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BFS Stage 3; Corporate Responsibilities & Business Ethics Membership Number: B4191

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BFS Stage 3; Corporate Responsibilities & Business Ethics Membership Number: B4191

Corporate
Responsibilities &
Business Ethics
BFS Stage 3 - Module
Assessment Question 1
Part of the BFS Programme

Name: Michael Bannon

Membership Number: B4191
Student: Insurance Institute
Company: Hibernian Aviva General Insurance
Staff Number: 061745
Stage 3: Bachelor of Financial Services Degree
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 BFS Stage 3; Corporate Responsibilities & Business Ethics Membership Number: B4191

Case Study - 4.9 Napster

Question 1 – Do you think that downloading the music was legal? Do you think it was ethical?

The downloading of music from the site was legal, as Napster facilitated users in the sharing of music
without the permission of the copyright owner creating a copyright infringement.

Something may be;

1. Illegal and unethical
2. Legal but unethical, or
3. Ethical but illegal

What is legal is not always necessarily ethical and therefore someone should not assume that they should
do something just because the law allows it. Below is the Venn diagram, as shown in the Trevino/Nelson
text, which represents the relationship between the legal world and the ethical one.

Common Ground
Legislation Ethics

Legislation and the legal system could be considered a blanket approach designed to cover regulations
that are obligatory to observe in relation to wide range of rights and wrongs. Ethics in society is the set of
moral principles and code for behaviour that guide individual actions in society and what fills these gaps is
legislation. Because of this, the relationship between legislation and ethics is one that is completely
interlinked as they blend into one another.

In the Napster case study, the issue on whether or not the downloading/sharing of music files was
something that was ethical or not requires the identification and evaluation of a number of steps;

1) What is the ethical issue?

The ethical issue in the Napster case revolves around whether or not it is ok for Napster to facilitate
its user with the ability to share music with each other which is not recognising the record
companies/musicians rights to be compensated for the music shared and control the distribution of
their own material. The second ethical issue is whether or not society/Napsters users should share
music with each other without paying for the music.

2) Identification of the affected parties or stakeholders

The identification of stakeholders is one of the fundamental ethical questions, which must be asked;
whom do we have an obligation toward; who will be affected by our decisions and how will our
decisions affect stakeholders. For actions or decisions to be considered ethical they must serve the
interest of all those who are identified as stakeholders.

In the Napster case study the main affected parties where;

i. Musicians and song writers

ii. Consumers
iii. Record Companies

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3) Identify the consequences

The identification of all possible impacts, both positive and negative to the stakeholders, need to be
considered.

The file sharing activities, which Napster facilitated through their technology, allowed music
files/downloads to be distributed from peer to peer. The ability to download or share music files
without paying or acquiring the appropriate permission created consequences for the stakeholders
involved. The consumer/music fan benefited from this file sharing facility, as they no longer had to
pay for the music the wanted. However this form of music piracy and file sharing undermined the
music industry by negatively impacting music sales and reducing record companies income. The
impact of such a reduction in revenue from music sales not only negatively impacted the record
companies but also the income of existing musicians/writers who relied on music sales/royalties
and their ability to control the distribution of their music and new musicians/artists/writers who rely
on investment from record companies. The possible long term affects of such piracy could lead to a
reduction to the numbers of musicians and development of the music industry as a whole.

4) Identify the obligations

Identifying and understanding what are the obligations that are owed to the stakeholders will vary
depending on the dynamic operating between the stakeholders. Napster had obligations to both
the record companies/artists and to society/consumers. Their obligation to the music industry was
to ensure they did not facilitate any illegal practice or infringements to copyright laws or cause
harm/damage to the industry through the provision of such service. Napster also had an obligation
to their users and society in general not to encourage piracy/copyright infringements though the
provision of its file sharing facilities.

The Napster user/consumer had an obligation to purchase the music, or attain the right/permission
to share the music with other peers, from the record companies or artist. As such, file sharing was
theft of copyright and would ultimately damage the music industry.

5) Consider character and integrity

By looking at the integrity of the Napster business model it is clear that Napster had actual
knowledge of specific material that where being shared which where a direct infringement of
copyright laws and failed to take any action to prevent the sharing of such material or remove it.
Napster was also profiting from the fact that users could share such material. This clearly showed a
lack of integrity on the part of Napster.

