Legal and Ethical Issues in Management

Week 1: Problem-Solution Analysis Paper

MGT623 Legal & Ethical Issues in Management

Professor Dave Ibarra

10-26-14

The availability of stock options and executive compensation has been a main target for criticism over the past few decades. The difference between executive compensation versus the compensation of the average worker is astoundingly large and often leads to corporate greed and the desire to gain additional wealth. Unethical activities arise such as bringing a conflict of interest into existence between shareholders and executives. Conflicts of interest and moral hazard issues that arise when a principal hires an agent to perform specific duties that are in the best interest of the principal but may be costly, or not in the best interests of the agent is known as the Principal-Agent problem (http://www.investopedia.com). Many executives practice this behavior which leads to a manipulation of power to the extent of them jeopardizing sound relationships and lacking corporate social and fiscal responsibility.

A prime example of this behavior occurred during the late 1990s and early 2000s; Executives lacked internal controls and were not being held accountable for their funds. In order to stay on top, executives did whatever needed to be done in order to keep their stock prices high and avoid losing money. Enron, a large energy company, was at the forefront of the news stories and scandal that occurred. They were accused and found guilty for participating in fraudulent business practices to increase the value of their stock and in turn their options and compensation. “News stories and analyses around the time of Enron’s collapse told tales of executive hubris, and an arrogant belief in their own invincibility and infallibility. These people managed the firm in a wholly egotistical manner with greed and self-aggrandizement as their primary motivation” (Perel, 387). Compensation was being rewarded in a corrupt manner. There was a lack of...