Business Finance
MGMT 5900 Creation of Unethical Workplace at Salomon Case Study

MGMT 5900

MGMT

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Case Study : Creating an Unethical Workplace at Salomon

This case study describes the unhealthy ethical culture at Salomon and the subsequent fallout. Read the case Creating an Unethical Workplace at Salomon.

Using APA-formatted notes with citations & references, include the following:

IDENTIFY: What key factors regarding Gutfreund’s leadership led to the unethical culture?

DESIGN SOLUTIONS: Pretend you have been hired to take over Salomon following Gutfreund’s resignation. As a leader, what steps would you take to change the culture at Salomon?

DEFEND YOUR SOLUTIONS: How do you know your actions would be effective & benefit the culture?


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Creating an Unethical Workplace at Salomon Case Author: Craig E. Johnson Online Pub Date: March 06, 2016 | Original Pub. Date: 2011 Subject: Business Ethics, Leadership & Ethics Level: Intermediate | Type: Indirect case | Length: 1104 words Copyright: © SAGE Publications, Inc. 2012 Organization: Salomon Inc. | Organization size: Large Region: United States of America | State: New York Industry: Financial and insurance activities Originally Published in: Johnson, C. E. (2011). Creating an Unethical Workplace at Salomon. In Organizational ethics: A practical approach (2nd ed., pp. 332–334). Los Angeles: SAGE Publications, Inc. ISBN: 9781412987967. Publisher: SAGE Publications, Inc. DOI: http://dx.doi.org/10.4135/9781506325880 | Online ISBN: 9781506325880 SAGE © SAGE Publications, Inc. 2012 SAGE Business Cases © SAGE Publications, Inc. 2012 This case was prepared for inclusion in SAGE Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes. 2018 SAGE Publications Ltd. All Rights Reserved. This content may only be distributed for use within Johnson . http://dx.doi.org/10.4135/9781506325880 Page 2 of 5 Creating an Unethical Workplace at Salomon SAGE © SAGE Publications, Inc. 2012 SAGE Business Cases Abstract Salomon Inc. is a Wall Street bank that experienced an ethical crisis in the 1990s This case study investigates the means by which Salomon found itself with such an unethical culture, particularly with respect to the behavior of its leaders. Case In the 1980s, the giant brokerage house Salomon Inc. was one of the most influential players in the financial world. BusinessWeek magazine proclaimed CEO John Gutfreund “The King of Wall Street.” However, in 1991 the firm faced an ethical crisis that threatened its very existence. The trouble began in the firm's government securities division. When the U.S. government issues treasury bonds to finance the national debt, it relies on a select group of dealers to acquire and then resell the bonds to other dealers and private individuals. This arrangement worked well for many years until one of Salomon's government securities traders, Paul Mozer, began to corner a large share of the market. He secretly violated Treasury Department rules limiting how much any one brokerage and its customers could bid at any given auction. Gutfreund took no action against the rogue trader when he discovered the illegal bids and waited months before notifying Treasury. Treasury then threatened to suspend Salomon's trading privileges. Soon Gutfreund resigned, and investor Warren Buffett assumed his role on a temporary basis. Buffett appointed himself chief legal compliance officer, ordered all Salomon officers to report every legal and moral violation (except parking tickets) directly to him, and spent hours answering the questions of federal investigators and the press. Warren Buffett's single-minded devotion to restoring the firm's ethical image kept it from collapse; but the fallout, nevertheless, was severe. In addition to paying millions of dollars in fines, the company lost three quarters of its stock underwriting business, was prevented from making US$4 billion in bond trades, and saw its stock value plummet. Trader Mozer spent four months in jail, Gutfreund lost his pension and stock options, and several executives received limited or lifetime bans from the securities market. Salomon largely regained its financial health but was acquired by the Travelers Group insurance company in 1997. A year later, Travelers merged with Citicorp, and Salomon Smith Barney began to operate as the investment banking/brokerage arm of the new conglomerate. Gutfreund gets much of the blame for what happened at Salomon. He helped create an unhealthy ethical culture using the following cultural transmission mechanisms: What leaders pay attention to. Gutfreund paid “absolute attention to a short-term business focus and what was happening that day or that week” (Sims & Brinkmann, 2002, p. 331). He never created a long-term strategy but focused on immediate profits, which encouraged Mozer to ignore the law. How leaders react to critical incidents. When Gutfreund learned that Mozer had exceeded legal bid limits, he tried to cover it up. The CEO waited months before firing the trader, and tried to save his own job. He kept information from federal authorities. The actions of Gutfreund and Mozer were particularly troubling, since bond traders depend on verbal commitments. A promise can have the same weight or importance as a legal contract. How leaders behave (role modeling). Stock and bond trading is a high-stakes, high-risk Page 3 of 5 Creating an Unethical Workplace at Salomon SAGE © SAGE Publications, Inc. 2012 SAGE Business