Mb321 - April 04

Question Paper Business Ethics & Corporate Governance (MB321) : April 2004 Section A : Basic Concepts (30 Marks) • • • • 1.

Which of the following statements is/are decisive in determining whether or not to study business ethics? (a) (b) (c) (d) (e)

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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.

Business managers don’t need to study ethics in order to know how to treat employees, shareowners, and customers Business and ethics simply don’t mix. In the final analysis, self-interest represented by profit overrides the interests of employees, customers, and communities. Opinion and sentiment get in the way of efficient business decision-making Ethical concerns are as unavoidable in business as are concerns of marketing, accounting, finance, and human resources. Formal study of business ethics helps address these concerns so that decisions of right and wrong may be made deliberately and conscientiously The answers to ethical questions are clear-cut enough; all business people already know right from wrong Both (a) and (b) above.

Which of the following are specially designed for suppliers, contractors and buying agents to certify that they abide by the company’s stated standard? (a) Purchase orders (c) Circulated letters (e) Management Philosophy statements.

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(b) Compliance certificates (d) Corporate credos

Workers believe that they are justified and it is customary for the organization to compensate them more, before a holiday or festival. Which of the following principle supports this statement? (a) Hedonist principle (c) Distributive justice principle (e) Might equals right principle.

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(b) Conventionalist principle (d) Categorical imperative principle

Which of the following Sections of Companies act defines a managing director as an individual who is entrusted with substantial powers of management?

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(a) Section 44(4) (b) Section 221(4) (c) Section 2(26) (d) Section 309(3) (e) Section 407(2). < Answer > Boards play a major role in guiding the strategic decision making process of the company. Which of the following strategy of board is concerned with decisions regarding the structure of the company and the business that it should enter? (a) Systematic level strategy (b) Implementation strategy (c) Structure and portfolio strategy (d) Accountability strategy (e) Profit maximization strategy. < Answer > Which of the following unethical practices is possible when management buy-out is attempted? (a) Management may attempt to bring down the share price and buy-out the company at cheaper price (b) Management may attempt to push the share price up and buy-out the company at cheaper price (c) Management may leak confidential information for their benefit during the buy-out (d) Management stalls the attempt in the hope that another more favorable company will try to take over them (e) Both (a) and (c) above. < Answer > 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 (e) Fraudulent asset evaluations. 8.

(d) Improper or fraudulent disclosures or omissions < Answer >

Which of the following is not an objective of ethical audit? (a)

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To determine the extent to which the decisions taken at all the levels of an organization are towards maximizing long-term ownership value and how well they are framed towards achieving distributive justice (b) To help in scrutinizing the basis on which accounts are drawn and also evaluate whether management has reliable information for running the business (c) To Measure business conduct against the varied moral or religious standards of a community in which it operates (d) To help the business establish ethical conduct (e) To improve the quality of governance by evaluating the performance and ensuring that financial information is both available and reliable. < Answer > Which of the following is not a rational assumption that managers make to justify their behavior in resolving ethical dilemmas? (a) Their actions are within reasonable ethical and legal limits and hence are not illegal or unethical (b) Their actions are aimed at the individuals or corporation’s best interest (c) Their actions will not be disclosed or published and hence there is no danger to them or their company (d) They will be protected by their company (e) They will be protected by their community.

10. In which of the following corporate governance models do financial institutions have a major say in governance mechanism? (a) Anglo-American model (c) Japanese model (e) All of the above.

(b) German model (d) Indian model

11. Which of the following judge the ethical nature of an organization based on the 'espoused values' and 'values in practice'? I. Theory of corporate moral excellence II. Ethics and stakeholders theory III. Ethics and corporate governance. (a) Only (I) above (c) Only (III) above (e) (I), (II) and (III) above.

(b) Philanthropy (d) Stake-holding

(e) Ethical audit.

14. Priya, Corporate Ethics Officer of Deccan Corporation, expresses this belief: “We should be judged by our company’s announced views of what is right and wrong. We have a right to decide what behavior is acceptable or unacceptable, and we should be judged based upon how we live up to the standards we set for ourselves.” Priya’s views show a preference for which of the following ethical theories? (a) Ethical fundamentalism (c) Ethical relativism (e) Kantian ethics.

