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Lesson 4 Trust Must Be Earned The May 14, 2001, cover of Fortunemagazine has a photo of Mary Meeker, the new economy analyst from Morgan Stanley, and the question, "Can we ever trust again?" Inside the magazine, the stories raise two basic concerns in business ethics: conflicts of interest and insider trading. The conflicts of interest in the new economy centered on the role of analysts. While many investors assumed that ana- lysts such as Meeker were offering their candid assessments of companies, the analysts very often stood to benefit personal- ly, or through their companies, if they endorsed an IPO. Many became cheerleaders for the companies they were sup- posed to be evaluating independently. Other players also had conflicts of interest in the new econ- ration of the underlying reasons they exist—that markets function because of certain assumptions about values and behaviors. Investors hold back when they perceive that they cannot get a fair shake in a market that has no level playing field. An examination of economic volatility differences across nations can show students what happens when there is a per- ception of corruption in markets. In this respect, stock mar- ket investments are no more sophisticated than money kept in a jar or under a mattress. The very nature of e-commerce demands more trust than has ever existed in our business transactions. We trust that those responding via electronic means are indeed who they purport to be. We trust that companies will not misuse the credit information we provide to them to pay for merchandise ordered electronically. And we trust that everyone will honor pledges made with simply a click. omy stock offerings. Lawyers who were offering their profes- sional opinions as part of the disclosures in the IPO registra- tion materials often were to be paid in shares of the new com- pany. Their opinions on the legal issues facing the company were in conflict with their economic interest in the IPO not only going forward, but going well. In addition, insider trading occurred in the form of the so- Lesson 5 called "pump and dump" stock sales. In this money-making venture, even television analysts got in on the game of pur- chasing a particular stock and then taking to the airways, the Internet, and the print media to pump the stock to investors. When the investors took the bait and bought, increasing the value of the shares, the pumper would then dump the shares at a significant profit. Even a teenager, 15-year-old Jonathan Lebed, managed to turn an investment of $8,000 into a handsome $800,000 profit. He used different screen names to pump shares he had purchased, and then sold them after intrigued investors caused the prices to climb. And he did all this without missing a day of school. These conflicts and self-dealing stock-trading scenarios are Go Back to the Basics As I think back to the young man's skepticism about the role of ethics in the new economy, my mindset has changed. It is because of the nature of the new economy and e-commerce, not in spite of it, that we need basic ethics more than ever. As teachers and scholars, we and our students can benefit teaching moments to show what happens to markets when investors lose trust in the fundamental fairness that they assumed existed. Beyond the ethical principles is the explo- from the experiences of the fallen dot-com companies in the now not-so-new new economy. They serve as the perfect examples to demonstrate how the basic principles of ethics, such as honesty, fairness, and the avoidance of conflicts of interest, are a cornerstone to success, even when the means for doing business changes. ■ z Marianne Jennings is a professor of legal and ethical studies at the College of Business at Arizona State University in Tempe, Arizona. BizEd JANUARY/FEBRUARY 2002 23