Ethics discussion: Bonds

When corporations issue bonds, the buyers of those bonds (the investors) should try to determine the impact of the bond issuance on the expected earnings of the corporation.

General Electric Capital, a division of General Electric, uses long-term debt extensively. In early 2002, GE Capital issued $11 billion in long-term debt to investors, then within days filed legal documents to prepare for another $50 billion long-term debt issue. As a result of the $50 billion filing, the price of the initial $11 billion offering declined (due to higher risk of more debt).
Bill Gross, a manager of a bond investment fund, “denounced a ‘lack in candor’ related to GE’s recent debt deal. ‘It was the most recent and most egregious example of how bondholders are mistreated.’ Gross argued that GE was not forthright when GE Capital recently issued $11 billion in bonds, one of the largest issues ever from a U.S. corporation. What bothered Gross is that three days after the issue the company announced its intention to sell as much as $50 billion in additional debt, warrants, preferred stock, guarantees, letters of credit and promissory notes at some future date.”

In your opinion, did GE Capital act unethically by selling $11 billion of long-term debt without telling those investors that a few days later it would be filing documents to prepare for another $50 billion debt offering?

Source: Jennifer Ablan, “Gross Shakes the Bond Market; GE Calms It, a Bit,” Barron’s, March 25, 2002.

My Response:



It is true from CNNMoney that the 11 billion in bonds that were issued in 2002, CNNMoney states, “GE Capital sold $11 billion in global bonds Wednesday, the second-biggest U.S. issue ever as the company sought to lock in low financing costs before the economy recovers.” (http://money.cnn.com/2002/03/13/news/companies/ge-bonds/index.htm)

This article interestingly goes on to say that who else but WorldCom was the other company that has beat out GE is bond issues just a few months prior issuing 11.9 billion in bonds. Now is that not interesting, WorldCom.Not only did they then sell the 50 billion 3 month later, they had sold 3.5 billion in notes just one month before and on the heels of that released a expanded annual report, “It also comes five days after GE released an expanded annual report to soothe investors who have been jittery about sprawling companies with complicated accounting, such as Enron Corp. (ENE: Research, Estimates) and Tyco International Ltd.” (http://money.cnn.com/2002/03/13/news/companies/ge-bonds/index.htm).

Given the quote by CNN and the Quote in the ethics question by Bill Gross, there was a great deal of speculation about this deal. I also feel that from the quote in the CNN article that Yes, GE was very much aware of the “jitters” of there investors especially due to Enron, and Tyco international. So why would they make such a bold step 3 months later when ethics were being so scrutinized at that time.Even American Express Asset Management team had something to say about all of this, “But not everyone was cheered by the news. Tim Doubek, a portfolio manager at American Express Asset Management in Minneapolis, said the bonds could only hurt investors if negative news persists about accounting, corporate earnings and management.” (http://money.cnn.com/2002/03/13/news/companies/ge-bonds/index.htm)

In that GE could make this decision to sell another 50 billion on the heels of the 11 billion, they like some of the big corporations these days added fuel to the fire of public trust yet again! How unfortunate and unethical! What is it going to take to get all this type of behavior to stop? Look at the mess our economy is in at the present. How low do we have to go I ask?

(http://money.cnn.com/2002/03/13/news/companies/ge-bonds/index.htm), retrieved October 11, 2008,

Web Research: Dividends

Go to the website of General Electric Corporation at http://www.ge.com/en and find information about GE's dividend record. Click on For Investors and then Stock Information to find the current market price of a share of GE stock. Then click on Dividend History to find the record of dividends paid per share of GE stock. Calculate the dividend yield of GE's common stock.
Discussion Question

What is GE's dividend yield? Is this dividend yield what you might expect from an established company like GE? Is GE's record of paying dividends an attractive feature of its common stock? Why or why not?

My Response:
Jill Stidd
6 Oct 08 3:46 PM MST

Here are a few things that I found in my research on the press that was on the GE website, it was very interesting to see that GE is parent company of NBC, I did not know that. These website are just packed full of information that I never even knew existed.

