Analysis of Personal and Organizational Ethics and Values between For-Profit and Not-for-Profit Organizations
Introduction
Unethical business behavior remains a major concern in the business world. The ethics problem is witnessed indiscriminately in both profit making and nonprofit making organizations. Ethics are as important as the objectives of the business and, therefore, corporations and other companies have a responsibility to adhere to the ideals of their organizations. This is if the ideals of such organizations have a standard moral and ethical stand that is universally acceptable. The persistence of this problem becomes a greater concern after considering the fact that organizations like those involved in charitable activities find themselves on the wrong side of morality.
This is a nonprofit making and charitable organization that offers loans to students. Established in 1987, EduCap provides loans to certain category of students; those who did not qualify for the government financial aid. The basis for the formation of this company was the fact that the tuition costs were too high in the 1980s. A catholic priest, John Whalen, who was also the CEO of Consortium of Universities of the Washington Metropolitan Area, established a nonprofit making organization that could provide financial aid to those students who did not qualify for automatic federal aid.
After approval from the Washington D.C council, Whalen engaged in selling of municipal bonds to raise the money which he later used to offer low-cost loans to students. Initially his target was Washington D.C but later started offering the services to students from all over the country. The financial schemes and systems for this Whalen’s organization were simple; selling bonds to willing investors and using the money (revenue) for loans while the money generated from the repayments and the interest charged was used to repay the investors. In the dying years of the 1990s, the University Support Services changed its name to EduCap.
Catherine Reynolds joined this organization in the year 1988 and became its president later the same year after serving as a controller. The organization was facing serious financial challenges at the time of Catherine Reynolds’ hiring. The institution was in debt, and Catherine attempted to improve the organization’s loan issuing concept. EduCap established another company which was named Servus Financial which was a for-profit company. Its role was to perform administrative duties including dealing with EduCap’s finances. Wellis Fargo later took over Servus Financial besides acquiring some of the assets belonging to EduCap. Initially, EduCap had invested $61,000 in Servus Financial but its share had grown significantly at the time when it was being sold at $48 million.
The mitigation of risks in this institution is done using interest rates. Considering the fact that their clientele are students, most of them with absolutely no credit history, the company charged interest rates higher than those charged government sponsored students.
EduCap’s ethical dilemma
Being a charity organization funded on the principles of giving students financial aid without intending to make profits, EduCap is certainly not expected on the wrong side of the ethical line. However, Educap has received a lot of criticism, by the public and the media for charging unreasonably high interest rates. The company’s interest rates exceed those of the federal government. The company however, maintains that all the practices in the company are simply normal business procedures. The management of this institution further insists that the high interest rates are not indiscriminately levied to anyone, except the few high risk borrowers.
In 2002 and 2007, critical reports about EduCap were all over the media with the Washington Post reporting that EduCap’s interest rates were as high as 18%. The management was further criticized on lavishly spending company money, for example, the company purchased a Gulfstream jet worth 31 million dollars to be used by friends and family. In addition to this, the management/executive received generous salaries. The public’s concern was the fact that an organization like EduCap is supposed to sponsor students for university students, but instead, the company robs these students of the meager that they have. The CEO, Catherine Reynolds takes home a salary of approximately $1million annually.
According to the news papers and CBS news, the watchdogs in the loan industry questioned personnel at the company of the nonprofit status. The 2007 article had triggered the government’s concern and the organization was thoroughly investigated. The investigation was done by the Senate Finance Committee. This committee aimed ascertaining the violations by EduCap considering the fact that a charity organization such as EduCap was exempted from tax.
Response and outcome
In response to the allegation by the media about the exorbitant interest rates, EduCap’s president Catherine Reynolds asserted that the company’s financial benefits were compliant with the standard business procedures and, therefore, the company did not have any explanations to offer. In response to the claims in the Washington Post, one of the executives by the name George Pappas claimed that the newspaper only misled the readers. Mr. George Pappas further stated that not more than 4% of those who pay higher rates get loans from EduCap. The company defended itself by asserting that the higher rates were only a way of mitigating the risks.
The media and the public were not satisfied by the explanations given by the company, and anyone who flies in the EduCap receives serious criticism. For example senator Ted Stevens, William Sessions (FBI director), Leon Panetta (CIA director), among others were heavily criticized for travelling on the jet.
Merrill Lynch & Co., Inc
Merrill Lynch & Co., Inc. is a financial institution. It is a wealth manager of the Bank of America. The company has slightly over 15000 financial consultants and client assets worth $2.2 trillion. It has traded on the New York Stock Exchange. This is when it was a public company before being privatized after 2009. It is a for-profit type of organization. Merrill ceased to exist as single/separate entity in 2009 after the financial crisis in 2008. The headquarters of this company is in New York City on the Four World Financial Center which is a 34 storey building. Merrill Lynch occupies the whole building.
