Business Ethics: Heinz - Case Study Example

Running Head: Business Ethics Business Ethics [Institute’s Introduction Maglich draws attention towards a latest high profile issue of insider trading shortly before the news of Buffet’s Berkshire Hathaway and 3G Capital acquiring Heniz. Insiders, who have simply been recognized as a “GS account”, got data regarding the acquirement of Heinz by Warren Buffet swiftly bought a number of shares of the business and the consequently raised the demand of shares by around 7.5 percent which had been trading at the same price level for quite some time. As soon as the announcement was made, trading for the shares showed a sharp increase and price raised by over 20 percent, as a result, providing beneficial for those who had earlier acquired those shares for a premium. The case furthermore shows that the SEC in addition to other supervisory bodies is ready to penalize these dealings as they are supposed to destabilize market competence as well as investor confidence. Actually, they have even gone to the extent of freezing Swiss bank accounts. Insider trading has been common from the beginning of stock markets (Ferrell, et al, 2012, pp. 83). Recently, a number of famous names, which consist of but are not restricted to Rajat Gupta (Goldman Sachs), Raj Rajaratnam and Jason Goldfarb (Galleon Group), Donald Johnson (NASDAQ), Joseph Skowron and Yves Benhamou Matthew Kluger and Brett Bauer have been dishonored, fined, and imprisoned as a result of insider trading. Even though, insider trading is among the most extensively talked about issue within the area of business ethics, there is a serious deviation between professionals concerning whether or not insider trading should be made ethical. This study tries to at investigate and examine different dynamics of insider trading taking into consideration the aforementioned article. In particular, the study would try to develop better perspective regarding the issue of insider trading considering business ethics theories, its influence on the stakeholders and offer suggestions to resolve this issue. Discussion Introduction to Insider Trading It is obvious that workers of a any business are expected to have data regarding the business that no other person on the outside has, for instance, a likely merger, acquisition (such as Heinz), economic outcomes, legal proceedings, accessing latest distribution or communication medium, strategic coalitions and a lot more. The regulation does not confine workers of any organization, and also the top management, from trading the shares of the business; however, it does not make it clear that they should not exploit the non-public data (Ferrell, et al, 2012, pg. 83). Actually, even if an insider discloses a bit of vital inside information, the law limits the capacity of any outsider to utilize that information or take decision based on that information (Henn, 2011, p. 85). The most crucial thing in insider trading is the timing. Insiders having non-public data can exploit that data once that turn out to be public. A number of organizations control insiders to work on that data only after 24 hours had passed on that information becoming public with the intention of avoiding any difficulties (George, 2006, p. 75). Ethical Issue The ethical concern, which is in question here, is that of insider trading. The insiders, obviously, utilized the data that did not own by them and utilized it for their individual benefit (Sharma & Bhal, 2004, p. 412). When any resource of a business is utilized for personal benefit without the authorization of the owner, the benefit should go to the owner and in this case, it should go to to Heinz who has currently been acquired by Buffet’s corporation. Insider trading is also an ethical concern because whereas other agents in the market can use a particular level of information, these insiders utilized information that had yet not been opened to the public to increase their gains. As a result, the information lead achieved by the insiders is completely unjust. Despite the fact that how thorough and systematic they would have been in their study, they would have never been capable of finding out this data hence upsetting the essential law of offering an equal opportunity to everybody (Henn, 2011, p. 85). As a result, the same has the likelihood to discourage investors from taking part within the market having major insider trading. As expected, smaller number of individuals, taking part within a market transforms into smaller liquidity, smaller competence and additional unpredictability all of which have a pessimistic effect on economic growth, which in turn has empirically supportable link with financial expansion (Shaw, 2010, p. 320; Höffe, 1994, p. 123). An economic model can be used for study of whether insider trading is suitable. Perfect competition has a lot of suppositions: several purchasers as well as retailers, no obstacles to market entrance or exit, complete understanding on the part of all applicants, etc. whereas these statements are hardly ever met. Microeconomic theory clearly declares that firm application of perfect competition to the entire market causes “pareto optimality” (McGee, 2010, p. 72), which is a desirable condition in which the limited resources of society are being employed very competently by the producing businesses. In addition, the goods and services are being circulated so well by the competitive markets, that it would not be possible to make any particular individual more affluent without harming some other individual. Immanuel Kant introduced a “categorical imperative” (Bainbridge, 2011. P. 93) representation to find out whether an activity is moral or ethical. It is interesting to relate this