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(b) Stakeholder concept (d) Profit-maximization in the short-term

13. Altruistic action, such as donating money, time, goods or services to charitable, humanitarian, or educational institutions is known as (a) An ethical dilemma (c) Social auditing

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(b) Only (II) above (d) Both (I) and (II) above

12. Corporations operating at which level of ethical consciousness seek to achieve certain social objectives such as promoting community health programs, participating in job creation, employing handicapped people, and self-realization of employees as well as financial success of the company? (a) Anything for profit (c) Corporate citizenship (e) Profit-maximization in the long-term.

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(b) Utilitarianism (d) Corporate citizenship

15. 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

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attempt? (a) Take over fees (c) People pill (e) Take over mail.

(b) Green mail (d) Golden parachute

16. Which of the following includes short and long-range studies of the internal requirements of the company and the external supply markets? (a) Purchase feedback (c) Purchase research (e) Purchase schedule.

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17. Which of the following approaches to ethical decision-making will yield an unethical decision? (a) (b) (c) (d) (e)

Apply existing laws to the situation. Apply the Golden Rule to the situation Strive to treat people impartially and consistently Remain within the letter of the law while intending to mislead people Both (a) and (b) above.

18. Today, virtually all major corporations have written codes of ethics. Which of the following is most likely not a purpose for having a written code of ethics? (a) (b) (c) (d) (e)

Increase public confidence in a firm or its industry Help managers respond to problems arising from unethical or illegal behavior Control the private behavior of employees Both (a) and (c) above None of the above.

19. Which of the following says that business and morality are inter-related and are guided by external factors like government, market system, law, and society? (a) Unitarian view of ethics (c) Integration view of ethics (e) Utilitarian theory.

(a) Egoism (b) Utilitarianism (e) Both (a) and (c) above

(c) Altruism

(a) Speculation Theft (e) Deceptive information.

(b) Bribery

(c) Coercion

22. An organization is considered to be ethical if its ‘Esposed values’ are same as the ‘values in practice’ ‘Esposed values’ are far better than the ‘values in practice’ ‘Esposed values’ are not entirly the same as the ‘values in practice’ ‘Esposed values’ are totally diferent from that of the ‘values in practice’ Both (a) and (b) above.

23. A multinational company operating from a developed country is said to be ethical if it adopts The standards of the home country to frame its policies The standards of the host country to frame its policies Uniform standards in all countries of operations The best of both the home and the host country standards to frame the policies The industry norms.

24. Which of the following statements about a corporation is false? (a) (b) (c)

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A corporation is a perpetual entity Corporations cannot act independently on their own Corporations are recognized as individuals under law

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(d) Both (a) and (b) above < Answer >

21. Which of the following is not considered as a form of unethical behavior in the market system?

(a) (b) (c) (d) (e)

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(b) Separation view of ethics (d) Normative theory

20. According to which of the following consequentiality theory/theories an action is morally right if the consequences of that action are more favorable than unfavorable to everyone except the individual?

(a) (b) (c) (d) (e)

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(d) (e)

Corporations can own assets Corporations can buy and sell assets.

25. The maximum remuneration a managing director of a company can be paid is (a) 4% of the net profit (b) 10% of the net profit (c) 5% of the net profit (d) 15% of the net profit (e) Unlimited. 26. Which of the following reasons accounts for utilitarianism's dominance among policy makers and administrators? (a) (b) (c) (d) (e)

It seems obvious that policy questions should be judged by results and consequences Policy experts at all levels are focused on results and getting things done Efficiency is simply another word for maximizing happiness Policy experts focus on the collective or aggregate well All of the above.

27. Which of the following statements about the shareholders of a corporation is/are not true? (a) (b) (c) (d) (e)

Shareholders’ liability is limited to the amount of their initial equity capital in case the business fails Shareholders can hold the directors accountable for their actions Shareholders can nominate or elect directors to govern the corporation Shareholders have unlimited liability in case of business failure Both (a) and (c) above.

