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Question
Paper
Business
Ethics & Corporate Governance (MB321) : October 2004
Section A
: Basic Concepts (30 Marks)
•
This
section consists of questions with serial number 1 - 30.
•
Answer
all questions.
•
Each
question carries one mark.
•
Maximum
time for answering Section A is 30 Minutes.
1.
Utilitarianism
as a school of ethical thought places complete emphasis upon the outcome, not
on the intent of individual actions, therefore the approach may be referred to
as
(a)
Ethical relativism (b)
Behaviouralist theory
(c)
Teleological theory (d)
Deontological theory
(e)
Economical
theory.
2.
Which of
the following committees carries out selection of Directors?
(a) Audit
committee (b)
Nomination committee
(c)
Remuneration committee (d)
Steering committee
(e)
Ethics
committee.
3.
The
principal recommendations of the Cadbury committee covered which of the
following?
(a) The
board of directors and their role (b)
Cross shareholding
(c)
Setting up of the organization (d)
Capital market issues
(e)
Both (c)
and (d) above.
4.
Which of
the following should be the governing objective of a company?
(a)
Higher return on investment (b)
Global cost competitiveness
(c)
Market share leadership (d)
Maximization of shareholder value
(e)
Lower
return on investment.
5.
Business
ethics can be best practiced under which of the following circumstances?
(a)
No
conflict of interest among stakeholders
(b)
Maximization
of profits sacrificed
(c)
General
business environment is favorable
(d)
Conflicts
of interests
(e)
No
conflict of interest among employees.
6.
Which of
the following branches of ethics deals with specific controversial issues like
capital punishment, cloning and nuclear war?
(a) Meta
ethics (b)
Normative ethics (c)
Applied
ethics
(d)
Virtue ethics (e)
None of the above.
7.
In
promoting products, a marketing manager's decision depends on which of the
following Overriding factors?
(a) Legal
aspects (b)
Product demand
(c) Short
term gains (d)
Long term consumer interest
(e)
Technology.
8.
Which of
the following is not a function of
the corporate audit committee set up by the board?
(a)
To
discuss with independent auditors about the problems they experience in
completing the audit
(b)
To review
the interim and final accounts
(c)
To inform
the board about the effectiveness of internal control and the quality of
financial reporting as pointed out by the independent auditors
(d)
To select
the new non-executive directors to the board
(e)
To make
recommendations regarding the audit fee, selection and replacement of auditors.
9.
Corporate
conscience is best decided by
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(a)
Middle level Managers (b)
Senior Managers
(c)
Board of
Directors (d) Employees of the company
(e)
Government.
10. Which of the following is the main dilemma a
multinational company faces in its global operations?
(a)
Differences
in ethical beliefs and value systems in its home country and the host country
(b)
Balancing
the company’s own economic interest with the interests of the host country
(c)
Differences
in legal controls
(d)
Issue of
transfer pricing
(e)
None of
the above.
11. Which of the following refers to the payments made
to selected stockholders in order for a company to repurchase some of the large
blocks of stock that had been accumulated during a corporate takeover attempt?
(a) Take
over fees (b)
Green mail
(c)
People pill (d)
Golden parachute
(e)
Take over
mail.
12. Which of the following type of boards lay(s) more
emphasis on maintaining cordial interpersonal relations among the members than
on effective decision-making?
(a)
Rubber stamp board (b)
Representative board
(c)
Country club board (d)
Professional board
(e)
Both (b)
and (c) above.
13. The Vertical – Dyad Linkage Theory (VDL Theory) of
Leadership is based on the premise that
(a)
Leader’s
style depends on the maturity level of the subordinates
(b)
Behaviors
can be acquired unlike traits which are generally inherited
(c)
Women are
not inferior to men as leaders
(d)
Leaders
have different relationships with different subordinates
(e)
Leaders
have same relationships with all subordinates.
14. Employees, investors, customers, suppliers, and
society are some of the groups that affect or are affected by a business’s
operations. Collectively, these groups are known as
(a)
Invested parties (b)
Shareholders
(c)
Stakeholders (d)
Stockholders
(e)
Both (a)
and (b) above.
15. Which of the following statements is true?
(a)
Ethical
decisions are much more difficult to make when a person is directly involved in
the situation
(b)
Ethical
decisions are easier to make when a person is directly involved in the
situation
(c)
It does
not make any difference to the ease or difficulty of an ethical decision
whether a person is directly involved in a situation or not
(d)
It is
never difficult to make an ethical decision
(e)
Both (b)
and (c) above.
