Posted: June 27th, 2015

Ethics and Financial Services

Ethics and Financial Services

Introduction

Risk management has become an issue of concern following the numerous cases of fraud and bankruptcy experienced in the last decades. The management of any company expands the values of a company through market share. It also focuses its attention on complying with ethics and standards. The image and reputation of a company are important aspects for any business, which can be destroyed easily by unethical conduct. Ethics and compliance introduce guidelines and regulations for organizations that are open-ended. They also create business opportunities for organizations that exhibit honesty and integrity in the operations. When this is exercised as an organizational culture, chances of criminal behaviors and misconduct are minimized (Brenkert, 2004). The case of James Hardie Industries and the Medical Research and Compensation Foundation illustrates the effects of unethical behavior on organizations and people working with these organizations.

James Hardie Industries and Medical Research and Compensation Foundation

Professionals in the actuarial profession should exercise personal and institutional obligation to practice ethics in the work environment. They are expected to be free from bias that amounts to unethical conduct. James Hardie Industries was operating in a hazardous environment, which compromised the safety and health of the workers. The asbestos materials, which they worked with, exposed the workers to asbestosis. When the company’s management was forced to increase its provision for asbestos related liabilities, it opted to implement strategies that would isolate exposure from the company’s main operations. This can be considered as a wrong action against the beneficiaries of this compensation. This is because it affects the independence and objectivity that is expected from actuarial professionals. When the management decided to evade the increased exposure by separating the operations, the main objective, which was to protect workers, was evaded. This was unethical conduct by the management (Gunz & Van der, 2011).

The independent Medical Research and Compensation Foundation were formed to hold assets to facilitate the distribution of money to the asbestos claimants. It was also involved in medical research on asbestosis, even though this was not addressed effectively. This foundation began on a wrong footing after it was discovered to have an underestimation of the liabilities. This was a misrepresentation by James Hardie Industries, which also involved some of its former directors in the planning. They influenced the investment analysis. Recommendations were made, and this was biased towards the interests of the former company. The management and the board of directors of James Hardie took advantage of the fact that MRCF was independent. Thus, they knew that MRCF had no power on the James Hardie’s legal responsibilities. It was unethical to take advantage of the independence in the subsidiary to make recommendations that were against the law. This situation affected the subsidiary and the general society because honoring future claims would be impossible. This would work to destroy MRCF’s reputation and lead to decreased business opportunities. If the right figures had been provided before the foundation of MRCF, the foundation would not have been formed on a fully funded basis. The under-estimation contributed to wrong decision making. This was costly to the organization in the long run. It affected the organization, as well as the beneficiaries (Harrington1991; Davson-Galle, 2009; Gunz & Van der, 2011).

The actuarial personnel who were involved in the formation of MRCF were responsible for advising the board on the expected claims and funds that would run the program effectively. The consulting services offered were biased towards ensuring that the estimated costs on claims were lower than the actual ones. This would reduce James Hardie’s costs on the payment of liabilities. This later became the major source of conflicting interests that called for the government’s intervention. The investment actions that were taken were not consistent with the objectives. However, they were meant to protect the financial interests of James Hardie Industries. In the long run, the interests of the claimants were compromised because the investment performance was unfair, in accurate, and incomplete. Boards should ensure that diligence is not eroded over time because the repercussions increase costs, which would have otherwise been avoided. It is advisable that the boards should regulate the performance of an organization through effective monitoring to prevent any issue from getting out of control. Transparency should not be limited by personal interests. A personal judgment, like in the case of the general counsel, is unethical (Hoy & Hersey 2009).

The project green was established to provide a further estimate on actuarial figures. It was expected to develop a different figure that was higher than the initial recommendation. This resulted into a conflict of interests that led to adjustment of the figure to reduce it from 350 million dollars to 294 million dollars. However, the contents of the report were kept in draft form after the discussion. This is because the general counsel wanted to change some of the information and alter the meaning. The principle of honesty and integrity in the workplace was violated by the counsel’s intentions to alter the report and change its meaning. It was also an abuse of the power that was bestowed on the counsel. This is because he used his power to convince the rest of the parties to keep the report in the draft and consequently alter the meaning. Honesty and integrity should be a requirement for working, as well as in promoting trust. Providing complete, fair and accurate information is a requirement for proper and ethical running of organizations especially in cases where partnerships are involved. When a report is changed to alter its meaning, it means that the information is unfair to the parties. When the information shared is not accurate, conflicts and distrust are bound to occur, and this strains business relationships. This is evident in the way the actuarial report was changed to give lower estimates on the asbestos claims (Gunz & Van der, 2011; Brenkert, 2004).

