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The case of Martha Stewart has been referred to by academic writers to review the moral and ethical issues surrounding the case. In this essay I will analyze the implications of insider trading in the business world, I will also examine the moral foundations of the Martha Stewart case. The issue will be established and also discussed. I will also recommend the most ethical way of approaching the insider trading issue. From this Martha Stewart case we will also evaluate the actions the companies should take to meet ethical considerations relative to social performance, financial performance and their reputation. I will also evaluate the extent to which social, ethical and public issues should be considered in both the internal and external stakeholder relationships. I will also recommend the adequate consequences for ethics violation.
Martha Stewart was an investor who owned shares of a company called Imclone. In the year 2001 this company received information a new prescription drug that the company had heavily invested into its research and development, would not be approved by the food and drug administration( Carroll & Buchholtz , 2006, p. 653). On realizing this, the CEO of Imclone, Sam Waskal, in his efforts to avoid financial losses through his shares in this company, contacted his stock broker with the intention of floating all his shares of the company stock. Coincidentally this broker happened to also be Martha Stewarts’ broker. He notified Stewart that the CEO was liquidating the company stock and it would be in her financial interest to do the same by selling out her shares of this company. Her shares totaled almost 4,000 shares. The Securities and Exchange Commission noticed an unusual coincidence between the selling of massive shares by the CEO of Imclone and Martha Stewart. They begun an investigation to determine whether be Martha Stewart was guilty of insider trading.
Insider trading is the buying and selling of security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. (U.S. SEC, 2009).
In all this however it is, first of all, important to note that be Martha Stewart did not necessarily breach fiduciary duty to the other investors, since she was not under any legal obligation to inform the other investors. This would have been the case if she had been an officer with the company. (Hoffman, 2007). Martha Stewart would not have been convicted of insider trading had she confessed to her activities. However, she did not go for this option. She instead chose to collude with her broker in an attempt to fabricate a story about how there was a standing order for Ms. Stewart to sell her shares if the stock price fell below $60 per share.
This is a clear demonstration of the issue of ethics in the decision made by Ms. Martha Stewart. In the moment when Martha Stewart received the information that there was a potential drop in the stock price of the Imclone stock, it is quite possible that she did not engage in any illegal behavior by choosing to sell her shares. There are discussions however whether insider trading should be illegal or unethical. (McGee, 2008). All in all the question of whether or not it is ethical to lie to federal investigators is blankly illegal and unethical. Ms. Stewart knowingly engaged in an unethical behavior by conspiring with her broker to defraud the Securities and Exchange Commission. There is no claim of ignorance that would be credible.
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The decision to collude with the stock broker brought the whole issue to new levels in addition to trying to deceive the Securities and Exchange Commission. The jail term and the hefty fines were 4 times greater than the losses Stewart would have incurred had she kept the shares of Imclone stock. This was the result of the court decision related to the perjury and collusion charges of which Stewart was ultimately found guilty (Hoffman, 2007).
In addition to this back fall Stewart also came under fire from investors in her company. They alleged that Stewart, knowing that her company Martha Stewart living inc. would see a negative impact of stock price from the accusations associated with Imclone, sold many of her own company shares to avoid additional financial loss (Carroll & Buchholtz, 2006). Stewart was also charged with manipulation of the prices of stock prices of her own company by expressing her innocence to those charges. The charge was thrown out later anyway (McGee, 2008).
From the above analysis we can already see that the primary legal issue arose from Stewart’s conspiracy to defraud the investigators who were working the Imclone case. If only she had confessed to the decision that lead to the decision that lead to the trading of her shares, she could not have faced the consequences she already got. This guilty verdict resulted into a fine and a jail term. Speculations were that Stewart was too arrogant to admit of any wrong doings (Jennings, 2004). The government could have possibly been looking for a scapegoat for the numerous corporate scandals that were prevalent at the time (Koch, 2004).