28. Which of the following is not a function of the corporate audit committee set up by the board? To discuss with independent auditors about the problems they experience in completing the audit To review the interim and final accounts 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.

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(a) (b) (c)

29. Which of the following branches of ethics deals with specific controversial issues like capital punishment, cloning and nuclear war? (a) Meta ethics (d) Virtue ethics

(b) Normative ethics (e) Teological ethics.

(c) Applied ethics

30. The two-tier board of an organization is particularly useful in which of the following activities? (a) (b) (c) (d) (e)

In ensuring that there is a counterbalance to the power of managers For managers to assert their power In improving operational efficiency In ensuring that employees can determine strategies for the organization In improving marketing efficiency. END OF SECTION A

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Section B : Problems (50 Marks) • • • • •

This section consists of questions with serial number 1 – 7. Answer all questions. Marks are indicated against each question. Detailed workings 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 organization, they result in large-scale retrenchment, which raise many ethical questions. Comment on the ethical aspects of mergers and acquisitions. (9 marks) < Answer >

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Would you have fired the plant manager, who served the company for 32 years in the manner it was done in this case? 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 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 a 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, 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, said that 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 other 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 banker and takeover lawyers. Silverline, an industrial machinery manufacturer, had the reputation of handling the employees of acquired companies roughly. After taking over 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 companies 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: What is the ethical dilemma faced by George? 3. (3 marks) < Answer > 4.

What should be an ethical solution to the lay off problem presented in the case? (7 marks) < Answer >

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“The Company cares for its employees as long as they perform.” Comment. (8 marks) < Answer >

Sangami constructions is medium-sized and moderately successful family-owned construction company started by Aditya Jain in 1964. In 1988, Mahaveer Gupta (who is married to Sangami, daughter of Aditya Jain) took over the company as its CEO. Mahaveer wanted to make the company more professional even if it required hiring people from outside his family. In his first move towards achieving his objective, Mahveer appointed Jomy Goerge, a graduate from IIM Ahmedabad as the Chief Financial Officer. Goerge was the first non-family member to hold such a position and to be nominated to the executive committee. When Mahveer announced his decision to appoint George as the CFO, some family members expressed their concern about George’s ability to ‘fit with the company culture’. But Mahveer supported George strongly. Soon George became a confidant of the CEO. He consulted George before taking any decision. In 2001, the company for the first time announced its plans to “right-size” the organization. George also felt that this move would help the company improve its financial health. Hence, George was entrusted the job of determining how the company should make its lay-off decisions in an ethical manner. George recommended a lay-off plan, which would be based on the annual performance of employees. As per the plan, each department head would submit a list of employees ranked on the basis of their average scores from the last 4 appraisals. George also instructed the departmental heads to state which employees they valued in case two employees received the same scores. According to George’s plan, once the scores were ready, the executive committee (in consultation with the departmental heads) would work out an acceptable cut off point. Employees with scores below the cut off would be laid off. With in a week George had received appraisal scores of employees from all the departments. While he was going through those reports he was wondered why the three senior employees had not been assessed. When George enquired the departmental heads about this, they told him that those employees were with the organization from its inception and they were not formally appraised in the last 4 years. To his surprise, George learnt that in 1998, Mahaveer had obliged to the requests of the senior employees to exempt them from formal performance appraisal. When George brought up this issue in an informal talk with Mahveer, he was told that he could lay-off those employees, as they were not performing well. George asked Mahaveer whether these employees were conveyed formally about their performance. Mahaveer responded that they did not know that and added that there would not be any legal suits even if they are laidoff. Mahveer left the decision regarding these employees to George saying “the company cares for its employees s long as they perform”.

Caselet 3 Read the caselet carefully and answer the following questions: 6.

Critically comment on the various ethical issues that biological projects like Stem cell research have raised. (8 marks) < Answer >

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Is it ethical to allow patenting of biological technologies like stem cell research, which are capable of curing several diseases?

