Ethics discussion: Dividends

When stockholders receive money from the corporation in which they hold stock, it is usually the result of dividends being declared and paid or the stock being repurchased by the corporation. When the stockholder is also an employee of the corporation, the stockholder also is also paid a salary. But other opportunities for the stockholder/employee to receive money may arise, and these may present an ethical dilemma for the corporation and its board of directors.

Bernie Ebbers, the CEO of WorldCom, a major telecommunications company, was having personal financial troubles. Ebbers pledged a large stake of his WorldCom stock as security for some personal loans. As the price of WorldCom stock sank, Ebbers’ bankers threatened to sell his stock in order to protect their loans. To avoid having his stock sold, Ebbers asked the board of directors of WorldCom to loan him nearly $400 million of corporate assets at 2.5% interest to pay off his bankers. The board agreed to lend him the money.
Comment on the decision of the board of directors in this situation.

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My Response:
Jill Stidd
3 Oct 08 3:03 PM MST

Initial post: Jill Stidd

From our text I would like to start by defining the role of the board of directors, “the stockholders control of the corporation is by electing a board of directors. This board meets periodically to establish corporate policies. It also elects the chief executive officer (CFO) and other major officers to manage the day to day corporation’s affairs.” (Warren, Reeve, and Duchac, p.569)

I do know that it is the board’s responsibility to create the policies and procedures for the corporation it is not stated if there was any policy around how the employee could use the stock. I do not think that the CFO can purchase stock from the corporation unless it is treasury stock provided by the corporation. So the stock initial sale was approved by the board of directors that we know. I it seems that the CFO could use the stock in any manner he chose given that the policies of the company did not state otherwise. We were asked to look at the ethics box on page 579, in this instance the dean of the school of business stated that the professor should not use his own money to purchase stock since he was “affiliated” with the program he was researching and had an unfair advantage of information.

I really do not see where this applies to our discussion, unless there is some conflict of interest that we are not aware of. From previous chapters part of internal controls is that there should be a red flag if there is evidence that someone in charge of financials is in financial trouble, strong potential for fraud, especially if it is the CFO! This could be in violation of Sarbanes and Oxley Act in regards to internal controls. The board of directors should have been taking stronger measures to monitor the CFO and certainly not loaning this amount of money to him. However, the board of directors has the authority to do so, given the ethics box on page 569, there is a possibility that the loan amount, should the CFO default and stock holders find out could file a suite that the director’s personal assets could be responsible to.

I am sure the board of directors saw some “benefit” of 2.5% interest on $4,000.00, again we are not given all the terms of the loan to know exactly how much they could collect in interest!!! The stockholders would not see this as ethical I am sure and public trust would be compromised as was Erron, WorldCom and Fannie Mae.Warren, Reeve, and Duchac, Accounting. P. 569, 578,579.