The Securities and Exchange Commission determined that the activities associated with insider trading are not specific laws and definitions. There are however underlying moral laws that insider trading might violate. The company’s executive has a responsibility to safeguard the interests of the investors in the company. If there is information that could negatively impact the stock price then the executive is under obligation to disclose such information to the investors. The executive of the company is an employee of the shareholders. These investors are under the obligation to make upright and informed decisions that will increase the profits of the company and therefore increase the share value of the shares owned by the investors. In our case today, the decision which leads to the rejection of the medication was neither from the executive nor from Ms. Stewart.
However the information would lead to loss of shareholders money. The question we could ask ourselves is whether the decision would affect the value of the shareholders stock. We can argue out that those who purchased the shares from the CEO were the most harmed from by the insider trading, however, this are stocks that could have been bought anyway regardless of who sold them. We can hence determine that the lower stock price was not directly related to the insider trading (McGee, 2008). Insider trading can appear at lower level of loss to the insider, but this does not come at the expense of a shareholder. If we take this as a crime of theft or fraud, then we also need to determine the victim. There is definitely no individual who is at a risk of worse financial position as a direct result of insider trading.
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The other issue is to determine whether there was breach of any contract when he engaged in insider business. If the executive for example shared information that was patented or trademarked for the company thereby resulting in the trading of shares by another individual, then the insider would be guilty of violating a confidentiality agreement with the company. In this case however, it is not the selling of stock that is the true ethical violation, but the use of confidential information for any purpose outside the context of the company. There are countless areas in life where many individuals benefit from having more information than others.
There are many situations where privacy of company information functions to the advantage of the shareholders. Taking an example, if investors are able to access public information regarding the position of company stock that is held by the CEO the investors will be able to more accurately access the direction that the CEO feels the company is going to take. If the CEO makes public statements about the company’s bright future, but is selling his or her own shares, the investors will be cautious with the suspicion that the CEO would be hiding some information from them. They would actually be tempted to act in like manner (McGee, 2008). This prevents a “do as I say, not as I do” dynamic from appearing.
From the analysis done, it is actually debatable insider trading is unethical and should be illegal. As at now, the insider business is illegal and therefore any executive is ethically bound by the shareholders and the society to follow the law. There are steps that a company can take that will help the executive avoid the chances of the ethics of insider jobs. The company can for example set up an instant notification to shareholders when any individuals above a certain organizational level, buys or sells stock in the company. This would help the executive hold to their fiduciary responsibility to the shareholders and also keep them from acting on information that might benefit them, or reduce financial losses (Buchholtz, 2006).
There should also be a waiting period for the buying or selling of stock by the executive above a certain organizational level (Olson, 1987). This would prevent such actions as the CEO of Imclone who acted on information before it was made public. A reasonable waiting period would prevent such occurrences.
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There is need to uphold ethics in any business entity. It actually makes good sense. A business that conducts its transactions ethically actually influences the other partners to behave ethically as well. A company that treats all the stakeholders with care meeting all their responsibilities to the employees, customers and suppliers is usually awarded with a high degree of loyalty, honesty, quality and productivity. An example would be employees who are treated ethically. They will most definitely behave themselves more ethically while dealing with customers and business associates. It is a common belief that individuals who persistently train themselves to be ethical overcome any unethical behavior and also end up overtaking those individuals who are unethical in their environment. A good explanation to this view is the fact that when workers or rather anyone acts ethically they are able to operate with a sense of confidence regarding their position, their mind and energies are made free for maximum productivity and creativity. On the contrary, when engaging in unethical behavior, the individual fails and is exhausted, this results in diminishing effectiveness and reduced success (Buchholtz, 2006).
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The best way to promote ethical behavior is through setting a good personal example. Teaching ethics may not be as effective in training individuals to act ethically. Ethical behavior and good personal values are taught at an early stage of life by parents and educators. Well renowned and successful business people like Martha Stewart do know what ethics is all about. With the closing of their plants and setting off of employees, they cannot fail to know what ethics is. Ethics is not only important in business but in our day to day lives. This is because it is an essential part of the foundation on which any civilized society is built.