1.Aviation and jet enginesAviation and jet engines aren't the only way GE will try to tap this market, but they are a key: China is slated to open more than 40 new airports by 2010 -- at the end of 2006, the country had 147 -- and another 55 or so by 2020. The country's evolving airport geography is like a treasure map that pinpoints where the government is going to make massive investments. (http://www.fastcompany.com/magazine/125/all-systems-go.html)
2. NBC ratings for the olympicsRatings for NBC, the GE-owned television network and the holder of Olympic television rights in the United States, soared with each breathtaking performance by the Baltimore Bullet after a controversial decision to turn tradition on its head and stage the swimming finals in the morning so that the medal moments could fall sweetly into American prime time. (http://business.timesonline.co.uk/tol/business/industry_sectors/media/article4576410.ece
3. GE Gas turbines for olympicsTwo of General Electric's 9FA gas turbines have been installed in Beijing's Taiyanggong power plant, which will supply electricity, heat and air conditioning to the central area of the Olympic Games in August.( http://www.marketwatch.com/news/story/how-china-power-olympic-games/story.aspx?guid=%7B43798B25-F2A1-499A-AA93-BDE9A9FD147E%7D&dist=msr_27)
4. Wind powerIn March, GE Energy announced it had secured a $1 billion deal to supply 750 megawatts of wind turbines -- enough to power about 200,000 households.

(http://www.reuters.com/article/domesticNews/idUSN1835150320080519?pageNumber=2&virtualBrandChannel=10112)http://www.fastcompany.com/magazine/125/all-systems-go.html retrieved October 5, 2008http://www.marketwatch.com/news/story/how-china-power-olympic-games/story.aspx?guid=%7B43798B25-F2A1-499A-AA93-BDE9A9FD147E%7D&dist=msr_27 retrieved October 5, 2008http://business.timesonline.co.uk/tol/business/industry_sectors/media/article4576410.ece retrieved October 5, 2008http://www.reuters.com/article/domesticNews/idUSN1835150320080519?pageNumber=2&virtualBrandChannel=10112 retrieved October 5, 2008

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.

Telluride Watch Article

Scroll down to Koffe with Kandee...and see the article about my expereice with pioneering a Waldorf preschool initiative...Titled..."A Feeling of Celebrating Together Is Very Unique in Today's World".

http://www.telluridetoday.com/watch/111502.html#k

Web research: Stocks

Go the website of Starbucks Corporation at http://www.starbucks.com/aboutus and find information that you would use in developing a company profile. Click on the company, and then click on and read the brief Company Fact Sheet and Mission Statements. Then go back to the about us page and click on investor relations. Click on stock information and find the current price of the company’s stock and the high and low price of each share during the past year.
Discussion Question

How did Starbucks get its name? What is the current price of a share of Starbucks stock? What was the high and low price of a share of Starbucks stock during the past year? Does Starbucks Corporation appear to have an operating philosophy that is similar or dissimilar to other corporations? Do you think this philosophy is serving Starbucks well?

http://kucourses.com/ec/crs/default.learn?CourseID=3073466&Survey=1&47=4849309&ClientNodeID=404340&coursenav=2&bhcp=1

My Response:
Jill Stidd
26 Sep 08 8:24 PM MST

I know that this post is a bit long winded,,,but I thought all these bits of information were so interesting along with all the “data” we were to get for this post. I like real life stuff. I also do not like to take simply what their website says but look further into what others are saying to get to the truth of thier statements.I wanted to find a little more details on the origination of Starbucks, It was very interesting to see where the first vision of three men started. “Starbucks began in 1971 when three academics—English teacher Jerry Baldwin, history teacher Zev Siegel, and writer Gordon Bowker—opened a store called Starbucks Coffee, Tea, and Spice in the touristy Pikes Place Market in Seattle. The three partners shared a love of fine coffees and exotic teas and believed they could build a clientele in Seattle much like that which had already emerged in the San Francisco Bay area. Each invested $1,350 and borrowed another $5,000 from a bank to open the Pikes Place store. Baldwin, Siegel, and Bowker chose the name Starbucks in honor of Starbuck, the coffee-loving first mate in Herman Melville's Moby Dick(so company legend has it), and because they thought the name evoked the romance of the high seas and the seafaring tradition of the early coffee traders. The new company's logo, designed by an artist friend, was a two-tailed mermaid encircled by the store's name. (http://www.mhhe.com/business/management/thompson/11e/case/starbucks.html)