6) Potential actions
Napster does not seem to have considered or offered up any alternative solutions to solving the
copyright infringements issues it faced.

Based on my evaluation of the Napster case study I would say that the facility that Napster provided was
unethical based on the fact they knowingly supported and profited from the copyright infringements its
users committed. The actual sharing and downloading of music by the users without payment to or
permission from the record company/artist was also unethical as it effectively stole from the industry and
removed the distribution rights from the industry to the users. Large companies such as Napster have
powerful positions within society and this provides them with the capability to do greater damage to society
when facilitating or acting unethically.

Question 2 – Why do some use the term peer-to-peer file sharing or ripping, whereas others refer to the
downloading as theft or copyright infringement?

Peer-to-peer networks are not illegal and are used to share or distribute files/information. In this case
study however the use of peer-to-peer networks is illegal when used for transferring/downloading material,
which is protected under copyright. In an attempt to rationalise something which is unethical, society or
individuals within society may refer to an act by another name. This is a way to justify the act to both

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themselves and others - by removing it and its association from any unethical or illegal issue. The issue
with such advancements in technology is that it takes time for society to understand the ethical impact of
such developments.

Society today has not become unethical or immoral however as the capabilities of the internet/technology
develop it has created new grey areas for society between how things where and how they have/are
developing. The result of our increased ability to transfer and share information between each other has
been the emergence of a new attitude in relation to information. Due to the variety of material that can be
found on the internet and the ability to download or share this material many people believe it is freely
available and there is nothing wrong with taking it The Internet also creates an international problem, as
what is unethical or illegal in one county does not mean it is unethical in another part of the world as it may
be a norm. Awareness campaign about the unethical and illegal use of peer-to-peer file sharing has been
quite successful, but this needs to continue. Educating society about file sharing and copyright laws is the
only way to remove grey areas that have been created by technology and aids individuals when making
such a decision.

Question 3 – Congress passed the Digital Millennium Copyright Act of 1998 (DMCA). What are these
complex laws attempting to do?

The DMCA legislation was signed into law to address the changes/advancements in technology that were
facilitating infringements of the existing copyright laws. It was designed to protect, in this case, the music
and recording industry, which had suffered losses in revenue, control over copyright and distribution rights
due to such advances in technology. These laws made companies/individuals liable for facilitating file
sharing where copyright infringements occured. This legislation was society introducing laws to prevent
what it consider unethical and illegal practice caused by technological advancement.

Question 4 – Did Law, Morals, and ethics change because the technology changed? Is that what
happens with Ethics over time?

In the Napster case the legislation did change after a period of time. Society’s’ morals or ethics in general
did not change on the subject of copyright infringement regardless of the technology which facilitated, for
the first time, large volumes of high quality copyright infringement. Large numbers of users did not
consider such copyright as theft as it became the norm within certain groups very quickly, and was referred
to as something which seem acceptable to this group and was not tangible to the group (unlike going into a
record shop and taking a CD without paying for it). To prevent the continued spread of this unethical norm,
legislation was introduced to clarify society’s position in relation to peer-to-peer file sharing which infringed
copyright. However as stated above, awareness and education is key to reducing this issue.

Ethics are the standards of conduct that govern a society or group of individuals. These ethics change
over time as the environment in which we live changes. Over time society and individuals become better
educated thanks to technology and research. This greater understanding leads to higher expectations on
how society should behave or act and less of an acceptance to follow norms that are considered outdated.
However changes in ethics develop over a longer period than technology and research. Take for example
the burning of certain fossil fuels in homes, which over time became unacceptable by society as it became
aware of the damage they caused or the scepticism which once existed in relation to certain medical
procedures such as stem cell research which is now generally accepted. Modern technology creates
ethical questions and issues that had not previously existed and it takes time for society to understand the
impact of these issues and decided on how to handle such change.

