Business Ethics Colloquium


October 5, 2006

Ethics of the U.S. and World Stock Markets

By Christos Papoutsy

First of all I'm not a stock market expert. I'm not a financial planner. I was a CEO, and owner-manager. The comments I make today are based on my own experience and research I have studied during the past 20 years.

The United States stock market stands as a symbol of Economic Freedom in Corporate America.
It is one of the world's greatest source for equity capital for small and large corporations.

It is an index reflecting the status of the American Economy. An index of looking forward to the hopes and dreams for over 70% of Americans that invest in it.

The stock market has been very good to me. Here is a real case history:

1. 20 years after starting a company in a garage, building it with world wide sales of approximately
$20 million, profitable for 15 of the last 20 years the board of directors made the decision to sell.
It was time to reward many of the stakeholders, i.e., owners, investors, employees with their reward
"Liquidity - i.e. money"

(A) In 1979, Hollis Engineering a manufacturer of Automatic Soldering and Cleaning Systems was sold to, Gardner Denver in a tax free stock exchange. At this time Gardner Denver was a one billion dollar corporation listed on the NYSE.

The price of G.D.'s stock at the time the definitive Agreement was signed was approximately $20 per Share. Timing is everything.

(B) A few days after signing the agreement, it was announced that Cooper Industries was acquiring G.D. The net result was that instead of Hollis stakeholder receive $20 per Share, of G.D. stock, we would be receiving $30 per Share of Cooper stock.

(C) We were now owned by a huge multi-billion dollar multi- national corporation. Hollis was now a part
of a $150 million dollars electronic production division that did not fit into Cooper's strategy. Cooper a 3 billion dollar public corporation.

(D) To make a long story short, I then purchased for cash from Cooper Industries, the entire division made up of four companies, and in a simultaneous transaction, sold three which in effect gave us back the crown jewel for free my old company Hollis.

(E) A few years later, we again sold Hollis again in a Tax free stock transaction for over $10 million dollars. Timing, again, yes, however, we had established an excellent twenty year track record and had earned the respect of our industry. Without the stock market none of this would have been possible.

Speak About Ethics and C.S.R. in all of the 20 years, we were never sued by an employee, customer, vendor or anyone, which were in the thousands.

(A) Part II of the Stock Market

The Dark Side

The 1990's brought:

The pigs at the trough

Tyco, Enron, World Com, Arthur Anderson

Corporate fraud and deception
Billions lost
Public trust was shattered

Fraud, greed and unethical behavior - in some cases, even criminal actions were and still are prevalent in many of the world financial markets. Shoddy and shady auditing with insufficient oversight and transparency by greedy executive management has created havoc many times.

Question: Why does any stock have a higher market value per share than the corporation's book value per share? Other than its dividend history and expectations of future dividends, there is no rational reason for the disparity in values, except in the case where a company is working on new, leading-edge technologies or break-through cures for diseases, research that has a potential to impact significantly the corporation's future sales and earnings. These types of investments are rare.

Very little, if any, discussion takes place about how the market value of the stock was derived. Instead, potential shareholders are told about projections that may or may not happen, meaningless profit-earning ratios (P/E), and other data difficult to understand. In essence, the market value of some stocks is magically derived through a series of mumbo-jumbo calculations based on incomplete information.

Insiders, experts, option-holders, traders, and others who fully understand how this complex, opaque system works, are rewarded handsomely by shorting stocks and by using sophisticated techniques such as puts, calls, futures, derivatives, margins, etc. The result is a great profit for a very small segment of the investing public. Yes, at times a rising tide does also help many others. The majority of investors, however, represent the mid- to upper-level socioeconomic stratum; they are hard-working people who have placed much of their hard-earned, intended eventually for their children's education and their own retirement needs, into stocks, expecting that this money would ensure their future, only to discover that many times the bulk of the money had vanished in the volatility of the stock market. Buyers of stocks are stakeholders of the corporation whose stock they purchase, just like its customers. They, too, serve as a moral compass for the corporation.

Stockbrokers and financial advisors need to disclose fully the exact nature of the risk versus the reward for each stock they recommend for purchase. Their advice should be based on objective data: accurate sales figures and projections, earnings, new products, quality of management, and solid justification for the premium of the market value per share and this information should be continually updated.

At the present time, the overall market value of most stock markets is valued at a significant premium over the book value. Does this represent another bubble about to burst?

Restoring Public Trust

Much has been accomplished with new laws and regulations designed to significantly reduce corporate fraud

Congress adopted the Sarbanes-Oxley Act of 2002, comprehensive, wide-ranging law that affects nearly every aspect of the corporate governance of publicly held U.S. corporation and their international subsidiaries

The SEC-requires all CEO's and CFO's to certify legally, that financial statements and reports are accurate and not misleading-exposing them to possible criminal charges if their numbers turn out to be bogus.

Even with all these new laws and regulations, questions remain, " Can morality be mandated?"

Adam said it was the apple Eve said it was the serpent, they were Both were wrong. It was greed.
Greed, some people will do anything for money.