model to insider trading, as the outcomes are not what one might anticipate. Some would definitely argue that according to the categorical imperative, insider trading is not suitable. Initially, this appears logical - certainly, people would not consider it satisfactory to be in the place of executing a trade with a person who have inside information. However, on additional evidence the categorical imperative develops the exact contradictory conclusion. If a person with inside information is acquiring stock, the price the seller gets will be somewhat higher as compared to what he or she would otherwise get. The seller may hope that the inside information would turn out to be public so the stock increase considerably; however, apparently that is not an alternative. The only options are stock market without insider trading or a stock market with insider trading (Elitzur, 2011). Since the retailer will collect additional for his or her stock, individuals will realistically allow insider trading. Impact on Stakeholders Here, the most pertinent as well as key stakeholders’ insider concerned in trading, Heinz, its shareholders as well as investors, SEC and supervisory bodies and investors concerned with the broader stock market. Noticeably, the insiders who took advantage of this information benefitted from a positive impact of insider trading; at least until the time when their Swiss bank accounts were freezed. If the inquiry of SEC exposes that they were actually engaged in the misdemeanor, they might as well end up in jail as the same decision was taken in other high profile instances as well. The benefits for shareholders as well as for investors of Heinz could have a lot more had there been no insider trading. More importantly, insiders’ capability to produce monetary benefits from trading activity are expected to be hindered shortly as with this scandal, the investors would now consider Heinz as among those businesses which were unsuccessful at successfully handling the issue of insider trading (Petrick & Quinn, 1997, p. 85). Even worse, the brand name of the organization might as well be affected if it becomes public that a few top-level executives or directors were involved in the case. In addition, insider trading as well has negative influences for the wider investor community as well as securities market. Insider trading has the possibility to generate major benefits for the insiders; however, it is a zero-sum activity because it controls the capability of outsiders to get benefits from the trading practice (Shaw, 2010, p. 320). Insider trading influences the market and the outsiders, as discussed earlier, feel left out and operating in a field where they can clearly see the drawback. Among the best accomplishments of the US during the beginning of 19th century was opening the door of monetary growth, which consecutively guaranteed economic development. Stock market is a central component of the financial market because it connects investors with lenders within a transparent market. They suppose that everyone has an equal prospect of doing extremely well and generating benefits if they invest time as well as energy in knowing the dynamics. Nonetheless, as what took place in the case of Heinz, all the understanding, planning, estimates and suppositions of the savers and investors were challenged when the insider capitalize on their non public data. Overall, these incidents discourage investors operate within the market which is not a good sign in the time of recessionary stress and credit issue. Recommendations/Resolution There is certainly no question about the fact that Heinz and American stock market have faced a severe blow as a result of the latest insider trading accusations. The outsiders that are currently trading other shares and do not have links within the stock market with the insider or are not insider themselves do not participate in the trading process since they think that it has been subject to unjust situation. As expected, it also has the potential to reduce the liquidity in the markets and increase serious concerns regarding the capability of the markets to fuel monetary growth. When outsiders, who make a considerable mainstream in all instances, leave the market, financial markets would stop creating the link among the lenders and borrowers within the market and driving financial activity. Here, it is very important to find solutions for this issue. Even though, Heinz and the SEC cannot undo this incident, they pursue some easy steps to reduce the chance of such incidents taking place again. The SEC as well as Heinz should implement an active approach at raising the confidentiality within organizations. When there are additional individuals who be acquainted with a particular corporate decision, it is more possible that the data would reach the public. Nonetheless, when only a very small number of individuals are acquainted with particular information, it is simpler as well as straightforward to identify the offenders, as there are comparatively a smaller number of individuals who come out as suspects. This solution is more reasonable as well as realistic since organizations such as Apple, Boeing, Lockheed Martin, Sukhoi Company, IKEA, Trader Joe’s, Glencore and others have been capable of staying away from the insider trading caption mainly as a result of the strong controls that they have inflicted on the outflows of data from the company. The fact is that rapid development in IT has made it a lot more convenient for people to share as well as shift data and that also without even making their identity. Over 63 percent of the stockbrokers have accepted that they gain from inside information; however, there are merely a small number of incidents