16. A manager practicing which of the following
management practices, would view the law as an obstacle to be overcome to
accomplish what the company wants?
(a)
Immoral (b) Moral (c) Amoral (d) Ethical (e)
Legal.
17. Selling / Coaching style of leadership are recommended
for people who are characterized as having
(a) Low
ability, low willingness (b)
Low ability, high willingness
(c) High
ability, low willingness (d)
High ability, high willingness
(e)
High
ability, how creativity.
18. Vinay, President of Bharathi Infotech Ltd.,
expresses this view of social responsibility: “Our company believes in helping
the community. The community provides us with employees, favorable tax
benefits, roads, security, and schools for our children. In return, we want to
do our part to help the community solve some of its most pressing problems.
That is why we are helping the community eliminate pollution.” Which of the
following theories describes Vinay’s view of social responsibility?
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(a)
Corporate citizenship (b)
Moral minimum
(c)
Maximizing
profits (d) Stakeholder interests
(e)
Ethical
relativism.
19. Most ethical decisions have which of the following
implications?
(a)
Corporate (b)
Academic (c)
Personal
(d)
Normative (e)
Technical.
20. A person employed by a newspaper or other media
organization to handle complaints from audience members who feel they have been
mistreated and who criticizes in general the performance of the organization's
personnel is called
(a)
Ombudsperson (b)
Critic (c)
Booster
(d)
Facilitator (e)
Mediator.
21. The two-tier board of an organization is
particularly useful in which of the following activities?
(a)
In
ensuring that there is a counterbalance to the power of managers
(b)
For
managers to assert their power
(c)
In
improving operational efficiency
(d)
In
ensuring that employees can determine strategies for the organization
(e)
In
improving marketing efficiency.
22. The theory which propounds that moral structure and
moral ethics are part of business is known as
(a)
Integration view of Ethics (b)
Unitarian view of Ethics
(c)
Metaethics (d)
Applied ethics (e)
Utilitarian
Ethics.
23. In order to ensure ethics in advertisements given
by companies, it is best to adopt
(a) SEBI
regulations (b)
Peer Regulation
(c)
Mandated regulations under various Laws (d)
Self Regulation
(e)
Both (b)
and (c) above.
24. According to which of the following committee
reports, listed companies with either a turnover of over Rs.100 crore or a paid
up capital of Rs.20 crore should set up audit committees within 2 years?
(a)
Kumara
Mangalam Birla Committee report
(b) CII
committee report (c)
Cadbury committee report
(d) OECD
report (e)
WTO report.
25. Which of the following are the important features
of corporate body?
(a)
Perpetual succession (b)
Legal entity status
(c)
Limited liability (d)
Large capital investment
(e)
(a), (b)
and (c) above.
26. Generally, which of the following types of
directors is appointed by the Financial Institutions on the Board of Directors
of a Company?
(a)
Nominee director (b)
Nominal director
(c)
Shadow director (d)
Executive director (e) None of
the above.
27. Which of the following financial frauds committed
while preparing a financial statement can be detected by comparing financial
statements over a period of time, examining unusual journal entries, verifying
supporting sales documents and unusual sales transactions?
(a)
Fictitious
revenues
(b)
Fraudulent
timing differences
(c)
Concealed
liabilities and expenses
(d)
Improper
or fraudulent disclosures or omissions
(e)
Fraudulent
asset evaluations.
28. An organization is considered to be ethical if its
(a)
‘Espoused
values’ are same as the ‘Values in practice’
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(b)
‘Espoused
values’ are far better than the ‘Values in practice’
(c)
‘Espoused
values’ are not entirely the same as the ‘Values in practice’
(d)
‘Espoused
values’ are totally different from that of the ‘Values in practice’
(e)
Both (a)
and (b) above.
29.
Which of the following help(s) employees to resolve
ethical dilemma at workplace?
(a)
Support from the top management (b)
The rules of the organization
(c)
Beliefs and values (d)
A corporate code
(e)
Disciplinary
actions.
30. Which of the following statements about a
corporation is false?
(a)
A
corporation is a perpetual entity
(b)
A
corporation cannot act on its own
(c)
A
corporation is recognized by the law as an individual
(d)
A
corporation can own assets
(e)
A
corporation can sell assets.
END OF SECTION A
<
Answer >
<
Answer >
Section B : Caselets (50 Marks)
•
This
section consists of questions with serial number 1 – 6.