It was obvious that the inspiration for these 3 men came from Aflred, Peet, “The inspiration for the Starbucks enterprise was a Dutch immigrant, Alfred Peet, who had begun importing fine arabica coffees into the United States during the 1950s. Peet viewed coffee as a fine winemaker views grapes, appraising it in terms of country of origin, estates, and harvests. Peet had opened a small store, Peet's Coffee and Tea, in Berkeley, California, in 1966 and had cultivated a loyal clientele. (http://www.mhhe.com/business/management/thompson/11e/case/starbucks.html)

After reading about how Schultz came on board with the company “In 1981, Howard Schultz, vice president and general manager of U.S. operations for Hammarplast—a Swedish maker of stylish kitchen equipment and housewares—noticed that Starbucks was placing larger orders than Macy's was for a certain type of drip coffeemaker. Curious to learn what was going on, he decided to pay the company a visit. The morning after his arrival in Seattle, Schultz was escorted to the Pikes Place store by Linda Grossman, the retail merchandising manager for Starbucks. A solo violinist was playing Mozart at the door, with his violin case open for donations. Schultz immediately was taken by the powerful and pleasing aroma of the coffees, the wall displaying coffee beans, and the rows of red, yellow, and black Hammarplast coffeemakers on the shelves. As he talked with the clerk behind the counter, the clerk scooped out some Sumatran coffee beans, ground them, put the grounds in a cone filter, poured hot water over the cone, and shortly handed Schultz a porcelain mug filled with the freshly brewed coffee. After three sips, Schultz was hooked. He began asking the clerk and Grossman questions about the company, about coffees from different parts of the world, and about the different ways of roasting coffee. (http://www.mhhe.com/business/management/thompson/11e/case/starbucks.html)

As a man that knew nothing about coffee or brewing after visiting the Pikes Place store he was sold on the idea and approached the three owner to hire him. After much effort on Shultz part they hired him as the marketing director .I was interested to see why they were so resistant to his visionary ideas. I was really trying to see how Peets coffee and tea were involved, I found out that later the 3 owners of Pikes Place store also purchased Peet’s coffee and tea, located in San Francisco with about all the funds they had and there was nothing left to promote Shultz’s idea to expand locations. “But a more pressing reason for their resistance emerged shortly—Baldwin and Bowker were excited by an opportunity to purchase Peet's Coffee and Tea. The acquisition took place in 1984; to fund it, Starbucks had to take on considerable debt, leaving little in the way of financial flexibility to support Schultz's ideas for entering the beverage part of the coffee business or expanding the number of Starbucks stores.”
(http://www.mhhe.com/business/management/thompson/11e/case/starbucks.html)