Cases business. Gutfreund sanctioned this “bet the company” atmosphere. His formula for success was to wake up every day “ready to bite the ass off a bear.” Gutfreund once challenged another executive to a million-dollar game of liar's poker. The executive responded by raising the stakes to $10 million. In liar's poker, two or more players hold a dollar bill against their chests. They make statements, some true and some false, about the serial numbers on the bills. The winner is the person who correctly challenges the false claims of the other players. Gutfreund and the executive never played their winnertake-all game. However, their reckless example helped create a go-for-broke atmosphere that was to cost the company dearly. Gutfreund also modeled how to take advantage of others by selling Salomon to another company without consulting Billy Salomon, whose name was on the company door. How leaders allocate awards. Salomon paid extremely high bonuses for short-term performance. In 1990, for example, 106 employees earned $1 million each, and one arbitrage trader pocketed a US$23 million bonus. News of these high bonuses probably prompted a jealous Mozer to defraud the government and his firm. How leaders hire and fire individuals (selection). Gutfreund hired ambitious young people and turned them loose. They could reap high rewards if they succeeded but were quickly let go if they didn't generated significant profits. Further, performance guidelines and criteria for dismissal were unclear; the CEO seemed to dismiss employees based on such subjective measures as his own feelings. Those who wanted to be promoted had to follow Gutfreund's example by dedicating their lives to the company and getting deals done by any means possible. Though decades have passed, the financial industry continues to be plagued by many of the same cultural failings as Salomon. Wall Street bankers who focused on short-term profits helped trigger the recent Great Recession. They made risky investments in order to qualify for generous bonuses. In some cases, they received bonuses even though their investments later failed, and their employers had to be bailed out by the federal government. Bonus payments totaling US$1.6 billion went to executives at 17 firms receiving government funds, including CITI Group, Goldman Sachs, and AIG. Discussion Questions 1. Which cultural transmission mechanism did the most to create an unhealthy ethical culture at Salomon? 2. Can you think of other organizations that have ethical cultures similar to that found at Salomon? 3. Can you think of leaders who have been positive role models for you? What impact have they had on your attitudes and behavior? 4. Can you think of leaders who have been negative role models? What did you learn from their bad examples? 5. What will it take to change the ethical culture on Wall Street? Reference Sims, R. R., & Brinkmann, J. (2002). Leaders as moral role models: the case of John Gutfreund at Salomon Brothers. Journal of Business Ethics, 35, 327–339. Bibliography Associated Press. (2010, July 23). Pay czar will not fight banks over $1.6 billion in executive pay. The Oregonian. Retrieved from http://www.OregonLive.com Page 4 of 5 Creating an Unethical Workplace at Salomon SAGE © SAGE Publications, Inc. 2012 SAGE Business Cases Etzel, B. (2002, July 1). WorldCom's wrong number. Investment Dealers' Digest, pp. 9–12. Guyon, J. (2002, October 14). The king and I. Fortune (Europe), p. 38. Lewis, M. (1989). Liar's poker. New York: Norton. Loomis, C. J., & Kahn, J. (1999, January 11). Citigroup: Scenes from a merger. Fortune, pp. 76–83. Timmons, H., Cohn, L., McNamee, M., & Rossant, J. (2002, August 5). CITI's sleepless nights. BusinessWeek, pp. 42–43. Useem, M. (1998). The leadership moment. New York: Times Business, Ch. 7. http://dx.doi.org/10.4135/9781506325880 Page 5 of 5 Creating an Unethical Workplace at Salomon ...
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Running head: CREATION OF UNETHICAL WORKPLACE AT SALOMON

Creation of unethical workplace at Salomon

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CREATION OF UNETHICAL WORKPLACE AT SALOMON

Creation of unethical workplace at Salomon
What key factors regarding Gutfreund’s leadership led to the unethical culture?
There exist critical factors in Gutfreund's leadership, which brought about unethical culture for
Salomon. One factor was that Gutfreund never possessed a long-term strategy for the company.
Contrary, the focus was on short-term success, which led to an increase in the Organization's
profit. Gutfreund seems to be an effective leader though not an ethical one. As a result, this led to
breaking the rules and regulations in an attempt to achieve the set company goals.
Secondly, Gutfreund did not take any action after finding the misconduct. Instead, he ignored
and tried covering it. It was under Gutfreund because he had a moral responsibility to Salomon
Inc. It was under Gutfreund to follow step by step all the organizational policies after finding out
this issue, which affected the whole being of the company. Ignorance of Mozer’s misconduct
brings about a belief that there was another ignorance of moral conduct by some other
subordinates aiming to increase the company's profits. As posed by many great leaders, the
leaders should be at the forefront in acting ethically to ensure compliance with company policies
of code of conduct at the workplace (Childrety, 2016).
In the third factor, Gutfreund us...

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