•
Answer all questions.
•
Marks are
indicated against each question.
•
Detailed
explanations should form part of your answer.
•
Do not
spend more than 110 - 120 minutes on Section B.
Caselet 1
Read the caselet carefully and
answer the following questions:
1.
Although
mergers and acquisitions are aimed at economic well being of an organization,
they result in large-scale retrenchment, which raises many ethical questions.
Comment on the ethical aspects of mergers and acquisitions.
(9 marks) < Answer >
2.
Would you
have fired the plant manager, who served the company for 32 years in the manner
it was done in this caselet? What should be the ethical criteria for selecting
people for retrenchment?
(8 marks) < Answer >
Harbour Inc., is an industrial conglomerate that
has grown rapidly through acquisitions. The company has the reputation of
taking over other firms in depressed industries and improving their financial
performance through strict cost controls and large-scale staff reductions.
Richard Helly worked for Heights Inc for 32 years. He was a plant manager in
the compressor division. At the age of 58, Helly had to look for another job.
He was a hardworking man, who devoted his life to the company. After a week of
the acquisition of Heights Inc. by Harbour Inc, Helly was retrenched and he was
given 11 weeks’ severance pay.
Employees in Heights Inc., who retired at the age
of 60 years, were given a pension of about $200 per month; an amount which was
equivalent to the salary for 30 days, multiplied by their years of service; and
medical insurance. But as Richard Helly was retrenched at the age of 58, he got
11 weeks’ severance pay for his service, which deprived him of pension and
medical insurance.
Harbour Inc. laid off 40% of its staff to earn
profits. The employees who were retained had to work twice as hard to retain
their jobs. The company thought that if the older employees were retrenched, it
would save money on the pension and medical insurance. According to Fortune, a
magazine that published a study of the impact of mergers and acquisitions upon
employees of the acquired firm, personal tragedies like Helly’s were very common.
It estimated that the largest of 1990’s 1500 mergers, changed the lives of up
to 22,000 employees.
Usually, about one quarter to half the employees in
the merged organization are directly affected. Some employees are relocated and
some others lose their jobs, status, benefits or opportunities. Some even face
health problems and problems within the family.
Mergers and acquisitions have a human side, which
is never considered by top executives, investment bankers and take-over
lawyers. In another incident Silverline, an industrial machinery manufacturer,
had the reputation of handling the employees of acquired companies roughly.
After taking over Hedge Coal Inc. a mining company, it shut down the corporate
headquarters, decentralized the company, reduced employment in sick units,
shrank benefits and cut down the working capital. Many of the employees were
retrenched. The New Society Journal argued the high human cost was necessary
for sustaining the company’s operations. It justified Silverline’s action by saying
that Hedze Coal Inc., was facing sever problems with operations and lack of
proper management to adopt itself to the changing needs of the market and
competition from new entrants. Silverline’s president said that after taking
over Hedze Coal, its earnings increased.
Caselet 2
Read the caselet carefully and
answer the following questions:
3.
Identify
the reasons for Shaswati’s unhappiness regarding the composition of the board
of directors.
(8 marks) < Answer >
4.
Compare
the board structures of Swamy Electronics Limited and Frasier Inc. Do you think
the composition of the board impacts its performance?
In 1991, Mr. Narayana Swamy, an electronics
graduate, started a new business of marketing an external storage device “magic
pen” that enables PC users to store and carry 1.5 GB data on the move. This
device can be connected to any PC via the USB Port. Initially Swamy purchased a
readymade company registration and renamed it Swamy Electronics Limited. Out of
the 1000 shares issued Swamy owned 900 shares, and his wife Shaswati owned the
remaining 100. Board meetings were never held as per the law. But Swamy and his
wife Shaswati signed all the forms as required by the law with the help of an
auditor.
At this stage, the board structure was of little
importance to Swamy Electronics Limited, since Swamy was the dominant owner-
manager and therefore no board meetings were held.
By 1994, Swamy Electronics Limited prospered and
its auditor Raj Gopal advised restructuring of the capital. Swamy increased his
capital base to 10,000 shares. He offered 5% of these to his employees who
looked after production and marketing. Swamy also invited them to join the
board in recognition of their contribution to the company’s growth.
As the business grew, Swamy concentrated less on
his family and spent most of his time travelling abroad to meet his foreign
clients. Eventually, he and Shaswati were divorced. Swamy tried to dilute
Shaswati’s 10 percent stake at the time of capital restructuring, but failed.