Question 5 – What happens if there are no protections for intellectual property? How does property
ownership fit into a Kantian Model? As you contemplate your answer consider that CD sales hit an all time
low in 2006

Intellectual property rights are an important part of business. The value of services and products is directly
linked to the amount of time, work and research involved in developing the product. Music and CD’s are
purchased by consumers because of the enjoyment they get from listening to them, but it requires capital
investment in producing such creativity. Without protection for Intellectual property, musicians or record

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companies would be not be able to prevent others from using or distributing their music or lyrics and not
receive payment in return for the use of their property. No protection for international property rights results
in a lack of investment of both capital and resource, which could then result in the destruction or critical
damage of business/industry.

Kant’s “Categorical Imperative” explains how one should rationally evaluate their action. In this case a
person could download music and Kant’s models would ask if this practice would be suitable to become a
principle for everyone to follow. If the downloading of music is illegal and considered theft, then test one
would ask themselves what would a society be like in which everyone stole things. This would mean that
nobody paid for goods or services, they just took them. The knock on effect to business and industry
would be the removal of capital and nothing would ever be produced, as it would be impossible to get a
return on your investment. Therefore if a world where everyone stole was not acceptable it is not
acceptable that you would steal something. Using this model as a method for evaluating ones decision
making we understand how we should treat others and how we should conduct ourselves.
By looking at the Napster case, we can see how users who were sharing music via peer-to-peer file
sharing where treating the other music lovers as a means to an end. By ignoring copyright legislation and
stealing the music, non-users of Napster might have had to pay higher prices for music to compensate for
the falling CD sales and revenues. The music industry would have to increase prices to continue to give
adequate return on capital and continue to invest in the industry.

Question 6 – What does Hilary Rosen’s statements reflect in terms of her ethical values? And about those
of the downloader’s?

Ms. Rosen’s comments reflected those of principled and ethical individuals who believed in the right of
property ownership and that theft of others property could not be considered acceptable in society. Ms
Rosen found it difficult to believe that such a large number of people within society (the Napster users)
could have no difficulty with the theft of someone else’s property – removing the owners ability to handle
the property in whatever way they found fit. The downloader’s showed a lack of ethical values as they did
not consider the consequences their actions might have on the industry, as discussed before, and that they
did not consider the downloading as theft – perhaps due to the intangibility of their actions.

Question 7 – When Mr Fanning discovered that his Napster logo had been placed on T-shirts and was
being sold by another entrepreneur for a profit, he sought to stop the T-shirt sales. What ethical model
from Unit 1 offers a rich irony in his actions?

Kant’s “Categorical Imperative” model and the Golden Rule of the Bible are the two closely related models
that pose a certain irony in the Napster case. These two models suggest the concept of “Do unto others as
you would have them do unto you”. In the Napster case Mr Fanning was perfectly happy to facilitate the
Napster users with a method of copying and downloading music regardless of the copyright infringement
and at the cost of the music industry once he made a profit. However once someone started to infringe his
copyright and where making a profit at exploiting his property he did not feel that it should be allowed.

Question 8 – What would do? How could you approach the issue?

I would not allow my children to download music without paying for it. It is illegal and shows a lack of both
responsibility and ethical behaviour. The key to responding to the child or roommate who wishes to use my
computer to download music without paying for it is education and awareness. It is important to convey
that these actions are identical to theft from a shop and by calling it a different name does not make it right
– would you steal a CD from HMV? It would be important to explain how file sharing could undermine the
music industry and how the entire industry would suffer from it. It is also vital to explain that ethical
behaviour is not conditional upon popularity – it is not ok to assume that if everyone else is doing it that its
ok for me to do it – would I like it if someone stole from me?

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BFS Stage 3; Corporate Responsibilities & Business Ethics Membership Number: B4191

Case Study - 6.6 Enron

Question 1 – Can you see that Enron broke any laws? Andrew Fastow testified at the Lay and Skilling trial
as follows; ”A significant number of senior management participated in this activity to misrepresent our
company. And I have come to grips with this. That, in my mind, was stealing.” Is Mr.Fastow correct? Was
it Stealing?

I would suggest that Enron broke multiple laws in the US relating to financial reporting, fraud, insider
dealing and the mishandling of employee pension reserves. Yes, the actions of senior management
amounted to theft from others. As Investors and employees bought/invested in Enron shares, other
companies dealt and traded with Enron regardless of the fact the senior management were aware of the
fact that these investors or trading partners may not be able to realise the monies owed to them. The
senior management were quite happy to take in cash flow and pay themselves and their family/friends
large amounts of monies – effectively stealing cash from people and taking it for themselves.

