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Ethics

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Touro University International
ETH 501
BUSINESS ETHICS
MOD 1
CASE STUDY Dr. Cathy Anderson
Introduction

The case against Martha Stewart surrounded her sale of 3,928 shares in ImClone Systems Inc., and whether she lied to investigators and her company's investors about it. On Dec. 27, 2001, Stewart cashed out her ImClone stake at an average price of $58.43, collecting about $229,500. After the market closed the following day, the Food and Drug Administration announced its refusal to review ImClone's application for Erbitux, a promising cancer drug. The next trading day, Dec. 31, ImClone's shares opened at $45.39 per share. That difference in price would have cost Stewart about $51,200 if she sold first thing that morning.

Had she acted responsibly? The obvious answer is no. But I defy anyone to ignore the possibility that they could lose a large some of money in a short time. Her actions after getting the news that she could lose thousands of dollars were a matter of self preservation. For those that states it’s all about the money; I ask, why then does a billionaire continue to buy low and sell high. It’s clear they’ve reached a point of saturation a few million dollars ago. For some it’s the thrill of the hunt not the kill that keeps them motivated; they’ve enough severed heads mounted within their mansions. Compared to the recent actions of others CEO’s Kenneth Lay of Enron and L. Dennis Kozlowski of Tyco, Martha Stewart told what amounted to a ‘little white lie’ – that aside, as a leader of any organization one is held to a higher standard. It’s against that measuring stick that leads me to believe that she acted irresponsibly.
Body
Martha Stewart, born in 1941 as Martha Kostyra, grew up in Nutley, New Jersey in a working-class family with six children. At an early age her mother taught her the basics of cooking, baking, canning, and sewing and her father introduced her to gardening. Because of this, her parents helped develop Martha's passion for cooking, gardening, and home keeping, which eventually lead to the creation of Martha Stewart Living Omni-media (MSLO). MSLO is a leading provider of original "how to" content and products for the home. The "Martha Stewart" brand is leveraged across four business segments - Publishing, Television, Merchandising, and Internet/Direct Commerce. MSLO has eight core content areas - Home, Cooking and Entertaining, Gardening, Crafts, Holiday, Keeping, Weddings, and Baby and Kids - in which creative experts are constantly seeking and developing new ideas to maintain the high quality and value associated with the brand. The experts at MSLO produce an extensive collection of "how to" articles, books, television programs, newspaper columns, radio segments and products relating to the eight core content areas throughout the four business segments. Kmart plays a huge role in MSLO's merchandising segment. In 1987, MSLO and Kmart created a partnership which has been extremely beneficial for both companies. Sales of Martha Stewart merchandise in Kmart stores have reportedly been in excess of $5 billion since the beginning of the partnership. In 2001, Kmart sold $1.5 billion worth of Martha Stewart Everyday house wares, and those licensing fees accounted for almost 25% of MSLO's profits. But since Kmart filed for bankruptcy on January 22, 2001, MSLO finds its fastest growing segment - merchandising - in jeopardy. Kmart has increasingly lost ground to competitors such as Wal-Mart and Target due to ill-advised price-cutting strategies and a mismanaged supply chain. It has already closed the doors of 250 to 350 of 2,100 stores and MSLO has taken quite a hit. Martha's image has taken a hit. Her dramatic rise and creation of a worldwide empire, with products in stores, magazines, online, on radio and television, also made Stewart a target for critics who derided her as an aggressive, arrogant, money-grubbing capitalist. Such claims reached a climax in late spring 2003 when, after months of media scrutiny and government investigation, a federal grand jury indicted Martha on nine counts related to her sale of nearly 4,000 shares of ImClone stock. According to the Feds, Sam Waksal, head of the biotech company and a close friend of Stewart's, found out that the company failed to get the FDA's approval for Erbitux, the cancer drug on which the company had bet its future. Waksal informed his broker, who happen to be the same broker as Martha's, that he wanted to sell all of his shares of ImClone stock. Martha and Waksal's broker, Peter Bacanovic, tried to call Stewart several times after he learned from his assistant, Douglas Faneuil, about the situation. Bacanovic