that have shown in the media during the last few decades. Again, the issue is that insider trading is unavoidable and the most excellent approach is to place competent as well as efficient controls concerning the flow of data within the business (George, 2006, p. 75). An additional solution to avoid the issue of insider trading is to ascertain that Heinz as well as other businesses take dynamic steps and enhance their overall communication with the public. It turns out to be additionally rewarding and appealing for the insiders to utilize inside information when they recognize that information will not be made public in the near future. Nonetheless, when the company itself chooses to make the entire information public as soon as it is feasible, it would reduce the possibility of the insider having any key non-public information to utilize for their trading. The next two suggestions are intended for both Heinz as well as the SEC to impose. A large number of Austrian free market as well as democratic economists and professionals argue that the answer to the problem of insider trading is to make insider trading legal. They argue the same with the thought that markets are expected to acquire the prices correctly and these prices should appropriately reveal the condition of the business in addition to market anticipations regarding the same. Buffet acquiring Heinz was positive report that had the possibility to boost the stock price of the business, nonetheless, that boost within the stock price only shown on the surface once the statement had been public. However, when insiders started to acquire the shares of Heinz at premium, the same guaranteed that it start to replicate within the market prices much more rapidly. As expected, insiders have the most genuine as well as pertinent information concerning the organisations that they are working with, hence, if they are permitted to trade then the markets would be at a better spot to avoid a collapse like the condition of Enron and WorldCom at one time. At this point, it is essential to know that in this period of connectivity and information technology, it is nearly impossible to retain close watch and keep up to date with information flow from and to workers of any company without infringing their civil rights (Shaw, 2010, p. 320). In addition, a number of professionals think that the prospect for insider trading provides executives with a chance to take part in a never-ending process of modernization, development, and generating value. Besides, it also compels executives to take planned risks with the presented funds instead of being satisfied with the existing situation of the company. For instance, had insider trading been legalize, the executives and directors Heinz would have struggled a lot more harder to safe this contract with Buffet’s company since they were aware of the fact that this sort of an opportunity would guarantee an inflation of the stock price. The benefits that Heinz’s executives and insiders would get from trading would act as the remuneration for their difficult task and willpower. The supporters of insider trading as well argue that reward to workers in shape of the earnings from insider trading is low-priced for the long-term shareholders of the company, as it does not arrive from the commercial earnings of the business (Henn, 2011, p. 85). Conclusion Heinz has come in the line of a number of businesses that have been faced by accusations regarding insider trading. The SEC has taken quick steps and has assured severe penalty for the criminals in this case. The affect of insider trading on the stakeholders is very likely to be harmful both in short as well as long term. This clarifies the reason a large number of countries have made it prohibited for traders to utilize inside confidential as well as non public information. Interestingly, a solution to resolve the issue would be to make insider trading legal across the broad in anticipation that it would initiate a fresh period where share prices would be capable of representing the condition of the company more precisely. An additional idea would be to pursue the stance of businesses like Apple, Boeing, Lockheed Martin, Sukhoi Company, IKEA, Trader Joe’s, Glencore and others to form a cautious situation and be quick in making the entire information public which unavoidably has to turn public in the future (Sharma & Bhal, 2004, p. 412). References Bainbridge, S. M. (Ed.). (2011). Insider trading. Edward Elgar Pub. Elitzur, R. (2011). The accounting art of war: Bounded rationality, earnings management and insider trading. Journal of Accounting and Public Policy, 30(3), 203-216. Ferrell, O C., Fraedrich, J., and Ferrell, L. 2012. Business Ethics: ethical decision-making and cases. New York: Cengage Learning. George, R, T. De. 2006. Business ethics. Pearson/Prentice Hall. Henn, S. K. 2011. Business Ethics: A Case Study Approach. John Wiley and Sons. Höffe, O. 1994. Immanuel Kant. State University of New York Press. Maglich, J. 2013. SEC Sues Traders Over Heinz Insider-Trading Allegations, Freezes Swiss Bank Account. Forbes. Retrieved from April 30, 2013: http://www.forbes.com/sites/jordanmaglich/2013/02/15/breaking-sec-sues-traders-over-heinz-insider-trading-allegations-freezes-swiss-bank-account/ Petrick, J. A., & Quinn, J. F. 1997. Management ethics: integrity at work. California, Sage Publications. McGee, R. W. (2010). Analyzing insider trading from the perspectives of utilitarian ethics and rights theory. Journal of Business Ethics, 91(1), 65-82. Sharma, P., & Bhal, K. T. 2004. Managerial ethics: dilemmas and decision making. California, Sage Publications. Shaw, W. H. 2010. Business Ethics: A Textbook with Cases. Cengage Learning. Read More