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Darien Kearney
Managerial Finance 5310
Dr. Maniam
Corporate Scandals and Its Impact on Society
Abstract
This paper will examine the very root of corporate malfunction from a historic point of view up
until present day. In studying the datum, it will be helpful to look at the actions a corporation has
taken that caused adverse effects on society, and will also examine society’s role will be
examined in the matter as well.
Introduction
When an individual considers opportunities to earn a return on their idle money there are
a few opportunities that immediately come to mind. Those opportunities are most likely playing
the lottery, investing in the stock market, or robbing a bank. The chances of winning the lottery
jackpot is around one in 200 million, and bank robbers are caught 60% of the time, oftentimes
the same day. So, that leaves the average person with the opportunity to invest in the stock
market. While there are many different investments one can make, corporate stocks and bonds
are among the most recognizable forms of investment today. This creates a direct connection
between the corporation and the consumer, in that what happens with the corporation straightly
coincides with the investor’s monetary well-being.
Introduction to the Great Depression
From 1930 until now, America have has such an enormous amount of changes not only in
the banking industry but in the stock market as well. Safe to say the financial industry as a whole
in a global sense. A lot of times when a malfunction in the financial system comes to a head
there is usually a heavy emphasis placed on the biggest players in this country. In Wall Street,
but more specifically big corporations and investment banks tend to take the most heat for these
malfunctions in the financial system. Also, the prevailing thought when something goes wrong is
to place the blame on what is called the top 1%. Whether that be the top 1% of earners, or the top
1% of producers, there is always a stereo typical ideology that says these people are the reason
Darien Kearney
Managerial Finance 5310
Dr. Maniam
for America’s problems. In reality, if one considers their underlying influence on others, they can
better understand why the people who provide them a service act in such manners.
Supply and demand in the early 20th century
Economically America’s financial system is based off of supply and demand, so its
market is driven on that basic principle. There is no deviation from that principle, it has been that
way for years, and is that way not only in America but globally. Supply and demand is an age
old solution to problem of trade. As early in ancient history as can be documented there are
always examples concerning the practice of trading. One trades goods that they have grown to
another for goods that individual has produced in some special way. Supply and demand in this
instance is driven by one's opportunity to specialize in a particular field such as a service offered,
or product. Society has learned that specialization typically brings more value than
generalization. In this is the principle that allows one person to work for years at mastering a
particular craft in order to bring it to the marketplace in hopes of a reward great enough to
provide for himself and his family. In fact, these specializations are considered valuable in the
sense that one’s value is based on what he brings to the marketplace. And from this basic concept
one can derive multiple layers of understanding with the crises that have happened here of late
and historically. What happens to a person whose services or product is now considered obsolete
and no longer valuable? Naturally, when the interest dies down, the majority of the population
will migrate to something else that fulfills their needs either now or will fulfill their needs in the
future.
The issue becomes about evolving in the sense that how fast can a person who specializes
in one thing see the coming trend in the future, and adapt to that trend. In essence, this person has
two not only perfect what they have now, but they have to continue to grow in their knowledge
Darien Kearney
Managerial Finance 5310
Dr. Maniam
and understanding of their customer base in order to fulfill everyone's future need. It's sort of like
a marriage, and that people tend to change every five years. That is to say that the person they
are today does not necessarily guarantee that they will be that person tomorrow. In fact, that is
what the case is often times. And true to form the principle of a breakdown can be observed if
someone is not able to adapt properly to the changing needs that are being demanded of them.
At this point, another concept from its infancy is to be considered. In considering how a
relationship between a person and a significant other comes together one might noticed that each
person sees the other and maybe likes something about that person that stirs up the passion in
them enough to want to get to know them. In that case, the two come together and begin to work
on the parameters of an intimate relationship. The couple is able to build a stronger relationship
with the understanding that they are feeling each others needs for the time being. But, what pins
to happen is that if the relationship drags on too long without any form of change then people
tend to get antsy because they feel as if they are no longer being fulfilled. This brings up the
concept that markets are driven by emotion, fear in particular. Since the market is managed by
emotional beings, it also makes sense to consider that the market serves emotional beings. Often
times it is tough to decipher or control the emotions of another person. One cannot always
anticipate with accuracy how another person is going to react to a particular situation or
circumstance. That being said, market studies are done, and a bunch of data is compiled in order
to help the recipient better understand the people they are serving. Continuing with the concept
or the example of a relationship it can be observed that in dealing with the emotional factor that
it becomes a driving force. This is not something that can be quantified numerically, but it is
something that must be accounted for in the financial analysts’ decision-making process. This is
the case because, when numbers come up short and it is hard to explain the data, analysts must
Darien Kearney
Managerial Finance 5310
Dr. Maniam
consider other factors that cause irrational behavior that are not quantifiable. To that end, the
young man has been courting this young lady for five years now and everything seems to be
going perfectly. He has been able to check all of the boxes necessary such as finishing college,
getting a house, getting a great job, and spending a lot of time with this young lady. But, what he
will notice is that eventually for some unexplainable reason she will become disenchanted with
the relationship because of some on known factor that doesn't directly communicate the real
issue, but under closer scrutiny will lead to the real issue. However, if the young man is wise and
able to anticipate the actions or the feelings of the young woman beforehand based on his data
that he's been collecting over the past five years, he will be able to come to the conclusion that
she might want to get married. To wrap this example, five years later she may want to have kids
and it is still his job as the person providing the service so to speak to anticipate that and respond
to that need directly in order to keep the market in constant harmony.
