Introduction to Finance

Ethical behavior 
is
 
how an individual or 
organization treats others legally, fairly, and honestly. Of course, the ethical behavior of organ-
izations refl ects the ethical behaviors of their directors, offi
cers, and managers. For institutions 
or businesses to be successful, they must have the trust and confi dence of their customers, 
employees, and owners, as well as that of the community and society they operate in. All would 
agree that fi rms have an ethical responsibility to provide safe products and services, to have 
safe working conditions for employees, and not to pollute or destroy the environment. Laws and 
regulations exist to ensure minimum levels of protection and maintain the diff erence between 
unethical and ethical behavior. Examples of high ethical behavior include when fi rms establish 
product safety and working-condition standards well above the legal or regulatory standards.
Unfortunately, and possibly due in part to the greed for excess returns (such as higher 
salaries, bonuses, more valuable stock options, personal perquisites, etc.), directors, offi
cers, 
managers, and other individuals sometimes are guilty of unethical behavior for engaging in 
fraudulent or other illegal activities. Reputations are destroyed, criminal activities are prose-
cuted, and involved individuals may receive jail sentences. The unethical behavior of directors, 
offi
cers, and managers also may lead to a loss of reputation and even destruction of the insti-
tutions and businesses for which they work. 
Many examples of fraudulent and illegal unethical behavior have been cited in the fi nancial 
press over the past few decades, and most seem to be tied to greed for personal gain. In such 
cases, confi dential information was used for personal benefi t, illegal payments were made to 
gain business, accounting fraud was committed, business assets were converted to personal use, 
and so forth. In the early 1980s, a number of savings and loan association managers were found 
to have engaged in fraudulent and unethical practices, and some managers were prosecuted and 
sent to prison while their institutions were dissolved or merged with other institutions. 
In the late 1980s and early 1990s, fraudulent activities and unethical behavior by invest-
ment banking fi rms resulted in several high-profi le fi nancial wheeler-dealers going to prison. 
This led to the collapse of Drexel Burnham Lambert and the near collapse of Salomon Brothers. 
By the early part of the twenty-fi rst century, such major fi rms as Enron, its auditor Arthur 
Andersen, and WorldCom ceased to exist because of fraudulent and unethical behavior on 
the part of their managers and offi
cers.
In addition, key offi
cials of Tyco and Adelphia were 
charged with illegal actions and fraud.
In 2009, Bernie Madoff was convicted and sent to prison for operating a “Ponzi scheme” 
that resulted in investor losses of billions of dollars. Returns in a Ponzi scheme are fi ctitious 
and not earned. Early investors receive their “returns” from the contributions of subsequent 
investors. Ultimately, the scheme collapses when there are no substantial new investors and 
when existing investors want to sell their investments. As of late 2015, executives of the Volk-
swagen Corporation were being questioned about the use of computer software that resulted 
in government emissions tests that were misleading concerning the amount of pollution that 
was being emitted by their diesel engine automobiles.