Salomon Brother’s Treasury Bond Scandal

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Table of Contents

Abstract
Introduction
What causes unethical business practices?
Ethical Considerations and implications
Conclusion
References

Abstract

Ethical issues in the workplace remain key agents of downward trends. A combination of ethical consideration failures contributes to bad decisions and adverse measures aimed at either saving corporate image or imminent losses from overtaking milestones. To produce, a description of an actual business ethical issue as well as an ethical assessment of the specific issue, reviewing data, and first-hand information from executives provides insight and a guiding viewpoint.

The Salomon Brothers saga in 1991 was a very interesting development, especially when ethical issues in business are brought to the limelight. Salomon Brothers Treasury Bonds scandal that happened in 1991 remains one of the most precise ethical considerations mistakes in corporate America to date. It serves as a guiding lesson to executives and learners. To get a composite overview of the context of ethical considerations as vital in business, I will review the Salomon saga and discuss how management causes a culture of impunity and underhand intents.

Introduction

This paper draws its ethical consideration flouting by examining the bond trading scandal at Salomon Brothers Company in 1991. The objective is to demonstrate the development of an unethical organizational culture under the leadership and the subsequent spread of unethical practices down to the management and employees. Salomon trader Paul Mozer was caught by submitting false bids to the US Treasury by Mike Bashan the Deputy Assistant Secretary. Mozer’s only explanation was that he was under instructions from his company, Salomon, to buy more treasury bonds.

The bids were an attempt to purchase more treasury bonds than allowed by law. As such, Mozer was under the instruction of an organization that puts too much effort into achieving corporate success. Sims and Brinkman argue that nothing is more important to an ethical corporate atmosphere than the moral tone and example set by the organization’s top leadership (Sims & Brinkman, pp. 327-339). In Salomon, traders were living on the company threshold. According to Spinello, Salomon traders read the tracts on the nature of warfare as they skillfully practiced their craft in the jungle of the world bonds market (Spinello, pp. 241-252).

What causes unethical business practices?

Unethical behavior can be fostered by organizational culture. According to Rao empirical evidence supports the fact that there is a significant connection between ethics and profitability (Rao, 55). Rao points out that the question of whether there is any causal link between a company’s ethical or unethical behavior and its bottom line is implicit (Rao, 55). Ethical behavior and integrity in a company are very important to its financial success (Rao, p. 55). Internally, the law and government regulations can reward ethical behavior and punish unethical behavior as was the case with Salomon’s charge and subsequent fine which crushed it (Rao, p. 56).

Here, the concept of integrity as a value appears, and we discuss it in context. The integrity of Salomon’s CEO was put in question only after the scandal. He was pushing for success at all costs. According to Rae and Wong, conflict of interest in financial institutions is commonplace. In many instances of conflict of interest in financial institutions like Salomon, the practice of respectable activities is rare, hence a commonplace method of increasing revenue bases. Investors will quickly lose their savings to dishonest and incompetent brokers. Admission of irrelevant information, wrong documents, failure to follow relevant laws, and failure to obtain critical documents were evident in Salomon (Rae & Wong, pp. 311- 312). Admission of false information can lead to decisions that are not conventional. Salomon was a successful firm. However, from the inside, the financial institution had not followed the recommended employment practices. As such, the company is clustered, according to Rae and Wong, in a group of companies with poor practices. Often such institutions make huge mistakes and lag.

About the success of Salomon, Rae and Wong argue that measures of success in the financial sector are complicated and less dependent on traditional methods of corporate performance, rather its more reliant on intangible factors (Rae & Wong, p. 312). Salomon was enjoying the spoils in the industry yet, they wanted more of the action. In general, they were greedy. Salmon hoped to hold more bond stocks as socially responsible investing. This is unethical and results in organizational pressure.

