This lesson was inspired by an article in "Fortune" magazine, "Why Companies Fail," May 27,2002. Its focus is on the relationship of business ethics to business bankruptcy or near failure. Students participate in a simulation by assuming the roles of either members of an inquirery board or by assuming the roles of the chief executive officers of a selected corporation. Internet research is required as students discover some of the causes of corporate failure.
- Explain the difference between ethical behavior and criminal misconduct.
- Gather, analyze, and synthesize financial data to investigate and determine claims of managerial error, unethical actions, or criminal activity.
- Explore the “boom and bust” cycles that occur in market economies.
What’s the difference between unethical actions and criminal behavior? Have top-dollar, multimillionaire CEO’s bilked their corporations and investors of billions of dollars and in so doing brought about the collapse of more than 200 corporate giants?
Uncover the truth about the financial failures of some of the world’s once wealthy and powerful businesses as you carry out research and assume the role of a corporate officer or as a member of a special Board of Inquiry.
Transparency #1: Shoes Business failures from 2000-2002.
Transparency #2: Gives reasons why companies fail.
Transparency #3: An overview of the creative destruction theory.
Transparency #4: Why most companies flounder.
Transparency #5: Fortune Magazines 10 deadly corporate sins.
U.S. Antitrust Laws: This page on the Federal Trade Commission website provides an excellent overview of antitrust laws.
Financial Accounting Standards Board: The FASB home page, provides information on business laws.
Securities and Exchange Commission: The mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. This is the SEC home page.
Fortune: This site contains the seed article from which this lesson was developed. To access it, scroll down to Information. Click on "Archive". Find 2002 Issues, May 27, 2002, "Why Companies Fail." A related article in the Fortune magazine Archives may be found for March 18, 2002. The title of the article is "Send Them to Jail." The article includes "Enough Is Enough: The Odds Against Doing Time," and "Schemes and Scams: A Brief History of Bad Business." This article provides a history of white collar crime from the 1920 Ponzi postal scam to Sotheby’s price-fixing scam in 2000.
Why Companies Fail: CEOs offer every excuse but the right one: their own errors. Here are ten mistakes to avoid.
Student Handout #1: A worksheet that students will complete to show that they understand the concepts in this lesson.
1. Begin with this anecdote:
If any of you had invested $1,000 in Enron stock two years ago, it would be worth about $16 today. If you had purchased $1,000 in cases of soda in aluminum cans, you could recycle the cans for a deposit refund of about $258. Ask: What do you think went wrong? [Allow the students time to offer their opinions.]
2. Show Transparency #1. Ask: If 67 represents an average number for companies claiming bankruptcy per quarter in 2002, will 2002 be more disastrous than 2001? [Yes, 268 companies would declare bankruptcy by the end of 2002. It would be an increase of 12 companies.] Would 2002 represent a more serious rate of corporate failures as compared to the increase in failures from 2000 to 2001? [No, there was an increase of 81 companies declaring bankruptcy from 2000 to 2001. There is an increased projected bankruptcy rate of 11 from 2001 to 2002.]
3. Show Transparency #2. External Excuses
Review “excuses” making sure students understand the terms as well as the intended humor.
Ask: Why are these “excuses” labeled “external"? [The situations all exist outside of what’s going on within the corporate structure and its operations.]
4. Show Transparency #3, Natural Cycle of Business.
Review the concepts used.
Ask: Why is this called “Creative Destruction"? [A corporation or company that is not satisfying a market demand is inefficient. Since resources are scarce, the demise of an inefficient corporation allows resources to flow toward the creation of more efficient businesses. For example, resources once spent in transatlantic travel by ocean liners might now be spent on air travel. Other examples might include the shift from old 33 1/3 records to DVD technology or VCR technology to DVD technology.]
5. Show Transparency #4
Explain that this thesis was recently forwarded in an online article from Fortune magazine.
Ask: When does “managerial error” become criminal behavior? [Allow the students to voice their opinions.]
6. Write the words UNETHICAL and CRIMINAL on the board. Ask the students to define them. [Unethical behavior is behavior that offends some people's standards of morality but is not considered so abhorrent or so dangerous that it threatens the very fabric of a particular nation or society. Criminal behavior is behavior is considered so dangerous that legislative bodies legally forbid it and set terms of punishment for those who violate the prohibition. You may wish to expand this by discussing the controversies behind the many anti-trust laws
A common way of looking at ethics is to compare conduct to professional and business standards. Knowing the rules is required before one can conform to them and the Financial Accounting Standards Boards and SEC laws set the bar of legal performance.
"Criminal" implies mortal consequences - fines, jail, the death penalty. Ethical implies moral consequences according to community standards or a code of normative personal judgment. Criminality is a man-made bright line code of conduct.]
7. Student should go to computers. Direct them to CNN's Fortune website. Scroll down to "Information" and click "Archive." Select March 18, 2002, “Send Them To Jail,” and then click on “A Brief History of Bad Business Schemes and Scams.” (This is a brief history of white collar crime from the 1920 Ponzi postal scam to Sotheby’s price fixing scam in 2000.) Direct the students to review the site.
