Ken Lewis’ Ethical Dilemma by Kristen Carmichael

Professor Kelly
Global/Ethical Issues in Business
August 20, 2010
Two years ago, Ken Lewis, the former CEO of Bank of America, was confronted with an enormous predicament when Ben Bernanke and Henry Paulson requested that his company immediately acquire Merrill Lynch to save them from declaring bankruptcy. With the financial system of the United States on the verge of collapsing, how do you say no to the Federal Reserve Chairman and the Secretary of the U.S. Treasury? Thus, Lewis agreed. Now fast forward one year later to September 2009. At this time, Lewis has agreed to step down as CEO. He has also been indicted for fraud for “deliberately misleading his shareholders about the ballooning losses at Merrill Lynch” before the bank bought the firm, which includes failing to disclose the year-end bonuses that were paid out to Merrill executives (Fitzpatrick and Eckblad). Furthermore, this begs two questions: what ethical dilemma was Lewis facing during this crisis and how could he have better handled the request from Bernanke and Paulson?
Assuming I was Ken Lewis when Bernanke and Paulson requested me to acquire Merrill Lynch, I believe I would have gone through with the acquisition as well. According to House Republican staffers in a memo obtained by Bloomberg, “the Federal Reserve and U.S. Treasury overstepped their authority and pressured Bank of America to complete its Merrill Lynch purchase” (Lanman and Torres). The memo also stated that: “a gun was placed to the head of Bank of America [Lewis] to go through with the merger. Government officials crossed the line by applying inappropriate pressure on a private institution to go through with a business deal” (Lanman and Torres). Therefore, due to the state of the United States’ economy and the amount of pressure put on Lewis by Bernanke and Paulson, I would have gone ahead with the acquisition given the extreme circumstances. However, it is how Lewis handled the news of failing to disclose to his shareholders the additional losses and the bonus distributions where I would have done things differently.
In a proxy statement Bank of America sent out to investors seeking approval of its acquisition of Merrill Lynch, the bank said that Merrill would not pay any year-end bonuses without Bank of America's consent. But according to the SEC, Bank of America had already agreed at this time to allow Merrill to pay $5.8 billion in bonuses. Despite this fact, Lewis told a congressional committee that Bank of America had very limited involvement in these bonuses, stating that: "[Merrill] had a separate board and a separate compensation committee and we had no authority to tell them what to do” (Gandel). Telling shareholders that Merrill still had to seek approval, and omitting that bonuses had already been agreed upon, was, according to the SEC, "materially false and misleading" (Gandel).
In my opinion, three virtues that are exceptionally important for someone with a great deal of authority and power to have are: integrity, responsibility, and trustworthiness. Unfortunately, Lewis lacked these three virtues when he allegedly failed to disclose all this information to Bank of America’s shareholders. As the CEO of the largest bank holding company in the United States, Lewis needed to demonstrate his integrity to the company and to its employees. Additionally, while he showed his responsibility to the United States economy, he failed to show his responsibility to his shareholders by not properly informing them about the conditions of the acquisition. Furthermore, by lacking integrity and responsibility, Lewis was deemed as untrustworthy by the public as well as by his own employees. Thus, I would have demonstrated these personal values by disclosing all the information about the acquisition immediately to my shareholders after talking with Bernanke and Paulson. While they would have been more hesitant in approving the acquisition knowing of all the losses that were expected to occur and the bonuses that were to be paid to Merrill executives, they would also be under the same pressure as Lewis to help prevent the economy from collapsing.
The main ethical theory I believe pertains to this situation is moral relativism. The theory states that: “the proper resolution to ethical dilemmas is based upon weighing the competing factors at the moment and then making a determination to take the lesser of the evils as the resolution” (Jennings 8). Moral relativists’ beliefs center on the pressure of the moment and whether the pressure justifies the action (Jennings 8). Both of these statements apply perfectly to the Ken Lewis case. I believe at the time he was under so much pressure from the government that he really thought he was doing the right thing and the “lesser of two evils” by not disclosing the information to his shareholders. He considered his responsibility to the United States economy more important than to his company and his shareholders.
Two ethical tests that Lewis should have thought of before making his decision to not disclose the information to his shareholders are Warren Buffett’s front-of-the-newspaper test and Blanchard and Pearl’s three questions. Lewis really should have thought of Warren Buffett’s test since he was, in fact, on the front page of newspapers such as the New York Times, the Wall Street Journal, etc. “Contemplating any business act, an employee should ask himself whether he would be willing to see it immediately described by an informed and critical reporter on the front page of his local paper, there to be read by his spouse, children, and friends” (Jennings 24). If Lewis had thought there was a chance of being indicted for fraud under the Martin Act, which would be talked about throughout the financial media, would he have still made the same decision?
The other ethical test that applies to this case is the three-question test Blanchard and Pearl devised that managers should ask themselves in resolving ethical dilemmas: Is it legal? Is it balanced? How does it make me feel? According to the theory, “if the answer to the first question, “Is it legal?” is no, you might want to stop there. Although conscientious objectors are certainly needed in the world, trying out those philosophical battles with the SEC and the IRS might not be effective” (Jennings 23). Unfortunately, that is exactly what Lewis is going through right now. If he were really thinking about the consequences of his actions and the legality to them would he still have gone through with it?
Moreover, there are current developments evolving in this case. As recently as last week, Lewis filed an aggressive response to the civil fraud lawsuit, calling the attorney general's case "implausible" and "an ill-founded attempt to lay blame where it does not belong" (Fitzpatrick and Eckblad). Thus, Lewis seems to be in no position to back down or to take responsibility for the charges against him. While the outcome of the case remains to be seen, the question we need to ask ourselves is would Ken Lewis even be in the situation he’s currently in if he had applied the personal values, ethical theories, and ethical tests mentioned above?

Works Cited

Fitzpatrick, Dan and Marshall Eckblad. “Bank of America Ex-CEO Fires Off Response
To Civil Fraud Suit.” The Wall Street Journal. 21 Aug 2010. <http://online.wsj
.com/article/SB10001424052748703579804575441563668263140.html?mod=WSJ_hpp_LEFTWhatsNewsCollection>.

Gandel, Stephen. “The Rise and Sudden Fall of Bank of America’s Ken Lewis.” Times. 18 Sept 2009. <http://www.time.com/time/business/article/0,8599,19245
80,00.html>.

Jennings, Marianne M. Business Ethics: Case Studies and Selected Readings. Mason: South-Western, 2009.

Lanman, Scott and Craig Torres. “Republican Staff Says Fed Overstepped on Merrill
Deal.” Bloomberg. 10 June 2009. <http://www.bloomberg.com/apps/news?p
id=newsarchive&sid=a5A4F5W_PygQ>.