James Hardie Industries Management’s Ethical behavior

Organizational decision making influences an organization’s day to day performances. This often results to neglect of the morality required in these activities. In the case of James Hardie and the Medical Research & Compensation Foundation (MRCF), more attention was given to limiting the estimate of the claims than the welfare of the claimants. The independent subsidiary had no legal relations with James Hardie. However, it included some of its management and board members. They were included to ensure that the actuarial personnel estimates did not increase the company’s costs. During this period of developing strategies and making decisions, the employees were not represented. All concerns revolved around the performance of the organization. This was unethical treatment by the management because they were biased towards the company’s performance while neglecting interests of the workers. The situation was only addressed when the victim groups and trade unions and other bodies intervened to prompt the formation of an inquiry commission. Underfunding and the inability to honor claims compromised the worker’s welfare and risks regarding their health and safety. It should have been considered during decision making to ensure that both the company’s and workers’ welfare was integrated in planning (Mandal, 2010; Gunz & Van der, 2011).

The establishment of Medical Research and Compensation Foundation, as an independent entity, was prompted by the desire to separate asbestos exposure from the company’s main operations. It was also implemented with a lot of urgency to ensure that asbestos liabilities did not affect the company’s growth in the United States. This behavior was a way of detaching the management from the welfare of the people working with the asbestos materials. They were interested in generating revenue that they overlooked their moral responsibility towards the society. When the commission was established to investigate the underfunded claims, the board and management were still hoping to defend the company’s interests. They did not care about the wellbeing of the people who presented their claims. Such an attitude towards consumers of their products was unethical. A business should generate revenue while considering the welfare of employees and those working with the products (Sims, 1992).

The management of James Hardie Industries had the bottom-line mentality. In this case, the organization was only interested in its financial success as the only value to be safeguarded. They supported short-term solutions that seemed financially sound at the period. This caused problems to MRCF and the people whose claims could not be honored. Such managerial values, which undermine integrity, cause suffering to the society. Morality is treated like an obstacle towards bottom-line financial success. This form of success is normally short-lived and is achieved as a result of unfair treatment towards people in an organization. For instance, the decision by the general counsel to alter a report and change its meaning was meant to maintain underfunding, and this would not offer a solution in the long run. Professionals should not surround themselves with ambiguity such that the solution provided is only for the present period. The decisions made should cover the long term goal. In the case of James Hardie, a wrong recommendation was made knowingly, and this resulted to a conflict of interests. In the whole saga, it was the claimants who suffered while the management established ways of evading their responsibility. Excusing unethical behavior under the guise of defending the organization is unacceptable. Any decision made and implemented should be comfortable to the organization, employees, and consumers (Rosanas & Velilla, 2003; Gunz & Van der, 2011).

There should have been a balance in the process to ensure that the welfare of the claimants was considered while estimating the actuaries. First, profitability should have been measured against the effects that the products had on the health of the workers. Exposing the health and safety of workers with no compensation is an exploitative business. The claims by the workers should have been considered as part of the costs, as opposed to an obstacle towards profitability. Blaming negligence on the health effects of asbestos on workers was unethical. The board and management ought to have treated liability issues as part of the operational expenses and facilitate the compensation of the affected employees (Phillips & Gully, 2012; Hoyk & Hersey, 2009). Personal self interests are unethical. The general counsel should have cooperated with the commission to ensure that the underfunding issue was solved without altering the information established. Establishing rules and procedures is also a good requirement to ensure that decisions made are acceptable (Lussier, 2008). For instance, the directors from James Hardie were incorporated within the actuaries’ estimation process to influence the process in favor of the subsidiary. If there were rules prohibiting such practices, there would have been a proper estimate that would serve the claimants effectively. Professional codes that prohibit senior management from abusing power would promote integrity. For instance, changing the draft letter would have been prevented by law. These practices improve an organizational culture that promotes ethics and adds value to the organization and society (Gunz & Van der, 2011; Mandal, 2010).

Conclusion

Ethical behavior in the financial field is a sensitive aspect that determines the value of an organization to the society. The response that the James Hardie’s management gave to the demand for compensation by employees was inadequate. It was more biased to the company’s interest than the welfare of the workers. This was evident in the way it influenced the decisions made. Management should exercise ethical codes of conduct that consider the organization’s welfare, as well as the employees. The foundation of an independent entity as a way of evading the responsibility to compensate employees was unethical. It resulted to a bad reputation to the company, and this decreased the organization’s value. The morality involved in ethical conduct should not be treated as an obstacle towards gaining short term profits but as a way of increasing an organization’s value.

Reference List

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Gunz, S & van der, LS 2011, Conflicts of Interest and Professional Independence: The Case of James Hardie Industries Limited, Journal of Business Ethics, vol. 98, pp. 583-596.

Harrington, SJ 1991, What Corporate America is Teaching About Ethics, Academy of Management Executive, vol.5, no.1, pp. 21-30.

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Rosanas, JM & Velilla M 2003, Loyalty and Trusts as the Ethical Bases of Organizations, Journal of Business Ethics, vol. 44, pp. 49-59.