Ethical Accolades Made by Third Parties: Do They Have Any Value?

The problem to be investigated is the value of ethical evaluations produced by third parties. Here the problem related to the incongruent nature of the corporate ethical accolades awarded to Fannie Mae by numerous media sources and the unethical behaviors engaged in by the company's executives. These unethical behaviors included deceptive accounting and modeling processes (Jennings, 2009). The results of this investigation demonstrated that the value of third party ethical judgments rests in the comprehensiveness of the evaluations that are conducted.

Outside Evaluations

The biggest problem that outside ethical evaluations produces is a limited scope of perception. Ethical analyses conducted by Business Ethics and other similar media sources focused specifically on one or two areas of operation, e.g. the services offered and the customers that were served (Jennings, 2009). As a result, Fannie Mae came off as a highly ethical company because they were providing valuable financial services to underserved demographics and they helped to reduce the victimization of these sensitive groups by purchasing predatory loans and restructuring them to be more reasonable and affordable (Jennings, 2009). Unfortunately, this narrow scope of evaluation left certain areas of the operation of Fannie Mae uninvestigated, e.g. their executive compensation practices (Jennings, 2009). This oversight allowed Fannie Mae to engage in unethical behaviors, while still being exalted as a top ethical company in the United States.

This example demonstrated that there is a difference between ethical behavior and social responsibility. Social responsibility can be defined as actions that are taken in order to meet the needs held by society (Kotler & Lee, 2005). In the Fannie Mae example, the social need that was being met by the Fannie Mae program was the need for reasonable mortgage opportunities for demographics that were underserved and that were also facing chronic homelessness (Jennings, 2009). In this respect, Fannie Mae was acting in a socially responsible manner. Ethical behavior, on the other hand, refers to "doing the right thing" in regards to business practices (Brenkert, 2004, p. 229). In this respect, Fannie Mae can be viewed as an unethical company because its executives were engaging in behaviors that were not entirely truthful (Jennings, 2009). As a result, stakeholders in Fannie Mae were deceived into thinking that the company was performing better than it was (Jennings, 2009). This is clearly not the right thing to do, and it indicates that professional ethics does impact the effectiveness of the governance of a company.

Signals

A number of signals emerged within the Fannie Mae organization that indicated that something was being done correctly. Amortization schedules and other accounting practices were not conducted in a manner that was consistent with GAAP (Generally Accepted Accounting Principles) (Epstein, Bragy & Nach, 2010; Jennings, 2009). As a result, amortization periods were shortened in order to "peak earnings performance with higher yields" (Jennings, 2009, p. 271). Another signal that emerged was the use of special computer models designed by Fannie Mae executives that compensated for what they deemed to be "volatile" factors that were corrupting the data (Jennings, 2009, p. 271). These signals should have produced red flags for Fannie Mae's risk management team, their accounting team or their auditors (Shih, 2010). The perceived impression that the company was a highly regarded ethical organization seemed to have clouded the internal judgment of Fannie Mae's management team leading them to neglect their oversight responsibilities.

Executive Compensation

The financial incentives offered to Fannie Mae executives were very effective at improving the organization's earnings. The effectiveness of this earnings management strategy was produced by the more than tripling the normal earnings of top Fannie Mae executives. For example, the normal earnings for the chairman and CEO of Fannie Mae, James A. Johnson were $966,000; however, the bonuses that were paid out for Johnson were valued at $1.932 million (Jennings, 2009, p. 270). This demonstrated the effectiveness of generous compensation on corporate performance, which is a well known fact in the field of human resources management (Frampton, 2000). This is most likely why the aggressive bonuses were used to entice aggressive results.

While aggressive bonuses can be used to produce aggressive performance results, they can also trigger less desirable outcomes as well. In the case of Fannie Mae, the less desirable outcome was deceptive and unprofessional accounting practices, which were used to manufacture the desired results down to the penny (Jennings, 2009). Researchers have discovered that there is a connection between the offering of bonuses and subsequent corruption within a company. The risk rate for corruption is directly associated with how the bonuses are structured, what they are tied to and what values are maintained by the organization's culture (Rose-Ackerman, 2006). Fannie Mae's corruption problems developed as a result of their organization's cultural value of meeting the EPS targets and the downplay of ethical behavior (Jennings, 2009). This problem was preventable, as the management staff of the organization could have stressed the importance of maintaining ethical behavior in the pursuit of professional goals and by ensuring that proper oversights were used to monitor the progress of the executive team's efforts to meet the lofty goals that were set.

Changes in the Numbers

The issue of market volatility was brought up by Fannie Mae's executives as a reason why special adjustments were made to amortization and other projection models (Jennings, 2009). Market volatility generally refers to the "spread of all likely outcomes of an uncertain variable" (Goudarzi & Ramanarayanan, 2011). Since the mortgage and housing industries are highly volatile it was a "logical" cover for the real purpose of the number manipulations, to produce specific, e.g. fabricated, results (Jennings, 2009; Lee, 2009). The deceptive use of the volatility cover is apparent when other models and accounting practices used during the same periods are examined. They too show tampering and fudging of the numbers to produce very specific results (Jennings, 2009). This indicated that compensating for volatility was not the primary goal of the model developers.

The Pep Talk

The pep talk that was given by Samantha Rajappa, who was Fannie Mae's executive vice president of operations risk was very powerful. Its delivery led to the integration of the meeting EPS (earnings per share) targets into the company's culture (Jennings, 2009). The integration of this concept into the organization's culture was both positive and negative. On the positive side it was effective at motivating employees to do what it took to meet the established goals; however, on the negative side it also encouraged employees to do what it took to meet the established goals, including engaging in questionable accounting practices (Jennings, 2009).

The failure of Rajappa to mention the importance of ethical behavior in achieving goals produced a scenario where employees believed that any strategies that were successful at meeting the goals would be acceptable. This is a common problem when ethics are not introduced as a factor in corporate decision making models (Moberg & Caldwell, 2007). As the operations risk vice president, Rajappa had the responsibility to minimize risk factors for the company, but her actions did the opposite (Jennings, 2009; Pagach & Warr, 2011). She should have included in her pep talk the importance of meeting the goal through ethical behaviors so that ethical behaviors would not only be tied to the processes of meeting the established EPS targets, but so that they would also be incorporated into the company's culture. My own credo reflects the warnings produced by the mistakes made by Fannie Mae in that it begins with the use of ethical behaviors in order to achieve professional excellence.

Conclusion

Third party evaluations of corporate ethics have a very limited value. These organizations have a tendency to look at only a few aspects of the company before making their decision. As the Fannie Mae example presented, a narrow scope of evaluation leads to oversights that can perpetuate ethical reputations of companies that have employees that are acting unethically. If a company wants to enhance its ethical standards and public image, then it needs to ensure that ethical behavior is a component of the organization's culture. This is especially true if financial incentives are to be used as a motivator for employee performance. The integration of ethical behavior into corporate culture will enhance the performance of employees and it will enhance the good will value potential of the organization as well.

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