WorldCom Scandal: Ethical Analysis

This assignment delves into the WorldCom accounting scandal, requiring you to analyze the events through various ethical lenses such as virtue ethics and stakeholder theory. Examine the actions of former CEO Bernie Ebbers, assess the impact on stakeholders, and draw conclusions about the ethical failures that contributed to the crisis.

Corporate Governance & Ethics
Contents
Executive Summary....................................................................................................................... 3
Introduction...................................................................................................................................4
Ethical Theories............................................................................................................................. 5
Application of Ethical Theories...................................................................................................... 9
Conclusion................................................................................................................................... 12
References................................................................................................................................... 14
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Executive Summary
Running a business is not an easy task and in order to do so there is a need to follow the
ethical policies and principles. This is because ethics guide in making the right decision from the
wrong decision. The executives of the company are given the role of moral agents where they
have to undertake the decisions and run the affairs of the company based on policies drawn for
the stakeholders, which include the society at large, the employees and the investors of the
company. WorldCom is famous for its accounting blunder, where the financial position of the
company was wrongly presented and the investors were misled into believing that the financial
position of the company was sound. The reality was stark different and due to this, the
company became a known blunder. In channelling this blunder was a key role of Bernard
Ebbers and that of Bernard Madoff. The following parts analyse their role and the immorality of
their actions, resulting in the moral agents of WorldCom being unethical.
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Introduction
The moral principle through which the individuals conduct any activity and through
which their behaviour is governed is what ethics are all about. It is basically the branch of
knowledge dealing with the moral principles. The term ethics has been derived from Ancient
Greek and means custom/ habit. As inferred from the literal translation, it is the habits and the
customs of a person which leads to their ethics, as the same gets shaped according to the
environment in which they live and based on their notions about any and all things. In
businesses also, the ethics play a crucial role as the businesses follow their own set of ethics.
These ethics are derived from the role played by the moral agents in running the operations of
the business, where their personal ethics translate into the ethics followed by the firm
(Jennings, 2008).
The moral agents are such people who play the role of being the company executives
and they undertake the decisions based on the needs of the different stakeholders, essentially
for whom the business operates. The decisions taken by the moral agent, naturally thus, have
an impact over the stakeholders, which could be both positive and negative (Ferrell, Fraedrich
& Ferrell, 2016). In undertaking such decisions, particularly where the decision is difficult, the
leading ethical theories can be applied, as they guide the moral agents on their duties in
context of the ethics propagated by such theories. This discussion is focused on highlighting
this very aspect, where the ethical theories can be made use of by the moral agents. In doing
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so, the case of the moral agent of WorldCom, i.e., Bernard Ebbers (BE) and that of Bernard
Madoff (BM), the CEO of Bernard L. Madoff Investment Securities would be elucidated.
Ethical Theories
The best manner of defining a moral agent is a person who holds the competence of
making a differentiation amidst right and wrong. Due to this competence, such moral agent can
be made accountable for the undertaken actions by them. The company executives are given
the duty of running the business of the company for the shareholders and have to do it in a
manner that the other stakeholders are also taken care of. The moral agents have been
imposed with significant duties and this includes the duty to act in a manner which shows ethics
being upheld, and also to make the decisions keeping ethics as the base. In context of decision
making role of the moral agents, the ethical theories thus act as guidance for them. The ethical
theories also help in identification of the moral agents’ character, the duties owed by them, and
the ethical dimensions of their decisions and actions. In undertaking such decisions, the moral
agents have to respect the other people and they have to be responsible towards the decisions
undertaken by them. There is a need to provide justification by the moral agents on the choice
of an undertaken decision in context of ethical decision making, since the same is relayed
across the societies (Weiss, 2008).