Question 2 – Do you think that Enron’s financial reports gave a false impression? Does it matter that most
investors in Enron were relatively sophisticated financial institutions? What about the employees’
ownership of stock and their 401k plans? How should the relationship with Enron’s partially owned
subsidiaries been handled in terms of disclosure?

Yes, Enron’s financial statements did provide a false impression to employees, shareholders,
investors/marketplace and their trading partners. To base earnings on the future market value of
commodities such as oil as far as 10 years into the future was completely unrealistic as it is impossible to
forecast pricing so far into the future. As there was no market standard pricing model used by the industry
it was impossible to identify who was performing well within the industry. Each utilities company could
adjust their earning to meet the objectives by setting different pricing strategies for the future pricing of
contracts. Also the ability to remove losses or loss making entities of the business, from the financial
statement by hiding them in off-the-books companies in which they remained shareholders and in doing so
continued to be responsible for those liabilities. This would have made any reporting by Enron
pointless/meaningless.

No, I don’t believe it matters that the investors or brokers (trading Enron shares) were sophisticated
financial institutions. Enron and its auditors had an ethical duty to report the real facts around their
financial position and not mask it, so that they would continue to get paid bonuses, meet targets or keep
the share price artificially high. However I suggest that the financial intuitions had a duty to their clients,
customers and society to investigate Enron further to insure financial stability or if they had any suspicions
in relation to Enron’s financial reporting. It is not acceptable that employees in these investment houses
where fired or told to not to ask any further questions of Enron (as was the case with Mr. Olson of Merrill
Lynch) when they reported concerns in Enron trading to the management in these investment house.
Enron senior management should not have been able to influence the management in these investment
houses to the point of preventing further investigation by investment staff, particularly when they where not
allowed to suggest that investors should not invest their savings in Enron.

Employees where encouraged to invest in Enron through a scheme that added additional stock to that
which was invested by an employee. Employees had their 401(k)s overly exposed to this scheme and
Enron stock. Due to the Enron culture of shedding and replacing 20% of its work force, for under
performance, no employee wanted to be identified as reporting issues with its trading practice or be seen to
suggest a problem, which would prevent Enron from meeting its growth/performance objectives. However
employees had a duty to each other and the company therefore were employees knew of a systemic
problem within Enron, which was not be treated seriously by the company, and threaten both its survival
and damage to others, as a last resort, they should have reported it to relevant regulatory bodies. Such
action early on could have prevented the fall of Enron or allowed the regulator to investigate the account
practice sooner. However acting as a whistle blower or blowing the whistle must be carefully handled and
it is important that the appropriate awareness is raised at the appropriate level – issues in respect to an
employee who calls in sick every week so they can play golf should be raised with their manager however

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issues could do real harm to stakeholders should be raised with the CEO and beyond if the person blowing
the whistle is not being taken seriously. It is important to report the issue up a long chain within the
business until it is resolved/or satisfactory controls have been put in place to mitigate any potential harm.
Whistle blowing does carry risks for the employee involved and it may be wise to have a number of
employees understand the issue and all take it to the appropriate level within the organisation until a
satisfactory solution is in place or beyond if not resolved/take seriously. Discussing hypothetical
circumstances with managers, directors or CEO can often be an approach, which that can suggest an
issue with current practices exists within the business.

It seems Enron did not legally have to report on subsidiaries in which they held 49% or less shareholding.
However, as these companies where purely holding liabilities belonging to Enron and to which Enron
where still exposed they should have been disclosed as liabilities to the company. Most of the subsidiaries
companies (or off-the-book companies) where owned by both Enron (49% or less) and other Enron senior
management (or family members of management) as individuals. Enron even facilitated the set-up of
these subsidiaries financially.

Question 3 – What questions could the officers of Enron have used to evaluate the wisdom and ethics of
their decisions on the off-the-books entities and mark-to-market accounting? Be sure to apply the various
models you have learned.