According to Rae and Wong, many young managers report receiving ‘explicit instructions from their middle manager bosses to do things they believe are unethical and sometimes illegal. This is the case with Salomon. Paul Mozer could not have simply gone to buy, he was under instructions. The explanation provided by Rae and Wong on this is that these executives believe the organization is not corrupt nor are their bosses greedy and unethical rather are under pressure to get things done (Rae & Wong, p. 313). Rae and Wong project that, ethical and even legal restraints can get lost when the overriding message is ‘just do it’ (Rae & Wong, p. 312).

Ethical Considerations and implications

The ethical considerations disregarded in this case include failure to comply with government regulation on treasury bonds. According to the US Treasury, Salomon admitted that it had committed irregularities and rule violations during its participation in treasury securities auction (Spinello, pp. 241-252). Here integrity of office bearing is the root cause of a poor management policy. Leadership and the office-bearing policies were not complied with. The CEO, Gutfreund had failed to play his role effectively. He had to leave office in 1991 after the scandal. According to Sims and Brinkman, the personal values of leaders powered by their authority set the moral tone of an organization (Sims & Brinkman, pp. 327-339).

Failure by top-level managers to practice management properly nips the effectiveness of a critical component of organizational culture. Gutfreund and his deputies failure to identify key organizational values, to convey those values through personal example, and to reinforce them by establishing appropriate organizational policies demonstrates a lack of ethical leadership on their part and it manifests an unethical organizational culture which led to the 1991 scandal(Sims & Brinkman, pp. 327-339). A leader’s role is to set an example and lead/guide his employees. Practicing ethics is important for it fosters ethical behavior across the organization.

According to Sims and Brinkman, the role of a leader is to enforce and shape an ethical organizational culture. Streamlining the revenue streams Salomon was using to benefit could have been much better. Unfortunately, the company failed to identify key strategies to increase profitability and sought only after one resource. Salomon borrowed the habit of breaking the law from top managers. The company flouted the law and tried to acquire treasury bills over the legal maximums.

Conclusion

The Salomon’s government bond trading desk allegedly made unauthorized bids to acquire treasury bills over the legal maximums (Spinello, pp. 241-252). This is indicative of acute sensitivity to ethical issues and how top managers should be examples for employees (Spinello, 241-252). It must be realized by all employees that ethics is necessary for any organization to function.

Lack of integrity in leadership is a commonplace ethical problem. Business leaders should be emphatic about being ethical through upholding high moral authority and providing guidance is core to making an organization remain credible and resourceful. Leaders should be aware of the fact that leadership is a critical component of the organization’s culture and it allows reasonable practices. A combination of ethical consideration failures contributes to bad decisions and adverse measures aimed at either saving corporate image or imminent losses from overtaking milestones.

The leaders should be able to provide guidance and ease organizational effort in achieving corporate success. Sims and Brinkman argue that nothing is more important to an ethical corporate atmosphere than the moral tone and example set by the organization’s top leadership (Sims & Brinkman, pp. 327-339). Ethics, as such are core in making an organization functional, credible, and resourceful. The Salomon case was because of greed to earn and remain competitive and equally reputable yet the practices were not ethically leading to the unethical practice.

References

Rae, Scott, and Kenyan Wong. Beyond integrity: a Judeo-Christian approach to business ethics. 2. Michigan: Zondervan, 2004. 311-315. Print.
Rao, Spuma. “THE EFFECT OF ANNOUNCEMENT OF BRIBERY, SCANDAL, WHITE COLLAR CRIME, AND ILLEGAL PAYMENT ON RETURNS TO SHAREHOLDERS.” Journal Of Financial And Strategic Decisions 10.3 (1997): 55-56.
Sims, Ronald, and Johannes Brinkman. “Leaders as Moral Role Models: The Case of John Gutfreund at Salomon Brothers.” Journal of Business Ethics 35.4 (2002): 327-339.
Spinello, Richard. “Review: ethics and leadership on Wall Street.” Business Ethics Quarterly 6.2 (1996): 241-252. Web.

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