There have been scholars who have discussed the moral agents in context of the ethical
theories. As per Jones, Felps and Bigley (2007) a key theory in this regard is egoism, which
covers the individuals acting towards their interest only and not of anyone else, exclusively. The
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theory of egoism has two sub branches, i.e., ethical egoism and psychological egoism. The first
one is one in which the individuals are held to act only for their interest from a normative
perspective. This view provides that there is an obligation of people in enhancing the long term
welfare along. As per Beauchamp and Bowie (2004), in such cases, the commitment towards
other people is not binding. The other type of egoism is psychological egoism, which is basically
human behaviour’s descriptive theory. As per this subset, the people are innately self-
interested and they act on daily basis to forward their interest only. Certain moral philosophers
have endorsed this theory i.e., ethical egoism; whilst there have been many who have denied
egoism as being a normative theory (Barry & Stephens, 1998). These are just arguments, as
there is a difference in the behavioural perceptions of these; and these do not require any kind
of intellectual stretch to provide that ethics are related to others only, instead of being focused
on self, in context of the thoughts and behaviours.
Another substantial ethical theory which needs to be discussed in the present context is
utilitarianism. This theory has been based on the works of Mill, Hume and Bentham through
which it is reproved that the moral agents have to promote the welfare of humans and this has
to be done in a manner that the best beneficial results are attained and any and all harmful
consequences are absent. The cost-benefit calculus given under this approach is applied
universally and this means that those who are impacted by the undertaken decisions of a
person, as is present in the previous discussed ethical theory of egoism, or for the companies
particularly in context of their objective of maximizing profits (Albee, 2014). In the view of
certain authors, it has been provided that the ethical theory of utilitarianism is adopted by the
moral agents in rule and act as its two forms. The first part gives the rules which have been
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created for the purpose of getting the most net positive result during a time frame. And the
second part covers that there has to be maximization of the benefits which are relative to the
costs, for the undertaken decision. This theory further dictates that the moral agents have been
imposed with the obligation of adopting the actions through which the utility of actions is
maximized and so is the happiness of individuals (Jones, Felps & Bigley, 2007).
When the theory of utilitarianism, which is a ‘consequence based’ theory, is applied in
this context, and which had been propagated by John Stuart Mill, the moral agents get the duty
through the principle of utility for the maximization of the intrinsic good, which basically is
happiness, and for working towards the minimization of intrinsic bad, which basically is
unhappiness. The consequence based approach continues to be an important one towards the
process of ethical decision making where no single individual is given more importance than the
other one. Based on this theory, the moral agents are expected to be non-biased and non-
prejudicial when deciding upon the happiness of every such person who would have to face the
consequence of the decision undertaken by them. This is particularly important when the moral
agent has a relationship amongst such people. In a strict sense, the correct or the ethical course
of action in this theory is one through which the greatest degree of happiness is promoted and
the one which results in the end of the last degree of unhappiness. Such actions are deemed as
ethical ones which help in attaining the goal of carrying the moral value successfully (Thomson,
Adams & Sartori, 2005).
The next relevant theory in this context is Kantism, which was given by Immanuel Kant.
Based on this theory, the actions would be deemed as ethical, where the adopted course of
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action is correct one, instead of the results attained by undertaking such action (Beiser, 2014).
Kant believed that the moral agents had to undertake the decisions based on the actions being
wrong or right through a thorough legislation of the reasoning capacity. When this happens, the
actions become obligatory and they have to cover the necessity concept, which is not
conditioned and continues to objective, resulting in the same being deemed as valid in a
universal manner. As per Kant, this can be done only when the reasons are not biased towards
the result of such actions, personal inclinations or that of societal influences (Thomson, Adams
& Sartori, 2005). Hence, Kant’s moral philosophy is such that in any given subjective duty, there
is a need for the moral agents to question their own self in the matter of reasonably making the
practical law applicable universally, which is the categorical imperative, and which provides that
such maxims have to be acted upon through which the universal law is upheld.