How strange that after various interactions with Shultz and Baldwin as owners of Starbucks and Shultz’s decision to go on his own that Baldwin would be involved yet again. “Ironically, as Schultz was finalizing the documents for his new company, Jerry Baldwin announced he would invest $150,000 of Starbucks' money in Schultz's coffee-bar enterprise, thus becoming Schultz's first investor. Baldwin accepted Schultz's invitation to be a director of the new company, and Gordon Bowker agreed to be a part-time consultant for six months. Bowker urged Schultz to make sure that everything about the new stores—the name, the presentation, the care taken in preparing the coffee—was calculated to lead customers to expect something better than competitors offered. Bowker proposed that the new company be named Il Giornale (pronounced ill jor-nahl-ee ) Coffee Company, a suggestion that Schultz accepted. In December 1985, Bowker and Schultz made a trip to Italy during which they visited some 500 espresso bars in Milan and Verona, observing local habits, taking notes about decor and menus, snapping photographs, and videotaping baristas in action.”
(http://www.mhhe.com/business/management/thompson/11e/case/starbucks.html)To the question of Starbucks operating philosophy two things stood out for me…1. That Starbucks bases there attention on the employees that it hires for reasons that are very smart most companies even though they might understand this concept do not have the passion that Starbucks does, “Starbucks recognizes competitors can replicate products, but they can’t replicate people. That’s precisely why the company focuses so much attention on the employee experience, because it is employees who create meaningful connections with customers. Many marketers view employee relations as a job solely for human resources—they see employees as tools. But employees—happy, rewarded employees—can work wonders for the company’s marketing efforts. There is no better spokesperson for a company, product, and brand than someone who is happy with his job and respected by his employer and peers. A happy employee will in turn, make customers happy.”2. I found it very interesting that Starbuck has stock options for its employees. “Starbucks has more than 172,000 partners (employees) worldwide as of September 2007. Eligible part- and full-time partners qualify for a comprehensive benefit package that includes healthcare benefits and stock option grants through Bean Stock,Starbucks company-wide stock option plan. Starbucks is committed to maintaining the quality, integrity and great taste of coffee as the company grows. “We have the mostknowledgeable workforce in our industry,” says Schultz. “I take great pride, not in the number of stores we have opened, but in the growth and development of our people.”(http://tribalknowledge.biz/discussion-tribal-truths/33-the-employee-experience-matters)I think both of these topics do set Starbucks apart from other companies in terms of their operating philosophy, and I also feel that it is this commitment to their employees that creates the successes that they have had.In terms of stocks:Data as of 09/26/08 4:00 p.m. ET / $14.96 / 52 Week High$27.82/ 52 week Low $13.33Sept, 26, 2007 $27.09.

(http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-stockQuote)http://www.mhhe.com/business/management/thompson/11e/case/starbucks.html retrieved: September 26, 2008http://tribalknowledge.biz/discussion-tribal-truths/33-the-employee-experience-matters retrieved: September 26, 2008http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-stockQuote retrieved: September 26, 2008

Ethics discussion: Stocks

The par value assigned to a share of stock bears no relationship to the market value of that share of stock (i.e., the price at which the stock sells to an investor/owner.) The market value, however, should reflect some real or perceived value of the corporation.
Gigi Liken and Ron Bobo are organizing Gold Unlimited Inc. to undertake a high-risk gold-mining venture in Canada. Gigi and Ron tentatively plan to request authorization for 75,000,000 shares of common stock to be sold to the general public. Gigi and Ron have decided to establish par of $1 per share in order to appeal to a wide variety of potential investors. Gigi and Ron feel that investors would be more willing to invest in the company if they received a large quantity of shares for what might appear to be a "bargain" price.
Discuss whether Gigi and Ron are behaving in a professional manner.

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My response:

Jill Stidd
26 Sep 08 2:07 PM MST

Given the description in our book on page 574 in regards to stock prices, “the price at which stock can be sold by a corporation depends on a variety of factors. 1. Financial record, earnings record, and dividend record of the corporation. 2. Investors expectations of the corporations earning potential. 3. General business and economic conditions and prospects.” (Warren, Reeve, and Duchac, p.574)

I would be important to know if Gigi Liken and Ron Bobo had any of these discussions or evaluations. That was not stated in the post exactly. However what was stated was that there reason was for determining the price of $1 was that the investors would be more willing to invest in the company if they received a large quantity of shares for what would be a “bargain” price. I also understand that this corporations was also a “high-risk” venture and that would be even more reason to create this “bargain” price, but if it does not fall under three factors stated then it is not appropriate and not ethical.Out text also states in regards to discounted stock this, “many states do not permit stocks to be sold at a discount, in others it may be done only under unusual conditions.”(Warren, Reeve, and Duchac, p.574)

I researched the web for whether it was legal to sell discounted stock in Canada and could not get a definite answer. But because our text does not even illustrate discounted stocks due the rareness I would have to say that Gigi and Ron were not deriving their price for the stocks for their company in the proper format and using the 3 guides listed above.