This company was started in the year 1914 by Charles E. Merrill at the time when he opened his business on Wall Street in New York City. A short while later, in early 1915, Edmund C. Lynch, Charles E. Merrill’s friend, joined him and the name of the company was formerly changed to Merrill Lynch. A year later, Winthrop H. Smith joined the company to make three partners. By 1921 the company had shown significant improvements as evidenced by number of successful investments. Merrill Lynch bought Pathé Exchange which later renamed RKO pictures. The game changer was in 1926 when Merrill Lynch bought a controlling interest in a company named Safeway. This saw a small scale grocery store transform into national grocery store, third largest in the country by then. This happened in the early 1930s.
In 1930, Charles E. Merrill decided to restructure the company and change the line of business and invested in banking. The brokerage business was handed over to E.A. Pierce & Co. since Merrill wanted to focus on banking. This meant that E.A. Pierce would remain the leading brokerage in the entire nation. E.A. Pierce, however, was facing serious financial problems in the 1930s despite having a large market share. Merrill Lynch merged with Edward A. Pierce's E.A. Pierce & Co. and Cassatt & Co. which was brokerage firm based in Philadelphia in 1940. In 1941, their company became the first company on Wall Street to publish a fiscal; report (annual fiscal report). The company underwent several transformations over time and in 1964, it acquired Devine & Co which was then the leading trader in government securities. The company had since rose to prominence expanding its capital base and becoming one of the leading financial institutions.
Merrill Lynch’s ethical dilemma
Merrill Lynch became involved with mortgage based CDO (Collateralized Debt Obligation) in the early years of 2000. The rise of the company to the top on CDO based mortgages was experienced from when Christopher Ricciardi came to the company with his team of CDO experts from Credit Suisse First Boston in 2003. Merrill started making losses and decided to sell a portion of the CDO shares to a company named Lone Star Funds. The CDOs were initially valued at approximately 30 billion dollars, but were sold at a mere 7 billion dollars.
Allegations about fraud and other felonies surrounded the company from other companies, allegedly Merrill Lynch robbed them of their money. MBIA bond insurance company sued Merrill Lynch in April 2009 for about six allegations, one of them being fraud. The suit entailed violation of insurance contracts. Merrill Lynch bought the insurance from the MBA Company using four CDOs. The four Collateralized Debt Obligations were ML-Series CDOs: Broderick CDO 2, Broderick CDO 3, Newbury Street CDO, and Highridge ABS CDO I. MBA claimed that the Merrill Lynch also defrauded them by using misleading information. Merrill promised MBA that the CDOs were AAA rating, when in fact they were not. The CDOs lost their market value, and the MBA Company was left owing Merrill a large amount of cash.
In a related but slightly different case, a bank named Rabobank also sued Merrill. The CDO in question was named Norma. Rabobank and a certain company named Magnetar Capital went into a contract with Norma. Magnetar chose the assets to be used but instead, the Magnetar Company bet against Rabobank. Rabobank was not aware of this because Merrill had assured them that it was the NIR group which was choosing assets. The Rabobank Company was left owing Merrill a lot of money after the CDO value tanked.
Response and Outcome
Merrill disputed both claims, publicly and in court. In 2010, the court case headed by Justice Bernard Fried ruled that Merrill had indeed violated the contract between then and MBA by providing false information. However, Justice Bernard did not agree with the other allegations. I the lawsuit related to Rabobank, Merrill Lynch gave a public statement through its spokesman saying that the allegations made by Rabobank about a year ago did not match what they claimed a year later. The spokesman also assured the public that the public that the allegations were unfounded.
Reflections on Ethical Stand Points Taken
EduCap Inc is a non-profit organization that was involved in lending finances to University Students. This means that the company should not be making profits, but rather its primary objective should be helping the needy students. Most of these students have to jobs, but are expected to pay exorbitant interest rates from the loans.
The company received criticism from all over the country. The response they gave was unethical. Even after investigations and the fact that the Company was making huge profits; the Company had no intentions to stop. In fact, they engaged in activities that used a lot of money from the profits. Their actions are not something to be proud of. This can simply be termed as immoral and irresponsible behavior on the part of EduCap Inc. Buying a company jet worth $30 million while thousands of students struggled to pay loans is an ethical disgrace.
The company should have responded by lowering their interest rates, which were reported to be as high as over 18%. When the company was founded by its pioneers, they had students’ interests at heart. They had plans to ensure that the education of these students came first. When the company later moved away from these values, and turned around the rules to fit their personal needs, the company violated a lot of moral ethics. Like earlier mentioned, the essence of a non-profit making organization is to help the needy without making profits by siphoning money from the same people you are trying to help.
The company issued a public statement in response to the allegations and investigation saying that they were in a business like any other company. This was wrong, considering the fact that the company is supposed to offer help not make profits.
Merrill Lynch
The company started using fraudulent methods to get cash from other companies after realizing they had started to make losses. Their response to claims of fraud was not ethical. They continued to make profits off other companies by lying. Publicly, Merrill Lynch denied all these claims. In court too, they argued against them. This is very embarrassing in light of the fact that there was sufficient evidence to incriminate them.
Probably, Merrill Lynch has engaged in more fraudulent activities and hid the evidence. Fraud involves making profits through cheating and is considered as theft. This is a morally unacceptable act. For example, in one of the cases above, the Merrill Lynch Company knew exactly what was going on in the contract which involved the Norma Collateralized Debt Obligation. They lied to Rabobank Company, which entered into a contract blindly. Rabobank made huge losses and became indebted to Merrill Lynch.
