Business Ethics—Do No Harm

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Presidents Column May 2006 Bulletin Business Ethics—Do No Harm The Ken Lay and Jeff Skilling trial is in full swing, and by the time this letter is published, the trial may be resolved. The issues surrounding the trial are varied and complex and it seems to get down to one man''s word against another''s word. What did upper management know and when did they know it? The only thing I know for certain is that I am glad I am not sitting on that jury. Was Enron''s demise the result of unforeseeable market forces, or was it the result of a conspiracy at the highest levels to obfuscate the true financial condition of the company in order to maintain an artificially high stock price? I have not been following the trial closely enough to have an informed opinion as to whether Enron''s upper management was culpable or merely inept. However, there have been some aspects of Enron''s business activities that have come out of the trial that have some interesting implications. Enron''s trading business was so successful that they concealed the magnitude of the profits to keep Wall Street from realizing the risks Enron was taking and recognizing that Enron was basically a trading company, rather than an energy logistics company. During its peak, Enron traded hundreds of products. Unfortunately, Wall Street does not put a significant stock-price-to-earnings (P/E) multiple on trading revenue. The value of a dollar is perceived differently depending on its source. Trading dollars have less intrinsic value because they are not as predictable as a dollar received from gas transmission or power generation. The more likely it is that a dollar of net revenue will be repeated next quar-ter, the more intrinsic value it has to Wall Street. In some respects, it is similar to the risk/reward calculations we routinely use in evaluating the relative value of drilling prospects with different risks. We all realize that exploratory prospects need higher potential reserves than development prospects because of the higher risk. However, I had not put it in the perspective that a barrel of oil (or mcf of gas) produced from a development well has a higher intrinsic value than a barrel of oil received from an exploratory well.
This then raises the question-can two dollars received from the same source have different perceived values? If you do not believe it is possible, consider the difference between Google and The New York Times. They both receive the bulk of their revenues from advertising, and they had generally comparable net earnings during 2005. Yet, Google has recently sold at a P/E multiple of 67, while during the same period, The New York Times sold at a P/E multiple of 15. Google had a market capitalization of $100 billion, whereas the Times had a market capitalization of $4 billion. Granted, Google has a potentially global reach; whereas, The New York Times'' influence, and therefore earnings potential, is more regional and limited in nature. Does that justify a five-fold difference in the P/E ratio and a 25-fold difference in market capitalization? Obviously, Wall Street believes it does. Based on its stock price, the financial fortunes of Google have declined recently. Wall Street will probably attribute the decline to one of those fabled market corrections-a change in perceptions. What does any of this have to do with business ethics? Business schools have used Enron as the type-section of what not to do in the realm of business ethics. From what has been reported in the news media, at least some of Enron''s managers who were charged with wrongdoing believed that they were acting in the best interests of Enron at the time the alleged illegal acts were committed. Could they have been so far out of touch with reality as to believe that they were doing nothing legally or ethically wrong? The previous discussion of the evaluation of the financial worth of a business suggests Wall Street''s rules of valuation are subjective. Are the rules of business management, hence business ethics, also subjective? Is ethics merely a matter of perception? Clearly, there should be a difference between what is wrong ethically and what is illegal. Some ethical considerations are black and white. You do not steal from your employer, you do not sabotage a coworker''s career, and you do not represent work done by others to be your own. But most ethical questions are colored by various shades of gray. To that extent, the rules governing business ethics may be subjective and subject to perception. However, the underlying principle for all ethical decisions has not changed since Hippocrates: it is to do no harm. A large dose of common sense goes a long way in resolving most ethical dilemmas. We all recognize that it is unethical to use your employer''s or client''s assets for your personal gain without their express permission, but is it unethical to exploit a unique situation to fulfill a requirement? Like all licensed geologists in Texas whose license will be up for renewal after September 1, I have a 15-hour continuing education requirement that includes a personal development hour of business ethics. Under the board''s rules, the preparation of this column should count toward that ethics requirement. Anyone can submit an article on any relevant topic to the HGS Bulletin for publication, and if it has some merit, it will probably get published. It will also count toward your continuing education requirement. But because the HGS president''s monthly column is not available to all licensed geologists, is it unethical for me to use it to fulfill a personal requirement for licensure? My perception is no harm, no foul.

Paul Britt
Friday, June 2, 2006
From the President