The banking industry and the beginning of the Great Depression
To begin this part of the study, it is helpful to first discuss a well-known topic that is the
building block of everything else to come. That building block is called the great depression era.
Great Depression era is considered to have happened in between 1929 and 1939. It was a decade
of mostly turmoil, but some promise of future hope under President Franklin Delano Roosevelt.
The knowledge of this depression is so widespread, because it took America into the deepest
drought this country had ever seen. Not to mention that this drought lasted a substantial amount
of time. 10 years is a considerable amount of time to go through an economic recession, and it
typically causes a great deal of setbacks with in that period of time that make it very challenging
for a country to rebound from. The stock market crash is usually cited as the culprit that started
such a drastic malfunction in America. When considering the time period that preceded the Great
Darien Kearney
Managerial Finance 5310
Dr. Maniam
Depression era one can get a proper glimpse of what may have triggered such a nasty, and
aggressive wave of economic downturn across the country. The early 1900’s bought about the
idea of banks. The banking industry began to thrive as this new concept that was a solution to all
of America’s monetary facilitation problems. However, with any new thing it will take a little
time to get things figured out and adjusted. The originators did not really know the parameters of
banking, and everything that could be done in this space as of yet. This coupled with the fact that
a new concept called the stock market had been introduced, and the financial industry was still
trying to figure out how to marry the two concepts together.
The stock market
The stock market was great because it provided a way to build value where there was
none. Savers could now invest their money safely and expect to have more when they return for
at a later date. But as stated before, the parameters of this space were not yet completely worked
out. When problems began to arise within this newly established financial system investors and
depositors became increasingly uncomfortable with the ambiguity of the system. This discomfort
grew into an all-out panic, and caused investors of this new financial system begin withdrawing
their invested funds. As Not only were investors withdrawing their funds from banks, but they
were also withdrawing their funds from the stock market in record numbers. The withdrawal rate
was so high that the market makers could not keep up in replacing the funds needed by these
banks and corporations to sustain the system.
The collapse of the job market
As the financial system began to collapse, so did the job market. The collapse of the job market
inevitably lead to a drop in consumer spending. Understandably this led to manufactured goods
sitting on the shelves, unyielding crops going bad in the fields, and production ultimately having
Darien Kearney
Managerial Finance 5310
Dr. Maniam
to come to a halt because there was no demand for the goods. In this instance one could say that
because of a lack of knowledge, or adaptability financial proponents were not able to properly
protect and meet the needs of their investors and consumers. Similar to the relationship that was
discussed earlier, once the needs were not fulfilled, then the whole system imploded. No longer
was anybody supplying, and no longer with anyone demanding. Contrasting the fact that there
was no demand for stocks at this point but stock prices still continued to increase since
businesses were looking for people to not only by, but to carry the load of those who would not
buy. In other words, if a seller can get someone to buy at a higher price, then the seller could
make up the difference and the company could still be sustained. If this could be done, there
would be no need to resort to layoffs and the company could keep the flow of production steady.
The key to this whole equation is that consumer confidence vanished. To that end, consumer
confidence vanished based on a myriad of reasons. One reason being as was discussed earlier, is
that the American public feared what it did not know. Furthermore, the natural tendency of the
human is to withdraw from something they fear or they don't understand. This is done to allow a
little more time to observe and get a better understanding of what it is exactly that is being dealt
with at the moment. Subsequently, it's important to also factor in more than one part of consumer
group. What is mean by that is, that there were two classes as one may choose to separate them
that followed the law, and another class that took matters into their own hands. Internally, when
considering the management of the banking system and the stock market in that management
saw an opportunity in this economic downturn, and shows to take illegal action for the benefit of
preserving their own families.
Darien Kearney
Managerial Finance 5310
Dr. Maniam
A deeper look at human behavior
The human factor is extremely important even though it is not quantifiable, it is effective.
These internal managers for not considering the severity of their actions to the system when they
missed managed funds, or even went as far as embezzling funds while consumers were making
runs on the bank. (Bonini and Boraschi) reference Aharony and Swary in stating that “failure of
a bank undermines public confidence and threatens stability of the banking industry by causing
runs on other banks.” As the figure below shows, one of the several causes of bank suspensions
