The collapse of Lehman Brothers was an enormous event that created a significant impact on the economy and in the lives of the more than 26,000 employees who worked for the company for decades but eventually lost their jobs. Millions of investors lost their investment, and the chain reaction produced by the fall created the worst financial crisis and economic downturn in 70 years. The real reasons for the falls of the company are many, but in brief, the company executives did the following. First, they broke the law by filing misleading financial statements. In particular, the company misused Repo 105 to play around with figures in their balance sheet, but they never told regulators about it to make the company appear healthier or profitable that it was in reality. Secondly, the top management continued to engage in risky behaviors such as selling assets linked to subprime mortgages and did not disclose that information to the board (Wiggins, Bennett & Metrick, 2014). The managers also did not disclose some information about the underperformance of the company in the books of accounts (Schoen, 2016). Third, the board lacked experience and competency to deal with the problem. The relevant laws were broken in this case related to disclosure when preparing books and board did not act in the best interest of the shareholders. Finally, the board and the management failed in their fiduciary responsibility to protect the interest of their investors, customers, and other stakeholders. They did not act in their best interests. If the company wanted to take an excessive risk by underwriting subprime mortgage, they should at least have communicated that information to the shareholders. As an American company, Layman brothers operated under capitalism, which is an economic system governed by market principles. Under this economic system, companies are free to run their affairs in response to the forces of demand and supply and by offering something better than the competition. However, companies have to obey the laws by observing good corporate governance. They have to pay taxes, for instance, and the board offers an oversight role in the decisions of the senior management. The issue that led to the collapse of the company was due to unethical senior management and incompetent board of directors (Mensah, 2012).
Breaking the trust of investors, shareholders, customers, employees, among other stakeholders by engaging in activities such as violating the law, exploiting legal loopholes, filing misleading financial reports, failing to inform the board on important issues, adding inexperienced people to the board, and taking excessive risk by underwriting subprime mortgages, is not morally justifiable. The thesis is based on two claims. First, the company engaged in activities that broke the trust of stakeholders. Secondly, the actions of the company are not morally justifiable. The ethical theory that supports this position is deontology. The chief characteristic of deontology is that how one should act is defined independently of the moral good. It derives morality from reason without an appeal to any theory of good (Dpadvertisingco, 2013). An act is morally right regardless of the consequences for the human welfare or theory of good as long as such action is within the duty of an individual. Applying deontology to the Layman case, categorical imperative applies to the situation. The categorical imperative is the rational principle that people must follow regardless of their natural inclinations as a guide to ethical or moral conduct. In following the principle, immoral actions violate reason. The categorical imperative is formulated as a universalizing principle whereby an action is moral if the person doing it can at the same time desire that it should become a universal law. In applying the rule to the Layman case, it is evident that universalizing manipulating books of accounts, non-disclosure of material information to the board, and the failure of the board to undertake due diligence would lead to problems. More companies would fail, investors lose their investment, and that makes the issue in question morally unjustifiable.
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Deontology ethical theory presents a solution that is superior to others. If the management of the company has applied this solution, the company could not have collapsed. First, the company broke laws but using the categorical imperative to determine whether the action is moral, the conclusion is that disobeying the law cannot be universalized. Failure to follow the law creates chaos because the intention of the law is the foster order. The same case applies to the manipulation of books, failure to report or inform the board on what is happening, excessive taking of risks, and other actions that directly or indirectly led to the collapse of the bank. A careful examination of the same situation from the utilitarianism perspective, the results are different. One of the characteristics of utilitarianism is consequentialism. The theory holds that what matters for an action to be considered morally right are the consequences, whether good or bad (Macat, 2015). An action is moral if it produces more good than downsides. In the course of the operations of the firm, the executives decided to take advantage of an accounting loophole known as Repo 105 to hide the actual status of the firm. At the time the company was doing that, the benefits outweighed the risks. If the board or stakeholders had understood the extent of the problem of the company, it could have collapsed. Therefore, the executives protected the company. However, doing that only delayed the demise of the company. If the management was honest, the problem with the company could have been identified long before the financial crisis and lenders would have rescued the company by buying it or injecting additional capital. Secondly, at some point, the company must have discovered that underwriting subprime mortgages was lucrative but decided to hide the details to the board or even the regulators due to the risks involved. By doing that, the executive must have reasoned that from a utilitarian perspective that doing that brought more benefits. The company earned more money and reported huge profits that boosted stock prices. Investors and shareholders benefitted. However, due to the fundamental or shaky foundation of the whole thing, it had to collapse at some point in the future. The company just delayed the inevitable. Being honest with the regulators and the board, the company could have gradually reduced overexpose to the toxic subprime mortgage debt that later led to the collapse of the company. With reduced exposure to the debt, there are chances that the company could have survived the financial crisis in some form. It could have become smaller but still survived. Only some employees could have lost their jobs and not all. Investors could not have lost everything.
References
Dpadvertisingco. (2013, June 05). Kant Ethics. Retrieved from https://www.youtube.com/watch?v=eQcC1qYP08s&=&feature=youtu.be
Macat. (2015, October 13). An Introduction to John Stuart Mills Utilitarianism - A Macat Politics Analysis. Retrieved from https://www.youtube.com/watch?v=6LD5-2oj7DA&=&feature=youtu.be
Mensah, J. M. (2012). Why Lehman Brothers Failed: Preventive Measures and Recommendations. SSRN Electronic Journal . doi:10.2139/ssrn.2156006
Schoen, E. J. (2016). The 2007–2009 Financial Crisis: An Erosion of Ethics: A Case Study. Journal of Business Ethics, 146 (4), 805-830. doi:10.1007/s10551-016-3052-7
Wiggins, R. Z., Bennett, R. L., & Metrick, A. (2014). The Lehman Brothers Bankruptcy D: The Role of Ernst & Young. SSRN Electronic Journal . doi:10.2139/ssrn.2588551