Warren, Reeve, and Duchac.( 2007). Accounting 11. Thompson South – Western.

Web Research: Contingencies

Go to the website of Altria Group, Inc. at http://www.altria.com/. Click on Annual Reports and select the most recent annual report available. Click on Financial Review, and then click on Notes to Consolidated Financial Statements. Scroll down to find the note on Contingencies and read two or three pages of this note.
Discussion Question
Please respond to this Discussion Question using the information from the Web Field Trip above. Take time to review the responses of your classmates and provide your feedback.
In your Web Field Trip, you were asked to research the contingent liabilities of Altria Group, Inc. What are the major business units of Altria Group? Why do you think the Altria Group Annual Report has so much discussion of contingencies? Based on your brief review of the Contingencies note, are you confident that Altria Group has reported ALL its liabilities?

http://kucourses.com/ec/crs/default.learn?CourseID=3073466&Survey=1&47=4849309&ClientNodeID=404340&coursenav=2&bhcp=1

My Response:
Jill Stidd
20 Sep 08 1:27 PM MST

This financial page supports the subsidiaries that Altria owns, however I would like to add Kraft to this list as well, “Altria Group, Inc. is the name of the parent company of Philip Morris USA Inc., John Middleton Co., and Philip Morris Capital Corporation. As of December 31, 2007, Altria Group also holds a 28.5% economic interest in SABMiller plc. (http://www.altria.com/investors/2_6_1_financialnews.asp)

I have to say that my research after reading the many pages of contingencies, litigations, and lawsuits that the tobacco industry produced have created amazing liabilities for the subsidiaries. It makes me question the fact that there was a name change to Altria Group, “The name change to Altria Group, Inc. was effective January 27, 2003. All news releases in this Financial News section of our Web site, prior to this change, will refer to the parent company's former name of Philip Morris Companies Inc. “ (http://www.altria.com/investors/2_6_1_financialnews.asp)

The second question /concern for me was reading about the “spin-off” of shares by both Phillip Morris and Kraft very recently, “On March 28, 2008, Altria completed the spin-off of 100% of the shares of Philip Morris International to Altria’s shareholders.(http://www.altria.com/investors/2_6_1_financialnews.asp).

The Board of Directors of Altria Group, Inc. voted on January 31, 2007, to authorize the spin off of all shares of Kraft Foods Inc. owned by Altria to Altria's shareholders. The distribution of the approximately 88.9% of Kraft's outstanding shares owned by Altria was made on March 30, 2007, to Altria shareholders of record as of 5:00 p.m Eastern Time on March 16, 2007” (http://www.altria.com/investors/2_2_2_kraftspinoff.asp).

I think that the amount of liability due to the contingencies was to great a burden for Altria. It is very clear from the mission statement of the company that they are trying to stress change and improvements for the industry’s that they have purchased. There was a great deal of transactions happening during 2007 with all these spin-offs. What I did read from the Altria company was about their level of integrity. “Altria Group's scale, market position, balance sheet strength and improved operational focus make the company one of the most compelling investment opportunities available in tobacco and consumer products.” (http://www.altria.com/investors/2_1_strategyfinancialgrowth.asp)

Ultimately I feel that they are committed to proper reporting for the integrity of their company, the historic subsidiaries that they have purchased, and the shareholders that are scrutinizing their every move.

http://www.altria.com/investors/2_6_1_financialnews.asp retrieved September 20,2008.http://www.altria.com/investors/2_2_2_kraftspinoff.asp retrieved September 20,2008.http://www.altria.com/investors/2_1_strategyfinancialgrowth.asp retrieved September 20,2008.