(7 marks) < Answer > Since embryonic stem cell research involves the destruction of the human embryo, it has raised ethical concerns all over the world. Basically, stem cells are undifferentiated cells bordered by a margin of differentiated cells. These stem cells are incipient cells that do not have any traits of a specific organ cell, but are the precursors to normal organ cells. There are three types of stem cells: endoderm, mesoderm and ectoderm. These cells can in turn grow in to cells that form gut, bone marrow, cartilage, muscle, kidney, liver etc. Stem cells can be derived from a variety of sources such as the human embryo, fetal tissues, umbilical cord, blood bone marrow etc. Stem cells can be successfully used for curing a range of degenerative diseases like cancer, diabetes, cardiac problems etc. Currently, Stem cell research is being used for understanding the developmental biology of the embryo, which helps to understand the reasons behind defective births, infertility and so on. In developing nations like India, where assisted reproduction techniques are considered legitimate, embryos sourced from the fertility clinics are permitted for usage by the research, on the condition that the researchers seek approval from the donors. The government is trying to freeze the possibility of illegal trading or exporting of the human embryos. Another major issue raised by stem cell research concerns the patenting of stem cells. Right from the beginning of the research on embryonic stem cells by James Thomson at Wisconsin, stem cells along with their production techniques and replication methods were applied for patents to the US patents office. This office has already granted patents to Aastrom Biosciences. These patents protect various fundamental technologies pertaining to stem cells and ex-vivo gene therapy. Patent rights were issued even for the replication and genetic modification of human stem cells and the procedure for growing human hematopoietic stem cells, which are the source of all blood and immune cells. END OF SECTION B

Section C : Applied Theory (20 Marks) • • • •

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This section consists of questions with serial number 8 - 9. Answer all questions. Marks are indicated against each question. Do not spend more than 25 -30 minutes on section C.

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 want to introduce a corporate governance mechanism. How should the board of the company be constituted? (10 marks) < Answer >

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“Unethical conduct is a burden on the corporation and high ethical standards are assets”. What benefits can an organization gain by being ethical? Discuss. (10 marks) < Answer >

END OF SECTION C END OF QUESTION PAPER

Suggested Answers Business Ethics & Corporate Governance (MB321) : April 2004 Section A : Basic Concepts 1.

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Answer : (c) Reason : Business ethics studies the moral justification of economic systems. It studies the moral justification of the system’s structures and practice. The study of business ethics helps the individuals in addressing the ethical concerns. Answer : (b) Reason : A Corporate code refers to those policy statements that lay down a company’s ethical standards. They are designed to govern the conduct of the employees. It enhances the clarity of strategy, better decisionmaking, clearer communication and ease in delegation and inspires to have a greater commitment and loyalty for organization. Compliance certificates are designed for suppliers, contractors and buying agents to certify that they abide by the company’s stated standards. Answer : (b) Reason : According to ‘Conventionalist’ principle workers believe that they are justified and it is customary for the organization to compensate them more before a holiday or festival. Answer : (c) Reason : Section 2(26) of Companies Act defines a managing director as a individual who is entrusted with substantial powers of management Answer : (c) Reason : Structural and portfolio strategy of a board is concerned with decisions regarding the structure of the company and the businesses that it should enter in to. The board addresses the issues like what changes can be done in the structure of the company to achieve the growth aspirations of the board. Answer : (a) Reason : Management Buyouts are a kind of takeover in which the managers of the target business make the bid. When successful in the management buyout they can convert the company into a private company and at a later date, bring it back to market to market to make substantial profits. Answer : (a) Reason :

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Fictitious revenues are those, which are shown in the books but are not actually earned. The method by which this takes place is to book non-existent revenue and simply creating journal entries by debiting accounts receivable and crediting sales. Sometimes false sales are shown to existing customers. Smart accountants select transactions with a few major customers, such as large organizations and governmental agencies that they know will be difficult to confirm.