Swamy then started holding board meetings
regularly. He was the Chairman and CEO of the company. He used to meet his two
members of the board to discuss the procurement, production and marketing
aspects of the company. But he single-handedly took decisions on most of the
financial aspects. The board now had three executive directors, which was
dominated by Mr. Swamy.
The first annual general meeting was attended by
the three executive directors, Shaswati and her lawyer. In the meeting,
Shaswati’s lawyer called for the appointment of independent directors to take
care of the interests of minority shareholders. Shaswati also questioned the
practice of ploughing all profits back into the business without giving
dividends to the shareholders.
Swamy wanted his friend Kumar, a Chartered
Financial Analyst, to be appointed as a member of the board. Swamy thought that
Kumar’s experience would be valuable to the board and at the same time assure
the minority shareholders that the board was balanced.
Shaswati was still unhappy about the composition of
the board as Swamy, with 80% of the shares, still dominated the board with the
help of his friend and non-executive director Kumar.
By 1996 Swamy Electronics was finding it difficult
to grow from retained earnings. The company required additional finance to
maintain the present growth rate. At that point, the board decided to invite a
merchant bank to provide venture capital by way of a convertible loan, secured
on the company’s assets and 20 percent equity holding. The bank demanded a seat
on the board in return for the loan.
Now the board had 3 executive directors and 2 non -executive directors
(Kumar and the bank’s representative). By 1998, the business grew three fold
and there were plans to go public. Frasier Inc., a multinational company, which
operated from Tokyo, expressed its willingness to acquire Swamy Electronics
Limited. The negotiations went on for a month and finally a deal was struck,
according to which the MNC would get 60 percent of the equity and the balance
will be retained by Swamy. Swamy would still be the CEO of SF Electronics Ltd.
(formerly Swamy Electronics Ltd.) and he was also appointed to the board of
Frasier Inc., The two executive directors and Shaswati sold their stake to
Frasier Inc.
Frasier Inc. appointed new executive directors for
the subsidiary who also figured on the board. The vice-president of overseas
operations of Frasier Inc., became the new chairman of SF Electronics Limited.
It was a new experience for Swamy - the board meetings
were more professional and dominated by the policies of the parent company.
Swamy as a director of the parent company saw that
the board of Frasier Inc. had only 5 executive directors on the board of 15.
The CEO of Frasier was always kept informed by the board on the various issues
related to the functioning of the company.
Back home, Swamy felt that the parent company was
diverting funds from SF Electronics Limited to other subsidiaries abroad. Swamy
tried to oppose this but was voted-out at the board meeting. Swamy felt that
his interests were being overlooked, so he sold out his 40% stake to Frasier
and walked out of the company.
Caselet 3
Read the caselet carefully and
answer the following questions:
5.
Why does
the fact that the majority owner is a nonprofit make a difference in this case?
(8 marks) < Answer >
6.
Who are
the stakeholders in this case, and what are their interests in a decision to
either sell or keep the stock?
(8 marks) < Answer >
Hershey Food is a well-known manufacturer of chocolate
and candy, selling numerous well -known products under its own brand and other
brand names such as Reese's. Although the stock is publicly traded, the Hershey
Trust, a nonprofit organization, owns over half of the shares. The mission and
major activity of the Trust is to support the Milton Hershey School, which
provides free room, board and education to over 1,000 needy students annually
in Hershey, Pennsylvania.
In the summer of 2002, the Trust, seeing that more
than half of its own net worth (which is called "fund balance" in the
nonprofit world) was tied up in Hershey Food stock, decided to sell its Hershey
Food stock. The Trust's reason for making this move was that it wanted to
diversify its holdings. Initial interest in acquiring the stock came from
Kraft, Nestlé, and Cadbury-Schweppes.
The announcement prompted a wave of criticism. The
major issues that emerged were that selling the company to an outside owner
puts the city of Hershey at risk, and that the Trust does not need to sell the
stock to fulfill its mission. Hershey Foods is the dominant economic force in
the community. While it is a major corporation, it is still mainly a local
company.
Consequently, there has been scrutiny of how the
Board of the Trust came to their decision to sell. One sign of the controversy
has been that the Attorney-General of Pennsylvania decided to challenge the
sale (during his election campaign to be Governor). Another is that the alumni
of the school have been organizing to fight the sale. There have been public
demonstrations by workers. The web of relationships between the players is
being stretched by the possibility of a sale of the Food Corporation.