- Why were these actions considered criminal? [Answers will vary, but should include how these actions harmed the rights of others to earn income. All of these actions violated personal property rights.]
- Which of these crimes do you consider most serious? [Answers will vary but the numbers of people violated and the amount of money involved will probably be major factors in many students’ answers.]
- Companies such as Lucent, Enron, and Cisco were all at the pinnacle of success when they made their rapid declines. These companies took success and growth for granted. They never factored decline of growth into their planning equation.
- Companies like Polaroid and Xerox were slow to confront a changing market and superior technological competition.
- Subordinates fear giving the CEO bad news. A good example is presented in the case of Enron's Jeff Skilling and his tirades when he heard news not to his liking.
- Global Crossing’s CEO, Gary Winnick, overextended his company’s debt and used a “cannonball” strategy, one shot, and if you miss, it’s bankruptcy.
- WorldCom’s Bernard Ebbers cared more about acquiring MCI, MFS, and the 75 other acquisitions than he did about making them work together.
- Rich McGinn cared more about increasing Lucent’s Wall Street prices than he did about improving the company’s products.
- Some corporations looked for a “quick fix” to overcome financial problems. Kmart decided to use diversification by acquiring Office Max and Border’s bookstores, then vacillating from one strategy to another. In the meantime, Wal-Mart beat Kmart at its own game.
- Some huge corporations were brought to ruin or almost to ruin by the rogue actions of a few.
- When questions of illegal activity or transgressions are raised and the first domino falls, it creates a downward spiral eroding customers’ and investors’ confidence.
- Some companies had a Board of Directors that did not do its job. These Boards relied too heavily on the CEO’s reports, which usually told only the “good news.”
9. Direct the students to CNN's Fortune website. Scroll to "Information" and click on "Archive." Find May 27, 2002, "Why Companies Fail." This is the article that inspired this lesson. Read through this article.
10. Explain to the students that they are going to role play to determine the culpability of some CEOs and their chief executive officers. How much did the actions of these officers contribute to the demise or decline of the corporation’s financial health and stability? Finally, they will be asked to determine if these actions constituted managerial error, unethical decisions, or illegal activity.
11. Distribute Student Handout #1 and review the assignment.
- Divide the class into groups of 3 to 5 students.
- Assign one group to assume the roles of members of the Board of Inquiry.
- Have each of the other groups select a corporation from the list on the Student Handout. Assign students the corporate roles as suggested on the handout.
- Direct the students to explore the web sites suggested. They are not restricted to these sites, however, and they should feel free to obtain data at any reliable site.
- The time allotted for research does not have to exceed 45 minutes. Research may be initiated in school and completed as assigned homework.
12. Arrange the classroom for the Board of Inquiry’s Investigative hearings.
Introduce the Board Members. You can make up appropriate “titles” such as Representative from the House Committee on Business and Finance, Attorney from the Justice Department, Officer from the Securities and Exchange Commission, Chief Investigator for the FBI, Senator from the Senate Committee on Banking, etc..Call the first corporation. Have the representatives sit facing the Board. Each corporate officer should introduce him/her self.
Begin the investigation, allowing at least 10 minutes for each corporation to respond to the Board’s questions.
13. After the allotted time, have each Board member vote individually. The following decisions may be made:
- Managerial error
- Unethical behavior
- Criminal activity with the intent to bring charges
14. Then, allow the entire class to vote on the same array of possible conclusions by a simple show of hands.
To successfully complete the lesson, you will need the following materials:
- Transparencies 1, 2, 3, 4, and 5.
- One copy for each student of Student Handout #1. The Collapse of Corporate Giants: The New Dr. Evils?
- Access to computers with Internet capabilities.
Visit the CNN Fortune website. Go to the Archive and click June 24, 2002, "Cool Companies." Ask the students to read the article and to select some companies in which they would want to invest. Research the companies’ recent stock prices. Have the prices of stock increased or decreased since June, 2002? Assign a short paper asking the students to summarize this information and to discuss what they have learned about their selected “Cool Companies” as a result of their research.
Have the students locate recent newspaper or magazine articles that pertain to suspected unethical or illegal activity in the corporate world. Set aside a day for the students to discuss their articles.
Have the students bring one independent 'fact' from the internet in support of the idea that bad stewardship led to bad performance.
From what you learned, please answer the following questions:
- Which corporation’s officers’ behaviors were most reprehensible? Why?
- Which corporations' officers’ were most intellectually challenged – brainless? Why?
- Which corporations might fit into the “Creative Destruction” theory? [See Transparency #3] Why? [All answers will vary.]
1. Invite a corporate, criminal, or civil lawyer to speak to the class on the topic of corporate misconduct. How does corporate misconduct affect the individual investor and on the nation?
2. Invite a financial consultant to class to discuss how corporate misconduct affects investor behavior and the investment strategies of individuals.
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