Fictitious revenues can be detected by comparing financial statements over a period of time, examining unusual journal entries and verifying, supporting sales documents and unusual sales transactions. Answer : (c) Reason : The main purpose of an ethical audit is to check the actions of a firm, which are directed at maximizing long-term owner value and the extent of distributive justice. It is often believed that an ethical audit measures business conduct against the varied moral or religious standards of a community. But this is not true, as it measures a businesses standards and procedures against principles of maximizing owner value, distributive justice. The main objectives of an ethical audit are summarized below: •

To determine the extent to which the decision taken at all the levels of an organization are towards maximizing long-term ownership value and how well they are framed towards achieving distributive justice.

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To help in providing a critical assessment of how well a business is actually run by systematically evaluating its business practice.

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To help in scrutinizing the basis on which accounts are drawn and also evaluates whether management has reliable information in running the business.

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To help businesses undergo major alterations like restructuring,. Ethical audits are important for investigating into acquisitions or restructuring operations.

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To determine the type of training necessary for the employees if the objectives and standards of business are either misunderstood or not properly implemented by them. An ethical measure to the effectiveness of such training.

To help in establishing ethical conduct of business and this helps in attracting valuable investments. Answer : (e) Reason : According to Gelleraman, a manager uses four major rationalizations. There are: • • •

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Their actions are within reasonable ethical and legal limits and hence are not illegal or unethical. Their actions are aimed at the individuals or corporations best interest. Their actions will not be disclosed or published and hence there is no danger to him or his company.

He will be protected by his company. Answer : (c) Reason : In the Japanese model of corporate governance, the financial institutions have a major say in the governance mechanism. The shareholders, along with the banks, appoint the members on the board. In this model even the president is appointed on the basis of a consensus between the shareholders and the banks. Answer : (a) Reason : The theory of corporate moral excellence focuses on two aspects: Corporate culture and Ethical behavior. Analysts believe that an organization culture has an impact on the behavior of its employees. Culture is based on the values of an organization. According to Deal and Kennedy, “Values produce a sense of direction for employees and help to guide and control their day-to-day behavior”. Corporate values can be classified as: Espoused Values, Values in Practice. Answer : (c) Reason : “Corporate Citizenship,” proposes a higher level of ethical consciousness and redefine the mission of business in society. Entrepreneurs operating on this level would seek to achieve certain social objectives such as promoting community health, participating in job creation, employing handicapped people, and self-realization of employees as well as financial success of the company. Answer : (b) Reason : Altruistic actions, such as donation money, time and goods or services to charitable, humanitarian, or educational institutions is known as ‘ philanthropy’. ‘Philanthropy’ refers to the desire to help mankind. (a) Ethical dilemmas by their nature involve a range of actions and their corresponding consequences. (c) Social audit is a process of measurement of firm’s social responsiveness. (d) The stake holders of an organization are all those who participate in some way in the activities of the organization (e) An ethical audit assesses a businesses structure, procedures, systems and policies. Answer : (c) Reason : Priya’s view shows preference to the theory of ‘Ethical relativism’. According to ‘Ethical relativism theory’ there is no universal set of principles by which to judge morality. Each society has its rules and it is inappropriate to compare the ethical rules of one society with that of another. Relativism cannot pass judgment on the actions of societies other than their own (a) Priya’s view does not show preference to Ethical fundamentalism. (b) Utilitarianism: An action is morally right if the consequences of that action are more favorable than unfavorable to everyone (d) Corporate citizenship proposes a higher level of ethical consciousness and redefines the mission of business in society (e) These ethical theories were proposed by ‘Kant’ Answer : (b)

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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) (c) (d)

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It refers to fees paid during the process of Take over. It is a defensive strategy for warding off hostile takeovers. Golden parachutes are agreements made by a company to compensate executives with bonuses and benefits if a merger or demotion displaces them.

Answer : (c) Reason : ‘Purchase research’ involves studying the present trends regarding the cost of various input materials and also that of the general economic conditions, industrial conditions and national and international developments that may be of importance to the organization.