END OF
SECTION B
Section C : Applied Theory (20
Marks)
•
This
section consists of questions with serial number 7 - 8.
•
Answer all questions.
•
Marks are
indicated against each question.
•
Do not
spend more than 25 -30 minutes on section C.
7.
Sagar
Chemicals limited (SCL) is a public limited company run by Mr.Vishaal Singh and
his family. The capital of the company consists of equity from shareholders and
loans from financial institutions and other creditors. For efficient running of
the organization, the company’s management wants to introduce a corporate
governance mechanism. How should the board of the company be constituted?
(10
marks) < Answer >
8.
When is a
takeover bid labeled ‘hostile’? What are the popular anti-takeover measures
taken by companies to protect themselves from unruly predators?
(10
marks) < Answer >
END OF
SECTION C
END OF
QUESTION PAPER
Business
Ethics & Corporate Governance (MB321) : October 2004
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Section A : Basic Concepts |
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1. |
Answer : |
(c) |
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Reason :
This approach is referred to as ‘Teleological approach’. |
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2. |
Answer : |
(b) |
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Reason :
‘Nomination committee’ carries out the selection of directors in the
company. |
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3. |
Answer : |
(a) |
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<TOP> |
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Reason : |
The principal recommendations of the Cadbury
committee covered ‘The board of directors and their |
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role’. |
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4. |
Answer : |
(d) |
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Reason : |
‘ Maximization of shareholder value’ should be
the governing |
objective of a company. |
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5. |
Answer : |
(b) |
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<TOP> |
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Reason : |
Business ethics can be practiced when the
‘Maximization of profits is sacrificed’ |
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6. |
Answer : |
(c) |
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<TOP> |
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Reason : |
Applied ethics deals with specific often
controversial moral issues such as abortion, female feticide |
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and infanticide, displacement
of tribal people due to huge hydro electrical projects, cloning, testing |
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drugs on animals etc. |
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Business too face many
controversial moral issues such as misleading advertising, insider trading,
bribery and corruption etc.
(a)
Meta
ethics is the study of the origin and meaning of ethical concepts.
(b)
Normative
ethics is the branch of ethics that guides human conduct.
(c)
Virtue
ethics is concerned with attaining these dispositions of character or
personality that an individual desires in himself or others.
(e)
Teleological
ethics states that an action is considered morally correct if the consequences
of that action are more favorable than unfavorable.
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7. |
Answer : |
(d) |
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<TOP> |
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Reason :
In promoting Products, a Marketing Manager's decision depends on ‘Long
term Consumer interest’. |
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8. |
Answer : |
(d) |
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<TOP> |
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Reason :
Selecting non-executive directors to the board is not the
responsibility of the corporate Audit |
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committee. Some of the functions of a corporate
audit committee are: |
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To discuss with independent
auditors any problems that they experience in completing the |
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audit. |
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To review the interim and final accounts in toto |
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To inform the board about the
effectiveness of internal controls and the quality of financial |
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reporting as pointed out by the independent
auditors. |
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To make recommendations regarding the audit fee,
selection and replacement of auditors. |
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9. |
Answer : |
(c) |
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<TOP> |
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Reason :
Corporate conscience is best decided by ‘Board of directors’. |
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10. |
Answer : |
(a) |
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Reason : |
‘Differences in ethical beliefs and value systems
in its home country and the host country’ is the main |
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dilemma a multinational company faces in its
global operations. |
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11. |
Answer : |
(b) |
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<TOP> |
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Reason : ‘Green mail’ refers to the payments made to
selected stockholders in order for a company to repurchase some of the large
blocks of stock that had been accumulated during a corporate take over attempt.
(a)
It refers
to fees paid during the process of Take over.
(c)
It is a
defensive strategy for warding off hostile takeovers.
(d)
Golden
parachutes are agreements made by a company to compensate executives with
bonuses and benefits if a merger
or demotion displaces them.
12.
Answer
: (c)
Reason : The country club board
lays emphasis on maintaining cordial interpersonal relations. Concern for
effective decision-making takes a back seat.
13.
Answer : (d)
Reason : The Vertical – Dyad Linkage Theory (VDL
Theory) of Leadership is based on the premise that ‘Leaders have different
relationships with different subordinates’.
14.
Answer
: (c)
Reason : Employees, investors,
customers, and suppliers are collectively known as ‘Stake holders’. The
stakeholders of an organization are all those who participate in some way in
the activities of the organization. The stakeholders of a company can be as
follows:
Any group of people who have a stake in the
business
Those who are vital to the survival and success of the organization Any
group that is affected by the activities of the organization.