The next ethical theory applicable upon the moral agents is the one based on character,
and this is the theory which is virtue based ethical ideology in which the actions are undertaken
as the correct one, based on the character of the person. As per the followers of this theory, in
most of the circumstances faced by a person in life, particularly when important decisions are
to be undertaken, there is no set of ready-made rules to make such decisions, and there is no
relevant data which can be relied upon for permitting the accuracy of predicting the result or
the effect of the same (Hooft, 2014). Due to these reasons, virtue ethics differ from the other
ethical theories which have been discussed till now, since the theory of virtue ethics is related
to disposition or character of a person and is not associated with the actions which align with
the impersonal principles. Under this theory, reliance cannot be placed by the moral agents on
the previously formed rules, particularly when these cannot be applied universally for a
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particular course of action. The choice between the options requires the moral agents to select
a path voluntarily and deliberately, where there is commonality between deficiency and excess.
In this theory, such actions are deemed as right which show virtues of honesty, justness,
fairness, and integrity, amongst the other virtues (Kamtekar, 2004).
The last significant theory in this context, which has to be taken into consideration for
the moral agents’ undertaken decisions and actions, is that of situational intensity. This theory
was given by Jones (1991) where he stated that for making the ethical decisions, the moral
agent was required to adopt the features of moral issues in context of the temporal immediacy,
magnitude of results, probability of effects, proximity, social consequences and concentration
of effect, as independent variable. The models which do not consideration these features depict
that the decision making process continues to be sae for each and every moral issues. As a
result of this, the relevant factors are neglected in context of the other ethical decision-making
models. Moral intensity has its base upon the normative arguments of the moral philosophers
where they have varied moral obligations based on proportionality, in place of constricting the
same from the moral decision making descriptive models. The moral agents’ extent of influence
of moral agents on the events, the probability of effects and the urgency of situation are the
factors which form a part of proportionality. As per Jones, the moral intensity of decision
influences the ethical decision making in place of the characteristics of the moral agents
(Thomson, Adams & Sartori, 2005).
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Application of Ethical Theories
The former CEO of WorldCom, Bernie Ebbers (BE) has been charged with the conspiracy
for committing securities fraud owing to the false filling under SEC, owing to the number of
accounting irregularities which had taken place in the company, which led to its fall, and the
executives of the company being convicted. All of the nine courts found that BE had been guilty
of this offence and a maximum penalty of 85 years in prison was awarded to him, in addition to
t the imposition of fine of $8.25 million (Scharff, 2005). Once this incident had been
undertaken, the news was full of character assassination of BE. The news covered a historical
trace of BE, back to the time he was a teacher in a school. BE built a telecom company which
was the second biggest one in the United States in the last 15 years and he made a lot of money
for his investors, but even more for himself (Wray, Finch & Treanor, 2002). Though, for BE, the
focus was on earning more and more profits for himself, even when the same was not
reciprocated for the stakeholders. Here, egoism can be applied on the given situation to decide
on the actions of BE being ethical or unethical. Based on this theory, BE was totally self-
interested and he worked on enhancement of long term welfare. So, based on BE working
towards his own interest, and disregarding the interest of the others, his actions can be
deemed as ethical. Where the theory of egoism is also analysed carefully, his actions could not
be proved to be in his best interest as he was ultimately put behind the bars and imposed high
penalties. Even his personal assets had been attached for the purpose of settlement with
investors (The Guardian, 2005). This meant that based on the ethical theory of egoism, his
actions were against him, making them unethical.
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BE had deprived the investors of their invested value and this is the reason why he was
held as the leader of the criminal activity which took place in this case (Bayot, 2005). This
depicts that BE had failed in working for the others’ benefit and he did not maximize the utility
for other. Applying the utilitarianism theory in this context, the actions undertaken by ‘BE’ were
not at all ethical and were also immoral. In his view, he was working for the investors but the
truth of the matter was that his work was self-centred. He continued to be a believer in stating
that he was an honest person in his undertaken conducts and he complied with virtue ethics
(Norris, 2000). Though, the cash withdrawals undertaken by him had wealth effects where the
consumption was sped up in comparison to previous years and the stock prices declined, which
showed the lack of virtues.