Dishonest business deals and acts can simply be termed as unscrupulous. A businesses core principle should always have honesty in this equation. Handling clientele with impartiality is all that a business should be based on. Merrill Lynch showed partiality it its dealing with clientele, which is wrong considering the fact that by doing so, the clientele are kept in the dark of the kind of business they get themselves into. The management of any business need to be aware of the possible risks their businesses face. This is because of several reasons: firstly, to avoid getting caught unawares in terms of risk preparedness. The organization would be in position to mitigate a risk before it actually happens. Risk preparedness reduces the chances of an organization finding itself in desperate situations. Secondly, the organization can share its projections of the nature of risks that exist in the market with their clientele, which would reduce the impact of the uncertainties that befall business organizations.
Critique
The moral obligation of every business organization is to carry out ethical business activities. Often, ethics come into conflict with the profit making process, where the organization could cheat and get some quick profits or maintain a straight record, and not get the benefits immediately. This is a tempting situation but organizations have to be aware that the best cause of action is the one feels right, one that would be universally acceptable. Some organizations claim that it is inevitable sometimes to do unethical business since a conflict between profits and reputation comes into the picture, and it is all that the decision maker prefers that would prevail. Various philosophical theories attempt to explain the logic behind carrying out ethical business activities. These theories, among others, include: utilitarianism, egoism, moral relativity, deontology, and virtue ethics.
In this situation, the ethical perspective by the two organizations can be best explained by the theory of deontology and utilitarianism. Utilitarianism advocates for the maintenance of the proper course of action no matter what happens. The proper course of action would ensure maximum utility. The moral worth of an act or deed can be defined by the consequence or the outcome. Merrill Lynch had a moral obligation to holding on to what is right instead of opting for unethical alternatives. Getting involved in fraudulent activities only caused more financial trouble for the company. This company probably used a moral relativism perspective, where right and wrong is relative.
Another moral theory is deontology. This theory insists on conforming to the available rules. The rules are supposed to bind us and guide us towards the right course of action no matter how tempting the alternative seems. EduCap Inc. failed to conform to the rules that bind them as a nonprofit making organization. Charging of exorbitant interest rates on student loans violates the principles of the organization’s formation and what is generally expected of a not for profit organization. Being excluded from tax by the government because of the nature of the organization needs to instill a sense of responsibility in the organization. Maintaining the proper course of action and adhering to all the rules would lead to success of the organization and the overall happiness of the workers.
References
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Deborah L. Rhode, “Where Is the Leadership in Moral Leadership?” D. 3 L. Rhode, ed., Moral Leadership: The Theory and Practice of Power, Judgment, and Policy, San Francisco: Jossey-Bass, 2006: 13.
James R. Rest, ed., Moral Development: Advances in Research and Theory, New York: Praeger Publishers, 1994: 26-39.
Jay Fitzgerald, “Treasury Gets Tough: Eyes Financial Bailout Abuse,” Boston Herald, January 28, 2009: 25; Sheryl Gay Stolberg and Stephen Labaton, “Banker Bonuses Are ‘Shameful,’ Obama Declares,” The New York Times, January 30, 2009: A1.
Kimberly D. Krawiec, “Accounting for Greed: Unraveling the Rogue Trader Mystery,” Oregon Law Review, 79(2), 2000: 309-10.
Leon Festinger, Theory of Cognitive Dissonance, Stanford, Calif.: Stanford University Press, 1957: 128-34; Eddie Harmon-Jones and Judson Mills, eds., Cognitive Dissonance: Progress on a Pivotal Theory in Social Psychology, Washington, D.C.: American Psychological Association, 1999.
Paul C. Light, How Americans View Charities: A Report on Charitable Confidence, Washington, D.C.: Brookings Institution, April 2008.
Peter S. Cohan, Value Leadership: The 7 Principles That Drive Corporate Value in Any Economy, San Francisco: Jossey-Bass, 2004: 2; Lynn Sharp Paine, Value Shift: Why Companies Must Merge Social and Financial Imperatives to Achieve Superior Performance, New York: McGraw-Hill, 2003: 36.
Peter Whoriskey and Jacqueline L. Salmon, “Charity Concealed Pilfering: Auditors Had Flagged United Way Executive,” Fort Wayne Journal Gazette, August 17, 2003: 7; Bill Birchard, “Nonprofits by the Numbers: In the Wake of Embarrassing Revelations, High-Profile Scandals, and Sarbanes-Oxley, Nonprofit CFOs Are Striving for Greater Transparency and Accountability,” CFO Magazine, July 1, 2005.
Sharyl Attkisson, “Student Loan Charity Under Fire: Is One Educational Charity Abusing Their Status with Lavish Travel and Huge Salaries?” CBS News, March 2, 2009; Sharyl Attkisson, “Loan Charity’s High-Flying Guests Exposed: Educational Nonprofi t Under Fire for Transporting Politicians with Money That Could Have Gone to Students,” CBS News, March 3, 2009.