15.
Answer
: (a)
Reason :
Ethical decisions are much more difficult to make when a person is
directly involved in the situation .
16.
Answer
: (c)
Reason : The Manager is
practicing ‘Amoral’ management. Amoral is beyond morality having no moral
principles.
(a)
Immoral
refers to contrary to accepted moral principles.
(b)
Moral
refers to the principles of right and wrong
(d)
It is a
system of moral principles governing the conduct of individuals and groups
(e)
It refers
to set of rules established to govern the behavior of individuals within the
society:
17.
Answer
: (b)
Reason : Selling/Coaching style of leadership are
recommended for people who are characterized as ‘Low ability, high
willingness’.
18.
Answer
: (a)
Reason : Vinay’s view of social responsibility is
described by ‘Corporate citizenship theory’. It proposes a higher level of
ethical consciousness and redefines the mission of business in society.
(b)
Moral
minimum theory does not describe Vinay’s view of social responsibility.
(c)
Maximizing
profits will not describe Vinay’s view of social responsibility
(d)
Stakeholders
interests will not describe Vinay’s view of social responsibility
(e) Ethical relativism argues that there is no
universal set of principles of which to judge morality.
19.
Answer
: (c)
Reason :
Most ethical decisions have ‘Personal’ implications.
20.
Answer
: (a)
Reason : ‘Ombudsman’ is the
person employed by a newspaper or other media organization to handle complaints
from audience members who feel they have been mistreated and who criticizes in
general the performance of the organization's personnel.
21.
Answer
: (a)
Reason : The Two-tier board
addresses the concerns for separating the executive management from
non-executive management from non-executive directors. This structure has two
separate boards: the non-executive supervisory board and the executive
management board.
The two-tier board of an
organization is particularly useful in ensuring that the there is a
counterbalance to the power of managers.
22.
Answer
: (b)
Reason : The theory which propounds that Moral
Structure and Moral Ethics are part of business is known as ‘ Unitarian view of
Ethics’.
23.
Answer
: (d)
Reason : In
order to ensure Ethics in Advertisements given by companies it is best to adopt
‘Self Regulation’
24.
Answer
: (b)
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Reason : According
to CII committee report companies with either a turnover of over Rs 100 crores
or a paid-
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up capital of Rs 20 crore should set up audit
committees within two years. |
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Audit committees should consist
of at least three members, all drawn from a company’s non- |
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executive directors, who should
have adequate knowledge of finance, accounts and basic elements of |
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company |
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25. |
Answer : |
(e) |
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Reason :
‘Perpetual succession’, ‘ Legal entity status’ and ‘Limited liability’
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Corporate body. |
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26. |
Answer : |
(a) |
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Reason :
‘Nominee Director’ is appointed by the Financial Institutions on the
Board of Directors of a Company |
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27. |
Answer : |
(a) |
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Reason :
Fictitious revenues are those, which are shown in the books but are
not actually earned. The method |
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by which this takes place is to
book non-existent revenue and simply creating journal entries by |
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debiting accounts receivable
and crediting sales. Sometimes false sales are shown to existing |
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customers. Smart
accountants select transactions with
a few major
customers, such as
large |
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organizations and governmental agencies that they
know will be difficult to confirm. |
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Fictitious revenues can be detected by comparing
financial statements over a period of time, |
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examining unusual journal
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transactions. |
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Answer : |
(a) |
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Reason :
Espoused values refer to a company’s statements credos and code of
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organizations purpose and ethical perspective. |
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An organization is considered to
be ethical if its ‘Espoused values are same the ‘Values in the practice’.
(b)
An
organization is not considered to be ethical if its ‘Espoused values’ are far
better than the ‘Values in practice’
(c ) An organization is not considered to be ethical
if its Espoused values’ are not entirely the same as the ‘Values in practice’
(d)
An
organization is not considered to be ethical if its ‘Espoused values’ are
totally different from that of the ‘Values in practice’.
29. Answer
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Reason : ‘Beliefs and values’ help employees to
resolve ethical dilemma at workplace.
30. Answer
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Reason : ‘A corporation cannot act independently on
its own’ is false about a corporation.
Section B : Problems
1.