Follow the money, the most significant temptation for corruption in the global business community I believe is rooted in the global stock markets. As of February 2006 there was 2800 public corporations listed on The New York Exchange (NYSE) the largest equities market place in the world, which had a global market value of approximately twenty trillion dollars. A phenomenal increase of the 1351 companies listed in 1970 with a market value of 600 billion dollars. Today's NYSE market value is approximately 70 percent above its book value of 5 to 6 trillion dollars. This disparity between the market value and book value is both significant and alarming. I believe this is one of the most tempting target for the majority of fraud, corruption and unethical behavior in the global world business arena, and I have only made reference to one stock market and not spoken about all of the other stock markets located around the world that have similar histories and ratios with much less oversight and transparency. The follow the money theory to greed not only tempts and corrupts those professionals that deal directly with the markets but also tempts and corrupts many of other related industries such as: accountants, auditors, attorneys, financial planners, bankers, investment bankers, to name a few. World stock markets may be rising again on the back of "Irrational Exuberance" Would you be in favor of the Social Security system investing in the stock market? Or keep the money in the lock box?

(B) Many individuals do not really understand what they are purchasing when they buy stock from their broker. Very little, if any, discussion takes place about how the market value of stock was created.
My experience indicates that in the stock market the three key words are "Caveat Emptor", Due Diligence and Diversification.

Now let's talk about another aspect of the stock market. " Socially Responsible Investing"

(C) There are presently approximately 200 funds with assets deemed Ethically or environmentally responsible.

A greater percent of the investing public is searching for places to put their money that consider ethics and C.S.R. as part of their mission and strategy. Over 13 billion is invested in the U.S. Public Mutual Funds that focus on socially responsible investing. That amounts to about one-half of one percent of the total mutual fund assets.

The returns on socially responsible investing, versus returns on other types of stock investments, is 9.64 percent compared with a return of 9.66 percent on the Standard & Poor's 500-stock index over the same period of time. Based on these two statistics, it would appear that you can have your ethical cake and eat it, too.

Yet closer analysis raises a number of important questions about the screening process, and the overall general label "socially responsible." Individual investors, financial advisors and corporations have different ideas and philosophies about what is ethical or socially responsible.

The environment plays a big role when screening for corporate social responsibility.

The right to bear arms, and arms for hunting and for the defense of our country is a topic of heated debate.

Whose values, whose principles should be applied in determining what a socially responsible investment is?

Often General Electric is rated as unethical and not socially responsible because it manufactures engines for military jets, without off-seting credits for the production of life-saving Cat-scan equipment that they manufacture.

The world corporations are at the beginning phase of changing their strategy and mission from being recognized as Socially Responsible, to a sustainable corporation. Sustainability is the new focus in the global world community, (The sustainable world) (another whole subject).


Is Moral Capitalism Possible? In the context of investing in the U.S. stock market. Yes! Moral Capitalism is possible.

John Adams, The theory of "The Invisible Hand" will be Rejuvenated. Only by forming close working partnerships with educational institutions like S.N.H.U, and the business community will we be able to ensure the health, dignity, freedom and creativity of our society. Thank you and God bless you all.

For more information about Mr. Papoutsy, or to read other articles on corporate social responsibility or on the topics of the Horatio Alger Lecture Series, log onto the Business Arena section of the Hellenic Communication Service website at, or visit the webpages of the Christos and Mary Papoutsy Distinguished Chair in Business Ethics at Southern New Hampshire University at Mr. Papoutsy welcomes comments and may be reached via email at


Papoutsy, Christos, "Savvy Business: Create a Company of Citizens with Human Capital," from "Business Partners," July August 2004, published by the American-Hellenic Chamber of Commerce, Athens, Greece

Papoutsy, Christos and Mary, ~Where Did Seven Trillion Dollars. Go?" July 10, 2002

Bibliography continued

"Study Bolsters Sarbanes Oxley," Twin pioneer Press,March 12, 2006 70104.htm

Smith, Adam, LLD, "An Inquiry into the Nature and Causes of the Wealth of Nations," Oxford at the Clarendon Press, 1880

U.S. Higher Education in Transition, D Forces -

(MBA enrollment history)

"White Collar Crime" (from Goode, 5th. 1997, chapter 12 and 6th, 2001 chapter 6, and 7th chapter 13)¬rkeel/200/wcolcrim.html.

Young, Steven, Moral Capitalism, Reconciling Private Interest with the Public Good, Barrett-Koehler Publishing, Inc., San Francisco, 'ISBN: 1-57675-257-7, 2003

On White Collar Crime:
Here is a sampling of infamous executives that indicted or are in prison; all~have MBAs: * Kenneth Lay, Enron
* Mark Swartz, .Tyco
* Andrew Fa-tow, Enron
* Bruce G. Wilson, Enron
* Jeffery K. Skilling, Enron
* Henry Blodget, Merrill Lynch
* Jack B. Grubman, Citi Corp-Smith Barney * Gerard Evans, attorney and lobbyist
* Richard A.Causey, Enron have been

(Posting date 19 October 2006)

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