April 2007

Ayn Rand said,

America’s abundance was created not by public sacrifices to the common good, but by the productive genius of free men who pursued their own personal interests and the making of their own private fortunes. They did not starve the people to pay for America’s industrialization. They gave the people better jobs, higher wages, and cheaper goods with every new machine they invented, with every scientific discovery or technological advance–and thus the whole country was moving forward and profiting, not suffering, every step of the way.

What she says is right…America wasn’t founded on the principles of democracy and altruism. It was a collection of individuals forging a living for themselves that ultimately resulted in the birth of our nation: our republic. We’re now so deeply entrenched in democracy that the ultimate minority, the individual, will never again be heard. This is a sad state of affairs and will ultimately result in America’s demise.

Altruism is not a responsibility. The adage, “the needs of the many outweigh the needs of the few” presumes that the greater served is the greater good. This kind of thinking ties people to support systems and inhibits growth. To help one’s neighbor is a choice made by an individual, but is not a responsibility of that individual. Should the individual choose not to help his neighbor, he should not feel guilt, nor should he suffer condemnation.

Insider trading is the buying or selling of securities by someone who has access to information that isn’t available to the public. The problem with insider trading is one of fairness. It is unfair to other investors if someone uses inside information to gain an advantage. An individual can use inside information to gain an advantage for himself or he could tip-off someone else. An individual can tip-off someone in one of two ways: purposefully (i.e. he tells someone directly) or incidentally (i.e. an outsider overhears a conversation between the insider and someone else). This means that insider trading isn’t isolated to company executives and upper management; brokers, family members, friends or a company’s employees can become insiders This doesn’t mean that an insider can’t trade his company’s securities; he can, but the Securities and Exchange Commission (SEC) has very strict rules concerning these trades and watches them very closely.

So, is insider trading unethical? I believe that for insider trading to be unethical, the trader must have a fiduciary responsibility to the organization he is trading in. In this respect, fiduciary responsibility makes one the caretaker of another’s rights or assets. The fiduciary has an obligation to carry out his responsibility in good faith and honesty, with integrity and loyalty to the interests of the organization. This good faith imposes an ethical obligation for the fiduciary to protect the organization’s interest to the exclusion of anyone else’s interests, including his own.

For example, an executive officer of a pharmaceutical company, who learns that the Food and Drug Administration (FDA) is about to announce the disapproval of his company’s experimental cancer drug, and subsequently sells his stock, is betraying a fiduciary trust. He is using inside information to gain an advantage over other shareholders. This act could have a negative effect on long-term owner value in that shareholders could lose faith in the organization and the management’s integrity. He is also violating the principle of ordinary decency by failing to deal fairly and honestly with shareholders.

What if the executive’s son, who is also a shareholder, overhears his father discussing the FDA disapproval with another insider, and subsequently sells his shares? Does this present an ethical dilemma and if so, for whom? Does the son have a fiduciary responsibility to the organization his father works for? No, he doesn’t. Does the son have a fiduciary responsibility to his father? Again, the answer is no. So, although the SEC would consider the act illegal, I don’t feel the son would be acting unethically. But what of the father’s disclosure of inside information to his son, is this unethical? I believe it is. After all, the father does have a fiduciary responsibility to the company and his disclosure of inside information, inadvertent or not, betrays his organization’s trust. The result of this disclosure is no different than the executive capitalizing on this information and selling his own shares.

I believe the presence of fiduciary responsibility is the determining factor of the ethics of insider trading. Insider trading is unethical if the trader has a fiduciary responsibility to an organization and uses inside information to gain advantage over others. This betrayal of trust fails to maximize long-term owner value and violates the principles of ordinary decency and distributive justice.

Yesterday, Senator Harry Reid (D-NV) made this comment to the President:

“Now I believe myself . . . that this war is lost, and that the surge is not accomplishing anything…”

Fine words from our Senate Majority Leader. What a nut! I cannot even begin to fathom that at this crucial time in our nation’s history so many of our elected officials are playing political party games! According to troops on the ground in Iraq, the surge is working. The Iraqis see our dedication and are coming forward with information on the location of weapons caches and terror cells working within their communities. Need proof, consider these letters from troops on Michelle Malkin’s blog. In fact, the President reported this morning that our forces in Iraq have received more local intelligence information in the last three months that at any other three month period since the war began. We’re losing this war? We certainly will if our newly elected democratic Congress doesn’t stop putting their own aspirations above that which in the best interest of America.

In our government, the legislature is responsible for declaring war and the executive is responsible for war’s execution. Our legislature abdicated their responsibility after 9/11 and gave the President the authority to pursue this “war on terror.” I’ve got news for you Reid’s and Pelosi’s: It’s too late to try to legislate your way back into the decision-making process now. The United States is committed. We made promises to the Iraqi people and America must be true to its word. This Nation will live or die based on what happens in Iraq. This is truly a clash of civilizations and the stakes are extremely high! Stop your demagoguery! If you aren’t willing to help fight and win this war, then get the hell out of the way of those who do!

The differing interests between business and its stakeholders create many ethical conflicts. The conflict that arises as managers make determinations on what is best for business and what is best for stakeholders can also result in more than just a moral dilemma. Managers also face many legal and regulatory mandates as well. In resolving these conflicts, managers must often balance the ideal solution with a practical one. The cost of making the wrong decision can have a disastrous effect on business as managers weigh the need to make a profit against the need for honesty in business practices. How the manager makes decisions in light of this conflict is a question of business goals and ethical conduct.

According to Dr. Elaine Sternberg, in her book, Just Business: Business Ethics in Action, the purpose of business is to “maximize long-term owner value by selling goods and services.” She explains that long-term owner value represents the one distinguishing characteristic of business. All other goals or purposes are “incidental insofar as they contribute to achievement of the definitive goal.” Therefore, a business that isn’t dedicated to the pursuit of long-term owner value cannot truly be considered a business. After all, a business that does not pursue long-term owner value will not remain a business very long. So, what is ethics?

The American Heritage Dictionary defines the word “ethic” as “a set of principles of right conduct.” Therefore to be ethical, one must adhere to a set of principles of right conduct. Boston University Professor Bordon Parker Bowne, stated,

The greatest need in ethics is the impartial and unselfish will to do right. With this will, most questions would settle themselves; and, without it, all theory is worthless. The selfish will is the greatest source not only of wars and fightings, but also of dishonest casuistry and tampering with truth and righteousness. One bent on doing wrong never lacks an excuse; and one seeking to do right can commonly find the way.

So ethical behavior is a choice: the will to do right. This suggests a conscious decision and conviction to focus on the rightness of decisions. This also implies the context in which decisions are made must be considered. In business, decisions are made in the context of maximizing long-term owner value. Therefore, the focus of business ethics is the determination of what is right in relation to maximizing long-term owner value.

The business has a responsibility to maximize long-term owner value. In this respect, the business is only concerned with its own self-interest. This “rules be damned” approach may actually have the opposite effect on long-term owner value. A business with the attitude of “profit at any cost” may ultimately fail because stakeholders will probably not have the same attitude toward the business. So, it’s important for the business to consider the repercussions of its decisions on stakeholders. The tenets of business ethics are to deal fairly and honestly with others and to treat equals as equals. The adherence to these tenets will assure the business attains its ultimate goal of maximizing long-term owner value while making the right decisions.