almost all U.S. residents now see it as the most important element of the American dream, an investment that will enhance the quality of their lives and the lives of their children. However, statistical correlations between homeownership and its purported positive effects—increased citizen involvement in politics and civic organizations, better educational systems, lower rates of crime, fewer school dropouts, and reduced teen pregnancy—are weak, and there is even less evidence supporting the inference that homeownership causes those outcomes. Family auto ownership is more strongly related to dropout rates than homeownership, and all of these outcomes are correlated more strongly with time spent in a community than with homeownership per se. Furthermore, both the outcomes and homeownership are better predicted by other factors (having a stable family life and average neighborhood income) than by one another (Kiviat, 2010).

Furthermore, the mythology ignores a number of disadvantages to homeownership, the most important of which is the “illiquidity” of housing. It is hard to turn a house into cash, especially during recessions when people most need to be mobile in order to relocate to areas with better job prospects. As a result, the areas with the highest levels of homeownership also tend to have the highest levels of unemployment—during recessions the “stability of homeownership” is transformed into “being trapped in a house you cannot sell” (van Praet, 2011). But, in spite of all these data, Americans believe the mythology of homeownership and do so without questioning it. Cultural assumptions are sustained by perceptions and rhetoric, not by data and statistical analysis.

The homeownership mythology also has led to the creation of a number of supportive systems. For individuals, the most important of these are subsidies and deductions that are built into the federal tax code, something that almost half of homeowners cite as a primary reason for buying a home instead of renting (Hiber & Turner, 2010). There is no question about the size of these incentives—in 2010, the federal government lost more than $100 billion in revenue to them, more than double the loss in 1995, and it is estimated that the total loss from 2010 through 2013 will exceed $500 billion (Harrop, 2011). But to get tax advantages, taxpayers must itemize their deductions, an option that largely benefits wealthier households. In 2009, the 2.8 million home-owning families with incomes above $250,000 (the top 2% or so) saved $15 billion a year in federal income taxes (about $15 a day each), while the 19 million families making $40,000 to $75,000 (middle income) saved only $10 billion (about $1.50 a day) (Peterba & Sanai, 2010). In addition, being able to deduct interest paid to purchase second homes exclusively benefits wealthier taxpayers (this deduction alone was worth $800 million in 2010). Being able to deduct property taxes increases these effects.³ Of course, a tax and subsidy system that primarily rewards wealthy taxpayers but is justified in terms of the rhetoric of homeownership for all raises some important ethical questions.

For financial institutions, the homeownership system includes a series of government-sponsored and funded incentives and protections. Savers will not deposit their funds in financial institutions unless they believe that it is both safe and profitable to do so. Similarly, the “dream” of homeownership will be within the reach of nonwealthy families only if financial institutions can be persuaded to offer home mortgages on terms that make them affordable. In order to persuade savers that banks were safe after the economic crash of 1929, the Roosevelt administration created deposit insurance programs (the Federal Deposit Insurance Corporation [FDIC] for banks, the Federal Savings and Loan Insurance Corporation [FSLIC] for savings and loans, and so on). Funded by a combination of levies on financial firms and tax monies, there were (and still are) two rationales for these programs. The first is practical—persuading people to deposit their savings in a financial institution allows them to loan money to entrepreneurs who want to start businesses, small business owners who want to expand their operations, and/or families who want to purchase homes. Since society as a whole benefits, the risks taken by depositors should be spread over the entire society—that is, they should be “socialized.”

The second rationale for deposit insurance is ethical. Depositors almost never have any influence over the decisions that create financial crises. Financial institutions are “limited-liability” corporations, which means that if a bank or S&L fails, the people who manage them and the stockholders who own them cannot lose more money than they have invested in the organization. For managers, this usually means that making bad decisions might get them fired, but they will not lose their assets. However, the gains that decision makers receive if things go well are not socialized—they are left in the private hands of managers and owners (usually stockholders). This combination of socialized risks/losses and privatized gains creates “moral hazards,” situations in which it is economically rational for managers to take excessive risks (and owners to allow or encourage them to do so). They control large sums of other people’s money, will benefit handsomely if their risky actions succeed, and will break even if they fail. If decision makers also believe that government (taxpayers) will bail them out when they make bad choices, the hazard is increased. So it would be unethical to put depositors’ life savings at risk when the people who decide how to manage that money do not have their own assets at risk. Of course, while deposit insurance programs protect depositors from unwise managerial decisions, they do not protect taxpayers. To do that, governments must regulate financial institutions very tightly.

The goal of widespread homeownership also relies on persuading financial institutions to offer mortgages at a low enough interest rate and extend repayment schedules over a long enough period of time to make monthly payments affordable and predictable. The kind of mortgage that became the U.S. standard—one that has a 30-year term and a fixed interest rate—achieves this goal but creates two kinds of risk for lenders, credit risk and interest rate risk. Credit risk involves the possibility that borrowers may default on a mortgage. This is especially likely during recessions when people lose their jobs or move from full-time to part-time work. During recessions, the value o...