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(a) It refers to the feedback given after the purchase of materials. (b) It refers to the study carried over before going for a purchase. (d) It refers to the requirements of the purchase (e) It refers to the schedule prepared for purchase of materials. (d) Remaining within the letter of the law while intending to mislead people approach to ethical decisionmaking will yield an unethical decision. (d) Every organization has its own corporate code. Corporate codes reflect the purpose of the company and guide the employees to behave in an ethical manner. A corporate code refers to policy statements that lay down a company’s ethical standards. Controlling the private behavior of employees’ is not likely the purpose for having a written code of ethics (c) To identify the name of the ethical theory which states that “business and morality are inter-related and are guided by external factors like government, market system, law, and society” (c) To identify the consequentialist theory/theories an action is morally right if the consequences of that action are more favorable than unfavorable to everyone except the individual. Discussion: According to consequentialist theory of Altruism an action is morally right if the consequences of that action are more favorable than unfavorable to everyone except the individual performing the act. Answer (a) is incorrect because according to this theory the act is morally right if the consequences of that action are more favorable than unfavorable only to the individual performing the action. Answer (b) is incorrect because according to this theory An action is morally right if the consequences of that action are more favorable than unfavorable to everyone. Answer (d) is incorrect because both a. and b. are incorrect. Answer (e) is incorrect because option a. is incorrect (a) To identify the activity that is not considered unethical in the market system. Any act that prevents the freedom of choice in buying and selling goods or services and restricts accesses to quick, reliable, and precise market information or results in loss to the business are considered to be unethical. Coercive acts, false or misleading information, theft and bribery all constitute unethical behavior in business. Answer (b) is incorrect because bribery is an unethical practice that influences the decisions of an official. Answer (c) is incorrect because coercion forces the players in the market system to take decisions against their will. Answer (d) is incorrect because theft result in loss to the business Answer (e) is incorrect because deceptive information restricts the players from having reliable information (a)

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To identify the correct relation between the espoused values and the values in practice for an organization to be considered ethical An organization is considered to be ethical whose Espoused values’ are same as ‘values in practice’. And any deviation of the ‘values in practice’ from the Espoused values’ is considered to be unethical. Answer (b) is incorrect because the company publicizes to have better values but does not practice them. Answer (c) is incorrect because there is a deviation from the espoused values. Answer (d) is incorrect because there is no relation between the espoused values and the values in practice. Answer (e) is incorrect because organization who have ‘Espoused values’ that are far better than the ‘values in practice’ cannot be considered to be ethical (d) A multinational company operating from a developed country should adopt those policies which are best of the host country and the home country. If the MNC just follows the standards of the host or the home country with out selecting the best it cannot be called as an ethical company. Answer (a) is incorrect because standards of the home country adopted to frame its policies may not always be the best standards. Answer (b) is incorrect because standards of the host country adopted to frame its policies may not always be the best standards. Answer (c) is incorrect because adopting uniform standards in all countries of operations may not be a criteria to judge the ethical nature of a company. Answer (e) is incorrect because industry norms may not be always good for the stakeholders of the company. (b) The four basic characteristics of a corporation, which attracted investors are limited liability for investors, free transferability of investor interests, legal personality and centralized management. A corporation is a legal person, and hence it can act independently on its own. Answer (a) is incorrect because corporations are considered to be perpetual entities by law. Answer (c) is incorrect because corporations are legal persons under law. Answer (d) is incorrect because as a legal person a corporation can own assets. Answer (e) is incorrect because as a legal person a corporation can sell assets (c) According to Section 309(3), a whole time director or a managing director may be paid a fixed remuneration on a monthly basis or at a specified percentage of the net profits of the company or a mix of these two elements. The percentage of profit paid out should not be more than 5% of net profit for one director and 10% for all the directors. Answer (a) is incorrect because a managing director can be paid up to 5% of net profit. Answer (b) is incorrect because a managing director can not be paid more than 5% of net profit. Answer (d) is incorrect because a managing director can not be paid more than 5% of net profit. Answer (e) is incorrect because a managing director can not be paid more than 5% of net profit.

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Answer : (e) Reason : All of the following reasons accounts for Utilitarianism dominance among policy makes and administrators.