The officers of Enron should have been asking themselves;

1. Firstly would their action be considered illegal or where contrary to existing rules/best practice
within the industry, did they feel that their actions where right. (Blanchard/Peale model)
2. Would their actions give a false impression to the stakeholders
3. Where they hiding vital information that would cause harm to anyone if not released
4. If the actions were legal, was it taking unfair advantage of stakeholders or would they have
considered their actions to be that of theft. What would these actions contribute to the stakeholders
- shareholders, employees, customers, potential investors, brokers/financial institutions, the market
place, the economy and what are the consequences? (Wall Street Journal Model).
5. Was it appropriate to prevent stakeholders looking for information in relation to their trading/financial
accounting practice by influencing others in higher positions with those stakeholders
6. Where they engaged in any types of situations, which would be regarded as a conflict of interest?
7. Did they take action if an unethical decision had been made or did they consider the ethics of their
action?
8. Where the actions taken for personal gain at the expense of others/stakeholders? Were these
stakeholders a means to an end? (Kant’s’ Categorical Imperative model)
9. Did they take a balanced approach to the issues surrounding the approach to financial reporting
and this approach minimise the harm their decision would cause will maximise the benefits – did the
largest number of people of people possible benefit from these decisions, (where they taking a
utilitarian approach).
10. Where they considering the results and consequences of their actions in relation to their trading
practice. If no rules/legislation in relation to trading currently existed would they be happy to see
their trading practice become best practice within the industry or across all industries and would it
stand up over the longer term, e.g. would businesses always be able to thrive using these methods
or would they collapse after a period of time? (The Contractarian and Justice Model)
11. Was their practice one which was completely inward focused and only concerned with their own
survive and self-interest regardless of the consequences other stakeholders may face and was this
ethical given the level of other stakeholder interest/dependency in Enron’s longevity as a success
and viable business? (Ethical Egoism Theory)
12. When deciding on the actions they would take would they have been happy that those actions
where thoroughly described and documented by a reporter on the front pages of the national and
international papers. (Front Page Test)
13. If they considered the “Golden Rule – “Do unto others as you would have them do unto you”, what
actions or direction in relation to the trading practice should they take.

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Question 4 – Did Mr.Fastow have a conflict of interest?

Mr Fastow was the principle of a number of the off-the-books companies/entities that done business with
Enron. This was a direct conflict of interest as Mr Fastow was able to profit at the company's expense. As
a guardian of Enron his ability to personally profit or benefit from decisions, which he made due to his
interest in these other companies, would have caused his objectivity and judgment to be compromised and
which should have come into serious questioning by the board at Enron or the regulator. A conflict of
interest occurs when some have divided loyalties. These should not be allowed to occur or they should be
openly disclosed to prevent fraud.

Question 5 – What elements for your personal credo can you take away from the following testimony from
David Delainey and Andrew Fastow? As you think about this question, consider the following from their
testimony at the Skilling and Lay trial?

When asked why he did not raise the issue or simply walk away, Mr Delainey responded “I wish on my
kids’ lives I would have stepped up and walked away from the table that day” Mr Fastow had the following
exchange with Daniel Petrocelli, Mr Skillings lawyer;

Petrocelli: To do those things you must be consumed with insatiable greed. Is that fair to say?
Fastow: I believe I was very greedy and that I lost my moral compass

Fastow also testified as follows: “ My actions caused my wife to go to prison. Defence attorneys being the
capable souls that they are extracted even more: “ I feel like I’ve taken a lot of blame for Enron these past
few days. Its not relevant to me whether Mr Skillings or Mr Lay’s names are on that page..I’m ashamed of
the past. What they write about the past I can’t affect. I want to focus on the future. Even after being
caught, it took me awhile to come to grips with that I’d done..I’ve destroyed my life. All I can do is ask for
forgiveness and be the best person I can be”

Mr Fastow also said “I have asked my family, my friends, and my community for forgiveness. I’ve agreed to
pay a terrible penalty for it. It’s an awful thing that I did, and it’s shameful. But I wasn’t thinking that at the
time.”

A person’s credo is their personal statement of convictions concerning their beliefs and will contain many
issues or topics one would feel are of the highest importance. It describes the personal qualities you have
when you are stripped back from all your belongings – a code of how you would behave, act and live no
matter what you had or what you could have.