left her many messages and directed Faneuil to tell her about the Waksal sales when she returned the call. When Stewart heard the news from Faneuil, she told him to unload all 3,928 shares, giving her at least $45,000 more than what she would have had if she sold on Dec. 31, 2001, after the FDA news became public. However, she insisted that she had no advance knowledge about Erbitux. She has pleaded not guilty. Since her role in the insider trading investigation became public in June 2002, all of MSLO's business segments have suffered. Because of her indictment, Martha's image has suffered and so has MSLO. Recently, there have been many corporate accounting scandals that breach ethical dilemmas. But unlike Martha Stewart, Kenneth Lay, former CEO and chairman of Enron, caused thousands of employees to lose out on their jobs and savings by hiding debts totaling over $1 billion. Enron's scandal was one of the biggest of the century. Tyco CEO L. Dennis Kozlowski, Adelphia CEO John Rigas, and WorldCom CEO Bernard Ebbers are also in the spotlight for scandals. All three of these men have been charged, but the end to their cases is no where in sight. Kozlowski used $600 million in company funds for personal loans and excess compensation. Rigas used hundreds of millions of dollars to pay for luxury condos, a golf course, and to cover personal investment losses. Ebbers used $366 million for personal loans. Kozlowski, Rigas, and Ebbers each pocketed millions of dollars from their companies before Martha's scandal even took place. Her trial is set for January and theirs have not even scheduled. Why is America so eager to get the woman into court? She saved herself a measly $40,000 from trading her stock. That is pocket changed compared to what the men in the recent scandals have stolen. It's obvious that greed played a huge part in all these scandals, which indicates the need for better corporate governance. Factors that play a role in these scandals is greed and the measures in which top executive are being compensated. Executive compensation is meant to be a governance mechanism that seeks to align the interests of managers and owners through salaries, bonuses, and long-term incentive compensation such as stock options. The reason for compensating executives in stock options is so that they have an incentive to keep stock prices high and align manager interest with shareholders. The outcome from these options is that top executives are fabricating accounting statements to inflate stock prices on Wall Street so the value of their options increases. Top executives also get compensated with loans, which have little or zero interest, from the company in order to buy company stock. However, some of the executives are using those loans for other purposes, such as to buy expensive jewelry and clothing, to build enormous golf courses, and even to throw elaborate parties for family, friends, and employees. While some stock option-based compensation plans are well designed with option strike prices substantially higher than current stock prices, too many have been designed simply to give executives more wealth that will not immediately show up on the balance sheet. Moreover, the managers must understand that the board of directors will hold them fully accountable for the development and support of an organizational culture that result in ethical decisions and behaviors.
Conclusion
Martha's scandal does not have anything to do with her company, but MSLO was affected by the choices she made. Governance mechanisms are designed to ensure that the top executives make strategic, hopefully ethical, decisions that best serve the interest of the entire group of stakeholders. It's obvious that Martha was not thinking about how her decision to sell her shares in ImClone would affect MSLO. Since the news of her indictment went public, MSLO's stock price dropped dramatically. Even though Martha was making a personal decision, she was still the CEO of MSLO, and personal decisions can, in spite of everything, have an affect on the entire company.

Work Cited:

Associated Press: Status of high-profile corporate scandals: Business week online: November 23, 2005: http://www.businessweek.com/ap/financialnews/D8E2BROO6.htm?campaign_id=apn_home_down&chan=db

Hinman, L.M. (2004) Kant and Kantian Ethics. Ethics Updates, Retrieved January 20, 2004 from: http://ethics.acusd.edu/theories/kant/

Kant, I. (2000). The Critique of Judgment (Great Books in Philosophy), Trans. J.H. Bernard, Prometheus Books, United Kingdom.
TROXLER, H: Our Supercenter Dilemma: low prices or high ideals: St. Petersburg Times: December 15, 2005 http://www.sptimes.com/2005/12/15/Columns/Our_supercenter_dilem.shtml

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