This Week In Finance

Ethics, Stakeholders, and Montgomery Wards

 

Ever looked for an interesting ethical dilemma with which to start off a discussion in your Corporate Finance course? Some of the best discussion-starters come right out of the newspaper. Consider the following.

In an otherwise slow news week, Montgomery Ward & Co. filed for bankruptcy reorganization (Chapter 11) during the week of July 7, 1997. The firm had dismissed approximately 300 employees on June 25th. At the time, the firm promised those who were let go continuation of their health insurance coverage and a severance package which allowed them two weeks' pay plus additional pay based on length of service and unused vacation time. So far, so good, right?

Unfortunately, the promised benefits were frozen upon the bankruptcy filing. And while Montgomery Ward executives indicated their willingness to ask the bankruptcy court to reinstate them, a ticklish situation has been created because of opposition from creditors who view the payments as disbursements of "their" money.

This situation brings up a number of interesting facets for discussion. For example, you might use this conflict to introduce the notion of "stakeholder" wealth maximization (vs. stockholder wealth maxmimzation) and ask students to weigh the rights of employees against those of creditors. And, to take the discussion one step farther, you might ask those who side with the employees, exactly how much severance pay is appropriate? If two weeks is good, is four weeks better? Or, for those who side with the creditors, what is the nature of their claims relative to those of the employees? What about secured creditors and unsecured creditors? How do their rights differ?

If you use this event (or another one like it) to raise these issues early in the course, focus more on the strictly ethical, rather than legal, aspects; by doing so you accomplish two things. First, you alert students early on to the ethical dilemmas faced by financial decision-makers in virtually every aspect of their jobs, and second, you lay the groundwork for a later discussion of legal issues (bankruptcy law, the absolute priority rule, etc.) which arise in the chapters on long-term financing and capital structure.

Once you begin to look for them, you will be amazed at how many items in the business news lend themselves to ethical questions. I have found that discussions of the ethics of financial decision-making help dispel the "Gordon Gekko" image which haunts us in the Finance profession to this day.

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