Mergers
and acquisitions seem to be justified from an economic point of view, as they
are aimed at using the available resources in an efficient way. But they raise
many ethical questions as they disrupt the existing arrangements and pose
hardships to people who lose their jobs. Many mergers and acquisitions result
in organizations with excess manpower and capacities. In such cases, the
management is forced to downsize the staff and in this process, unproductive
assets may be sold out and excess manpower retrenched. The ethical dilemma
occurs when one tries to weigh the benefits of mergers and acquisitions against
the problem caused by them.
Economic
analysis:
According to the microeconomic theory, market forces should not be relied on to
achieve a balance between economic and social performance gives a definite
ethical content. It is true that in many of the merged companies, most of the
employees lose their jobs due to which they face many problems, as in the case
of Richard Helly, who had to search for another job at 58, and was deprived of
pension and medical insurance by his employer.
Legal analysis: A democratic society can establish its own rules and if people and
organizations follow those rules, employees will be treated as justly as
possible. Workforce reduction and closing down of plants are unpleasant, but it
was never felt that they are so harmful to the people involved that a law to
prohibit them is required. If they cause major problems, a law can be passed to
deal with the situation.
<TOP>
2.
The
number of years of service of an employee may not be a criterion for evaluating
the ethical nature of the retrenchment decision. But the way a person is
deprived of his pension because of retrenchment seems to be unethical. It is
unethical for a company to deny an employee his due share of the provident
fund, for his services to the organization. This act is unethical because it
aims to gather profits for the shareholders at the cost of the employee who has
32 years of devoted service.
According to normative theory the
choice between “right” and “wrong” should be based on the concept of “the
greatest good for the greatest number”. When Harbour Inc acquired Heights Inc
it should have developed a rule for workforce reduction and plant closings on
the basis of the above principle. By doing so, it would have acted in a fair
and consistent manner towards the employees of Hieghts Inc.
An ethical criterion for
retrenchment would be remove those employees who contribute the least towards
the long-term owner value. Considering age, gender or years of service as
criteria for retrenchment amounts to ignoring the efficiency of an employee in
contributing towards the long-term owner value.
If Harbour Inc wants to retrench
the older employees, it should give them a compensatory package including the
benefits of pension, medical insurance and an amount, so that the employees who
are above 50 need not search for a job at that age.
<TOP>
3.
Shaswati
may be unhappy with the number of executive directors on the board. After her
divorce from Swamy, she might be thinking that Swamy may take decisions to
dilute her stake in the company. She might also be thinking that as a minority
stakeholder her voice may not be heard on the board which is dominated by Swamy
and his friends. Therefore, she might want to have more number of outside or
independent directors who can question the decisions taken by Swamy.
<
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4.
Initially
Swamy electronics started as a family owned company where swamy and his wife
held 100 percent stock in the company. The board was constituted to satisfy the
Laws and it functioned as a rubber stamp to ratify the decisions of the board.
Thus Swamy Electronics initially had an all-executive board and then it shifted
to a majority executive board. But on the other hand Frasier Inc., had a
majority outside board, it also had members of its subsidiaries working on the
board. It is also clear that every decision taken by Frasier was questioned by
the board, which never happened at Swamy Electronics.
Yes, the
composition of the board will definitely enhance its performance. If a board
has non-executive directors, who are experts in different fields they can
evaluate the performance of the management from various angles and advise them
appropriately.
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5.
If the
majority owner was a profit-making enterprise, it is less likely that such a
move would be challenged as severely. In general, nonprofits are expected to
pay more attention to fulfilling their missions than to maximizing their value,
which for the Trust means managing the operations of the School. Although it
may be good financial management for the Trust to reduce the weight of Hershey
Food Company stock in its overall portfolio of assets, it doesn't seem to be as
necessary for the overall governance of the Trust and the achievement of its
mission. Similarly, nonprofits are expected to monitor the needs of different
communities and populations they serve. The
Trust doesn't seem to have done this very
effectively.
<TOP>
6.
There are
numerous stakeholders here. The public stockholders (besides the Trust) are
probably interested in a sale because it will probably boost the value of the
stock. The workers at the Food Company and the community of Hershey are
concerned about the loss of local control. Marketing managers of the Food
Company may be concerned about how to manage the various Hershey brands if they
are wrapped up in a larger company. The alumni of the school are concerned about
the traditions of the school. The customers of the company probably would not
expect to see that much of a difference, but the suppliers would probably
expect to incur some difficulties if control of the Food Company leaves local
control and goes to a national or global company.
< TOP >
Section C: Applied Theory
7.
