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Adelphia Communications Corp - Why one Should Care About Ethics in Finance?

Essay by   •  April 12, 2013  •  Case Study  •  3,284 Words (14 Pages)  •  894 Views

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INTRODUCTION

There are many beliefs that ethics does not matter in finance. These views range from, "It's not my job" to others that believe these problems have been around for hundreds of years they will not be able to change them. Then there are the others that fall into relativism and believe "When in Rome, do as the Romans do." Those that fall into this relativism have lack of identity and fall into whatever those around them are doing. Ethics, however, is a part of finance. Ethics is an unavoidable tie in to finance and business. With the decisions that are made in finance come ethical implications and ethical reasoning has to be right there along with the other financial implements used.

I. Why One Should Care about Ethics in Finance?

There are five arguments why one should care about ethics in finance. The first reason one should care is for suitability. For a firm to be sustainable there needs to be an ethical foundation for it to stand on. With this sustainability also comes legacy. The company has to decide what kind of legacy they want to leave for those of the future. The second argument for ethics in finance is trust. An ethical company builds a foundation of trust with their consumers. In the case of finance trust then translates into more financial transactions and polices. The third argument to look at is how ethics build team work and leadership. A company that has structured ethics into its company then allows for better team building because members of the team already have a foundation of ethics. The team may then get along better due to a mutual understanding already in place. Next, ethics gives people a higher standard to be measured to than just laws and regulations. Laws and regulations are commonly broken and exploited where ethics makes one think a little more into the rights, wrongs, relationships, and overall how human well-being is affected. Lastly, there is the argument of reputation and conscience. Bottom line here is what kind of person you want to be. Are you going to be the business person that will do anything for some more cash or are you going to have a conscience and do right just because it is the right thing to do.

II. For Whose Interest Are You Working?

The main two agents that make up whose interest one is working for are stockholders or stakeholders. With stockholders the managers and directors are just looking to what can make the stockholders more profitable. In this case, they usually do not care about the community around, their employees, charitable giving or anything like that. The stockholder view is that their main purpose is to just return value to the shareholders. On the other end of this is stakeholder. When looking at stakeholders this ranges from employees, customers, suppliers, to the community around. The argument for stakeholders is that the managers making decisions need to look at the broad group affected by these decisions. This, however, does take into account that stockholders are a part of these decisions but not the solo factor.

III. What Can You Do to Promote Ethical Behavior in Your Firm?

The first and main thing a company can do to promote ethical behavior in one's firm is to have a code of ethics. This code of ethics would be a known set of guidelines that individuals should hold themselves to and how they should act with suppliers, customers, government agencies, etc. The code of ethics which employees will be held to will not only help employees know what is expected of them but also help employers by creating a foundation which decisions will be made on. The second part of having a code of ethics is talking about it. Talking about it with your firm will help them to understand that this is a serious manner. This does not have to be done in a formal manner but past cases can be shared with employees for them to have a better understanding of why a code of ethics is important. Lastly, it is important to reflect on the dilemmas a company faces. These reflections on dilemmas can help one to come to an ethical decision.

IV. Case Analysis

Adelphia

Adelphia Communications Corp was at one time the sixth largest cable provider in the United States. The company was founded in 1952 in Coudersport, Pennsylvania. Adelphia grew rapidly, largely through acquisition of other cable systems, and by the early 2000's had diversified into broadband Internet and telephone services, as well as business services.

Adelphia was founded when local theater owner John Rigas purchased a small cable franchise from a local hardware store in Coudersport, Pennsylvania. The company's growth was heavily driven by leverage, and acquisitions were frequent. In 1985, Adelphia more than doubled its number of subscribers from 53,538 to 122,500. Rapid growth continued through the 1980's and 1990's. In addition to Adelphia Communications, the Rigas Family purchased additional cable companies and other ventures.

John Rigas had a reputation for generosity in Coudersport, where the company was still headquartered. He was known for giving money to anyone that claimed to have a need, and used the Adelphia corporate jet to fly sick children around the country for medical treatment, and sent busloads of children to see Buffalo Sabers hockey games. The team was owned by the Rigas family as well.

Rigas family spending was not limited to philanthropy, however. They owned luxury homes and apartments around the country, golf courses, and the Buffalo Sabers hockey team mentioned above. Unfortunately, much of the Rigas' spending was done with shareholder money.

In February 2002, Oren Cohen, a high yield bond analyst with Merrill Lynch, noticed that the family's spending didn't make sense. The Rigas' had committed to purchase $1.8 billion in Adelphia stock, and convertible bonds. The family had no income sources other than Adelphia, and the stock had dropped from about $40 dollars per share to about $20 per share. Cohen estimated that the Rigas' were around $900 million to $1 billion in the hole. He requested clarification from Adelphia's investor relations department, but they refused to answer his questions.

On March 27, 2002, Cohen noticed a footnote on the last page of Adelphia's quarterly earnings press release. The footnote revealed that the company was liable for over $23 Million in off balance sheet loans. When Cohen pressed the family for details, CFO Tim Rigas promised to provide details later, then quickly dropped the subject. In the past, he might have gotten away with this, but the

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