BE did have the clear knowledge regarding the company books being cooked and that
the public was fooled in all this. Lies were told by him over and over again in order to cover up
the losses which were mounting and for steering clear of his financial decline (Belson, 2005). As
per BE, he had no idea regarding the shady accounting as he had left the subordinates to run
the company affairs on his behalf (Crawford, 2005). Though, being a moral agent, an obligation
which was imposed on BE was to work towards the interest of the stakeholders and towards
the benefit of such individuals. This means that he failed as a moral agent based on the ethical
theory of utilitarianism. The $11 billion accounting fraud was not only disastrous for him but
also for the stakeholders of the company (Rovella & Glovin, 2005). These stakeholders included
the employees of the company, the investors, and the suppliers, amongst the others. The
actions undertaken by BE were unethical, and this brought major transformations in the law,
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which was given a more severe status in comparison to the time when the nation struggled
with ‘Depression’ (Norris, 2005).
BE and BM were the moral agent of the company formed by BE and this meant that he
had the duty of undertaking the decisions which were right for the different subsets of the
stakeholders. The business had to be run for the various stakeholders where he was working for
the employees, investors and also the society. The moral agent status required him to act in a
manner which was ethical. Based on his, he had to work for their happiness to maximize the
utility of the action on the basis of utilitarianism theory (Baker, 2009). Where the egoism theory
is applied, he failed again due to the major loss caused to his own self. There was a need to
adopt the ethical theories in this regard and for him to work based on these theories.
Had this been done, the company’s reputation and its goodwill would have been raised,
resulting in revenues growing and the stock prices climbing up, instead of tumbling down.
Though, owing to the sheer lack of the various virtues discussed above, particularly in context
of integrity and fairness, damage was caused to a number of stakeholders. Being sent behind
the bars for 85 years further affirms the lack of correct application and adherence to ethical
theories and highlights the failure of BE as the moral agent. The features of BE and BM were full
of falsehood and lies and this caused damage to them. This also led to the company bearing
high losses and being imposed penalties. Kantism also shows that the actions of BE were
unethical due to his selfishness, dishonesty, deceitful nature and the lack of upholding integrity,
which resulted in the company being put in a wrongful position and the financial position of the
company being depicted in a wrong manner. The actions of BM were no less different where he
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also adopted deceit and dishonesty, who is now famous as an American fraudster. As a moral
agent, he had to be unbiased towards the consequence of his actions, or of personal
inclinations and societal influences; but his personal inclinations drove his actions. This
ultimately denied happiness to everyone.
There was a failure in choosing the common grounds in between deficiency and excess
since he gave favour to his position. This was not done in a careful or calculated manner owing
to his personal benefit as he left behind the evidence of his misdeeds which failed in protecting
himself against the actions taken against him. The actions of BM and BE were such were the
results of it and the probability of effect were not analysed. This meant that his actions were
flop based on the situational intensity.
Conclusion
Thus, it can be concluded that the decisions made by BE as a moral agent and the
actions undertaken by him were completely unethical. This has been established with the help
of the four ethical theories discussed. Irrespective of the approach adopted by the ethical
theory, the actions of BE, as a moral agent, were unethical, resulting in the stakeholders being
wronged. He did not take the decisions on the basis of virtues, self-interest, and morality of
actions or the consequences of it. Even in working towards earning profits for him, he failed in
keeping his interests safeguarded. The investors lost their money and BE was put behind the
bars. The financial position of the company was wrongly portrayed which ultimately led to
changes being brought in the laws, to curb reoccurrences of such instances. None of the
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theories could aid his actions. This case is also a lesson for the executives of the companies of
what not to do when they play the role of a moral agent, and on following the different ethical
theories when undertaking a decision about the future.
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