Having read Mr. Delainey’s statement I believe the most important element to take away is always to do
what you feel is right and for the greater good of others. Do not consider what you stand to personally gain
if it will cause harm to others. Be prepared to walk away from personal success or gains if the actions
required to achieve it are immoral or unethical.

Question 6 – Was Ms.Watkins a whistle-blower? Discuss the timing of her disclosures. Compare and
contrast her behaviour with Paula Reiker’s? Did she make the right decision?

Yes, Ms.Watkins was a whistle-blower and tried to alert Mr Lay to the potential demise of Enron amidst an
accounting scandal. It is not clear how long Ms Watkins was aware of the account irregularities however
you would expect someone employed at the executive management rank would learn quite quickly of such
improper conduct by Enron and at which point she should have raised the issue by blowing the whistle with
Mr Lay or the board, (as mentioned above in Q2 it is important that the employee considers the appropriate
way to escalate the issue within an organisation). This aside, the letter sent to Mr Lay from Ms Watkins
seems to have only been sent when she realised that management level staff where starting to discuss
concerns over the practice of accounting at Enron to the point of wishing Enron would be found out. This
was combined with her concern about the sudden departure of Mr. Skilling and how outside stakeholders
would perceive such a raid departure.

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Ms.Reiker’s behaviour was one of self-interest only. She mentions the fact that she considered quitting
Enron or speaking up (whistle blowing) on numerous occasions but did not due to the large compensation
package Enron provider her with for her services. Ms Reiker obviously considered the ethical issues of
reporting incorrect numbers relating to Enron’s performance to the market and debated this with herself.
However having deliberated on these issues she decided not to disclose or blow the whistle as it was not in
her best interest despite the impact on others. In contrast, at some point, Ms.Watkins did decide it was
vital to alert Mr Lay of the issues however her timing could have been motivated out of self-perseveration
or fear of getting caught rather than the right thing to do – something that would not have passed Kant’s
model.

No, Ms.Reiker did not make the right decision. She should have advised Mr.Lay of these issues she
perceived and if she received no real solution to the problems from him she should have reported the
issues to the regulator. The decision not to voice concerns/say anything and continue to profit from the
practices at Enron was a form of ethical egoism.

Case Study - 7.9 BP: Pipeline Maintenance and Refinery Safety

Question 1 – Discuss the ethical, negligence and environmental issues you can see in this case?

Decisions in relation to cost cutting where made by BP and how these cost cutting measure would impact
the existing safety standards the company had in place or need to have in place. The ethical issue faced
by BP was in respect to the cost cutting exercise, which we assume was necessary, and how the cost
cutting should be executed - what stakeholders would be impacted by decisions made and what would be
in the best interest of all.

BP decided not to replace the pipes at Prudhoe Bay despite the fact they had an economic life of twenty-
five years and had been installed in 1977. The pipe burst, which occurred in 2006, was as a result of
corrosion issues within the pipes, which had already exceed their life span by almost 5 years. BP used an
older method of pipe testing compared to a much-improved system (smart pig - the industry norm and best
practice), which allowed you to identify corrosion faster. The pipes had not been cleaned for 12 year prior
to the incident and due to the low price of oil during the 90’s, pipeline maintenance was cut down and BP
had instructed workers to use less anticorrosion chemicals in the pipes, all in an attempt to save on cost.
In relation to the explosions at the BP Texas refinery the investigation board found that the cost cutting at
the refinery had had a massive impact on safety with the plant infrastructure and safety procedures
deteriorating constantly. BP also had incidents in 1999 when it dumped hazardous waste at Prudhoe Bay
and again in 2003 where leaks from pipes suffering from corrosion took place.

All of these decisions where negligent and created environmental disasters but particularly at Texas and
Prudhoe Bay. It was fortunate that other serious disasters did not occur following the period of cost cutting.