Efficient
functioning of Sagar Chemicals requires an efficient board that should consist
of executive directors, non-executive directors, nominee directors, alternative
directors and shadow directors. Shareholders are the owners of the
organization. As each and every shareholder cannot become the member of the
board, executive directors are appointed on behalf of the shareholders and they
protect the rights of the shareholders. Some executives should also be
appointed to the board to facilitate decision-making with regard to the
operations of the firm. The employees of the organization are the executive
directors. According to the company law, executive directors are responsible to
the shareholders. SCL should, therefore, nominate employees who can take up the
responsibilities of the executive director, after which the shareholders can
elect the most suitable candidate.
Financial Institutions that
financed SCL should also be given a chance to appoint their representatives to
the board. Such directors are known as nominee directors. These nominee
directors look after the interests of the principals, which usually are the
financial institutions like banks and mutual funds. To safeguard the interests
of stakeholder groups, representative directors are appointed to the board of
directors.
<TOP>
8.
Hostile
Takeovers are those that elicit opposition from the boards or employees of the
target company. Some of the popular ways in which companies can use to protect
themselves from unruly predators are.
•
Poison
Pills
•
Greenmail
•
Golden
parachute
•
People
pill
•
Sandbag
‘Poison pill’ is an anti-takeover device used by a company’s management to make a
takeover prohibitively expensive for the bidders. The company under target
changes the ‘Articles of Association’ so that a group of shareholders has
special rights, which are evoked by a takeover. These rights include, special
voting rights, and the right to buy and sell preferred stock at highly
favorable prices (at times below market price). These rights can be exercised
only when someone is attempting a takeover to make the takeover prohibitively
expensive. Properly designed poison pills can make a company bid- proof or
shield the company from the threat of takeovers. ‘Poison pills’ are prohibited
in Britain by the Takeover code because they prevent open competition between
the bidders for shares and the bidders who are favored by the management of the
target company succeed in their takeover attempt. But devising Poison pills is
considered legal in the United States of America. When companies face hostile
takeovers, the shareholders have the right to buy or sell shares to their own
company or potential acquirer at a non-market price. The use of poison pills is
ethical if they are designed to protect the shareholders against unwanted
takeover bids.
Greenmail occurs
where a potential takeover agent purchases stock in a company. After the
purchases have totaled five percent, the agent must announce his intention to
takeover the company, if that is the intent. The stock price goes up in
anticipation of the takeover battle. The takeover agent ends up selling the
shares back to the company for this increased price or somewhat higher
negotiated price, when the attacked company struggles to thwart the takeover.
Management of the target company sends greenmails to prevent a shareholder from
taking over the company by himself or by teaming up with any other competing
company. Greenmails are considered unethical because the target company may be
forced to incur debts to raise funds to finance the buyback of the shares at a
premium price. Generally, the management is responsible for this unethical
practice as they usually send greenmails financed by owners' money without
their knowledge. The acts of the potential bidder are also considered unethical
if he increases his stake in anticipation of getting a greenmail from the
company. The use of
greenmail
is unethical because instead of using a company’s money productively, it uses
the money to avert the takeover. However greenmail is not inherently unethical
as it is not a form of extortion where a business is forced to pay a price.
Golden parachutes: When a company is taken over, many top executives are likely to lose
their jobs. So to discourage an unwanted takeover attempt, a company gives
lucrative benefits to its top executives- benefits that are awarded to those
executives who lose their jobs after a takeover. Benefits include stock
options, bonuses, and severance pay, etc. Such Golden parachutes can run into
millions of dollars and can cost the firm a lot of money. Another quality of
golden parachutes is that they act as a deterrent to anti-takeover tactics. The
presence of a parachute allows management to evaluate a takeover bid more
objectively. Without a golden parachute provision in place, executives might
selfishly implement costly defensive tactics to save their jobs, regardless of
what is in the best interest of shareholders. Whether a golden parachute
dissuades a takeover or not, it can benefit a corporation by attracting top
executives, thwarting costs associated with takeovers and promoting stability.
People pill is a defensive strategy for warding off a hostile takeover. In this
case management threatens that, in the event of a takeover, the entire
management team will resign. This is a very effective method if they are a good
management team, in place, the loss of which would harm the company. But if the
managers act in their own interest rather than the company's long-term value,
then they are acting unethically.
Sand bag is
another tactic used by management to stop a takeover attempt. The company
stalls the attempts in the hope that another more favorable company will try to
take them over. Management should not waste too much of time in trying to find
a more favorable company.
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