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It seems obvious that policy questions should be judged by results and consequences

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Policy experts at all levels are focused on results and getting things done

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Efficiency is simply another word for maximizing happiness

(d) Policy experts focus on the collective or aggregate well. Answer : (d) Reason : All of the following statements about the shareholders of the company are true except ‘d’ i.e Shareholders have unlimited liability in case of business failure Answer : (d)

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Reason :

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Selecting non-executive directors to the board is not the responsibility of the corporate Audit committee. Some of the functions of a corporate audit committee are: • To discuss with independent auditors any problems that they experience in completing the audit. • To review the interim and final accounts in total. • To inform the board about the effectiveness of internal controls and the quality of financial reporting as pointed out by the independent auditors. To make recommendations regarding the audit fee, selection and replacement of auditors

Answer : (c) Reason : Applied ethics deals with specific often controversial moral issues such as abortion, female feticide and infanticide, displacement of tribal people due to huge hydro electrical projects, cloning, testing drugs on animals etc. Business too face many controversial moral issues such as misleading advertising, insider trading, bribery and corruption etc. (a) (b) (c)

30.

Meta ethics is the study of the origin and meaning of ethical concepts. Normative ethics is the branch of ethics that guides human conduct. 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.. Answer : (a) Reason : The Two-tier board addresses the concerns for separating the executive management from nonexecutive management from non-executive directors. This structure has two separate boards: the nonexecutive supervisory board and the executive management board.

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The two-tier board of an organization is particularly useful in ensuring that the there is a counterbalance to the power of managers.

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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, was given a pension and medical insurance by his employer. Legal analysis: A democratic society can establish its won rules and if people and organizations follow those rules, employees will be treated a s 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 to law 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 is 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 longterm 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.

The biggest dilemma faced by George is that “ is it ethical to fire employees who have not formally been apprised for the past few years”. < TOP >

4.

Employees who have not been formally evaluated and are not performing well should be given the chance to be evaluated formally. Each employee should have an opportunity to discuss his/her evaluation face to face with managers. George should also inform the senior employees about their poor performance and ask them to decide whether they would prefer to take voluntary retirement or work towards improving their performance to meet the new standards. < TOP >

5.

As per the employment contract, an employee is bound to compensate the employee for the services he provides and hence, the statement is correct. But, it does not mean that a company should only take care of the employees as long as he is fit to render his services to the company. In this case, when the company has found that some of its senior employees are not performing well, it should part off with these senior employees by paying decent severance. < TOP >

6.

According to theory of Applied ethics, biological projects like Stem cell research are often become controversial. The theory of applied ethics specifies certain moral standards that provide a reference point for judging the moral value of a decision. The first major ethical issue is that of the destruction of the human embryo. As assisted reproduction techniques are legal, stem cell researchers may source embryos from fertility clinics after seeking approval from the donors. Such scouring of embryo’s can lead to many ethical controversies. Many other ethical

questions may arise if research companies start encouraging the creation of embryos or the termination of pregnancies for research purposes. < TOP >

7.

As stem cell research can cure a number of degenerative diseases like cancer and diabetes, it would benefit mankind. Patenting the research output or research information would transfer the benefits to private players, who may use the research findings for commercial purposes Thus, it would not be ethical to allow patenting of biological research in this area. < TOP >

Section C: Applied Theory 8.

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, nominee 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. BCL 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 referred 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 interest of stakeholder groups, representative directors are appointed to the board of directors. < TOP >

9.

An organization builds its image through is contribution to society. An organization can be said to be socially responsible if it i.

meets the requirements of the customers

ii.

acts in a socially and environmentally responsible manner

iii.

uses non-renewable energy resources.

Ethical dealing will enable an organization to gain both financially and non-financially. Financially ethical conduct reduces friction with society. For organizations, social friction arises when behavior, which is considered to be legal by an organization, is seen as illegal or unethical by society. This can result in demonstrations, protests and criticism by the media and social activists. This creates a bad image for the organization. This can lead to fall in the share prices and decrease in sales. Therefore by being ethical and building a good image, organizations can gain a competitive advantage. This can become a decisive market advantage when an organization offers products ad services that are comparable in quality and usefulness with those of other companies. Ethical corporate behavior prompts customers to buy, motivates investors to purchase shares and earn goodwill for the company. < TOP >

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