One of the ethical issues BP must have faced was in 2004 when Mr. Massey wrote to the board members
to raise issue with the impact the cost cutting was having on the pipelines and that corrosion problems
where becoming a real issues and that they where creating a real possibility of a catastrophic event. With
this letter Mr.Massey was attempting to blow the whistle – alerting the board to the immanent dangers
unless action was taken. The board need to evaluate this and decide on what actions should be taken. BP
hired a corrosion consultant to investigate however appear to take no further action when his report
confirmed the “accelerated corrosion” Mr.Massey warned of. Additional letters followed which warned of
employee safety issues - (example – Chuck Hamel who, due to a lack of response from BP, wrote to the
EPA expressing his concerns over BP and its safety standards)

Question 2 – Discuss how BP got into the position in which it finds itself in late 2006 and what might have
prevented the spill, the financial fallout, and loss of reputation. Be sure to factor in the financial
implications of any decisions made during the period from 2001-2006

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As mentioned above the cost cutting strategy which BP implemented was the reason why they end up in
the position they did. BP tried to justify to society and itself that it was an environmental friendly company,
forward thinking and interested in the development of cleaner fuels. However in the case study this comes
across as both a marketing and profit incentivised pursuit. By investing heavily in new technologies BP
hope it would increase profits by becoming a leader in cleaner fuel sources. However in an attempt to cut
cost at the company it reduced it’s investment in its existing plants, infrastructure, risk management and
safety. This was a poor ethical and business decision, as they did not fully explore the impact such cost
cutting measures would have on BP and all its stakeholders – stakeholders such as the environment,
employees, local economy, customers etc.

Paul Tansey, MD of economic consultancy firm Tansey, Webster, Stewart & Company, was commissioned
by Microsoft to produce a ‘study of Irelands productivity performance and the implications for Irelands
future economic success’. The study highlights the fact that productivity growth can be accelerated by
increasing investment in physical capital, human capital - through education and training, safety and risk
management and by improving total factor productivity (TFP). TFP is a mix of a number of factors
including, terms of trade, quality of the labour force, advances in technology, and risk management. The
investment in safety process and risk management by BP would have actually improved elements of its
organisations productivity, in the sense that it would have improved its business operation. BP should
have taken the initiative to reinvest in its existing infrastructure as part of the ethical ethos of the company,
its corporate responsibility and as part of industry best practice, all of which would have seen returns in the
form of improve productivity. However it was primarily investigation, legislation, claims management and a
need to prevent further reputational damage that drove its investment in risk management and workplace
safety in the end, which was not the strategy that a business with so many stakeholders whom faced such
potential disasters and with such potential for financial and reputational damage should have been taken.

By properly examining the potential consequences it and its stakeholders faced by cutting investment in its
existing infrastructure, BP would have known that it was not the right ethical, legal or responsible thing to
do. The decisions it made impacted BP financial – (1) the need to increase its pipe-line maintenance
spend by 80% in 2006 compared to 2001 to a total of $71 million, (2) the addition of $1billion to the planned
safety upgrades over the following four years, (3) the increase of spend on additional maintenance from
€1.2b in 2005 to $1.7b each ear from 2007 and (4) an additional $200m spend on external experts to
conduct safety audits. However this does not account for the financial cost of the investigations it under
went, the reputational damage and fines it may have received.

Question 3 – What was the impact of the emphasis on cost cutting on BP’s culture? What was the impact
on the company’s performance?

The culture of a business is the objectives, values and beliefs it holds and how it approaches problem
recognition, decision-making or problem solving. At BP employees considered the company Chairman,
Lord John Browne, as the industry’s best cost cutter. This led to a culture within BP that was considered
“ruthless”. The ethical position of a company in relation to its position on issues and its decision making is
driver or fuelled by the culture it has fostered – therefore if the culture is one of cost cutting and the bottom
line this will be all that matters to management and employees as the believe this is what needs to be done
to be successful.

As the price of oil increased, following the lows of the 90’s pipelines which should have been shut down for
maintenance or replacement where not. Due the lack of maintenance on the pipe the flow of oil was at
20% of its full capacity (capacity when they where first installed). This would have impacted the cost of
production, as the same resources would have been required while the output was drastically lowered.

BP lists one of its objects in relation to its social and community policies as “To earn and build our
reputation as a responsible corporate citizen”. However with such an objective, their lack of investment
and effort in the establishment and maintenance of an effective safety programme combined with a lack of
leadership in regard to safety from the top must have meant that employees thought that one of its core
values it so proudly spoke of, gave a false impressions externally and would have left employees feeling
uncomfortable and nervous about safety. The accidents, which took place at Prudhoe Bay and Texas (as
well as others), where as a direct result of BP foresting an internal corporate culture which was focused on

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cost cutting and not on making safety a top priority. The failure to investigate or follow through on repeated
warnings, its culture of slashing costs and not considering the impact and its lack of investment in its work
force (safety training and education) all indicated to this ruthless cost cutting described by employees.
From the case study we can see the culture BP had fostered left it open to poor ethical decision making.

Question 4 – Evaluate the social responsibility positions of BP in light of the refinery explosion and the
pipeline issue. What can companies learn from the BP experience?

As mentioned above, BP lists it objectives in relation to its social and community policy – one such
objective as “to contribute to social and economic development”. However incidents like Prudhoe Bay and
Texas do no contribute but in fact take from social and economic development. The cost environmental
and social of incidents like these can be unimaginable – cost in terms of lost lives, cost to environment etc.

By making decisions in relation to cost cutting, which were impacting so heavily on safety standards and
process, BP where directly impacting some of its most important stakeholders. In light of these incidents
and the investigations, which subsequently took place, I would suggest BP as an onerous social
responsibility to improve the safety standard at all their facilities, protect both human and environment life,
develop a culture which fosters the highest safety standard and does not try to cut costs in relation to such
area and in future truly examine the impact of the decisions it makes on all its stakeholders to ensure it only
makes the best possible decision – minimising all potential impacts on these stakeholders while
maximising the benefits for both society and itself.

Other companies should take a good look at the BP case study and its experiences from the
implementation of its cost cutting exercise. By not fully understanding and evaluating the obligations a
company has to its stakeholders and the potential consequences of its proposed actions it can suffer
financial and reputational damage, which it may not be able to repair. It is a falsehood to believe that the
financial gain and bottom line is all that counts in the long term as ultimately it will cause its demise (for
example Enron). A companies ethics are a component of the culture it fosters and therefore it is a vital
consideration as it will be the dominating factor of how the decisions making process works and the
consideration given to ethical dilemmas relating to these decisions.

Question 5 – Applying the regulatory cycle what do you see happening with regulation in both the refinery
and drilling parts of the oil and gas business?

As mention in Question 2 above it was primarily investigation, claims/incident management and damage
limitation in terms of reputation that was the driving force behind BP’s investment in risk management and
workplace safety in the end. This was not the approach a company should take. Self-monitoring,
improvement and correction is the key to becoming a truly successful company.

The regulatory cycle, as depicted in reference book Business Ethics – Case Studies and Selected
Readings 6th Edition – Marianne M.Jenning 2008, is reflected in the diagram below;
OPTIONS
Ethics

Latency Awareness Activism Regulation/Ligation 13

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BFS Stage 3; Corporate Responsibilities & Business Ethics Membership Number: B4191

As we can see from the regulatory cycle every issue will start at the Latency side of the graph providing an
opportunity to develop options or create solutions for potential issues before they require scrutiny by the
public and then legislator. The reason they usually become the topic of scrutiny by the public is due to the
how they perceive the ethical nature of decisions made by businesses or companies in relation to the
issue. By taking action before something becomes an issue and implementing a solutions early, which
benefit all the stakeholders concerned, the company are making the correct ethical decision, prevents any
harm from coming to anyone and prevents the public from calling for investigation.

I would suggest that as the BP incidents have raised the public awareness in relation to the unethical
decision made by companies in this industry and given the levels of profits which they are achieving are so
great that following the investigations into all the incidents involving BP a range of legislation in relation to
safety practices and the allowance of companies to encourage cost cutting in the area of safety will be
introduced. I would also suggest that these increased safety measures and regulation including fines for
breaches, introduced by governments, will have a much large impact on cost than if these companies had
control the safety agenda and driven the solutions themselves. By not being proactive companies risk
facing the issue of letting the public and regulators dictate the direction their industry must take in the
future.

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Bibliography

Business Ethics – Case Studies and Selected Readings – 6th Edition – Marianne M. Jenning 2008

Managing Business Ethics – 4th Edition – Linda K. Trevino and Katherine A. Nelson

Paul Tansey - Productivity - Ireland's Economic Imperative, ‘A study of Irelands productivity performance
and the implications for Irelands future economic success’. 2005. Tansey, Webster, Stewart & Company

Lecture Study notes – Eleanor O’Higgins

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