Mb321 - Jan 05

Question Paper Business Ethics & Corporate Governance (MB321) : January 2005 Section A : Basic Concepts (30 Marks) • This section consists of questions with serial number 1 - 30. • Answer all questions. • Each question carries one mark. 1.

Which of the following is an important difference between utilitarianism and ethical egoism?

< Answer >

(a)

Utilitarianism says we should consider everyone's interests, whereas ethical egoism says people should act in their own self-interest (b) There is no difference, since "utilitarianism" and "ethical egoism" are different names for the same theory (c) Utilitarianism is a consequentialist theory and ethical egoism isn't (d) Utilitarianism concerns how people should act, while ethical egoism concerns how people actually act (e) Both (b) and (c) above. 2.

Which of the following is not a rational assumption that managers make to justify their behavior in resolving ethical dilemmas?

< Answer >

(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. 3.

Differences in culture often pose problems for firms that operate in foreign countries. Which of the following term implies adopting the norms of the country in which an organization operates its business? (a) Cultural stock (d) Cultural mix

4.

By passing an ordinary resolution If a majority of the board members vote against him By using the chairman’s right to remove the director Only when non-executive members accept the proposal Only when executive members accept the proposal. < Answer >

Performs a dual role as a member of the board of directors and as an executive in the organization. Dose not hold executive position in the organization Appointed by major share holders or financial Institution Appointed as per Articles of association Influences the decisions of the board without formally being present on the board.

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

7.

< Answer >

Which of the following is a characteristic of a Nominee director? (a) (b) (c) (d) (e)

6.

(c) Cultural change

A director can be removed by (a) (b) (c) (d) (e)

5.

(b) Cultural relativism (e) None of the above.

< Answer >

< Answer >

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.

Smitha, 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? 1

< Answer >

(a) Ethical fundamentalism (d) Corporate citizenship 8.

(c) Ethical relativism

An employee who goes “public” about an unethical or illegal business practice, when finding no resolution through normal channels, is described as being which of the following? (a) Leafblower (e) Inside Trader.

9.

(b) Utilitarianism (e) Meta ethics.

(b) Hornblower

(c) Whistleblower (d) Trumpetblower < Answer >

Which of the following is not among business's responsibilities toward employees? (a) (b) (c) (d) (e)

< Answer >

Discrimination in hiring, firing, and promotion practices Diversity initiatives that help to build understanding and respect for people's differences Providing accommodations for persons with disabilities Compliance with health and safety standards Both (b) and (c) above.

10. Many multilateral agreements that can help companies make ethical and socially responsible decisions, deal primarily with all of the following except (a) Employment practices (c) Political activity (e) Legal activity.

< Answer >

(b) Consumer protection (d) Foreign exchange rates < Answer >

11. Which of the following is the main purpose of corporate governance? (a) To separate ownership and management control of organizations (b) To maximize shareholder value (c) Disbursement of organizational resources to individuals based on positive contributions made to the organization (d) To ensure that regulatory frameworks are adhered to (e) To adopt new technology. 12. 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) (b) (c) (d) (e)

< Answer >

Fictitious revenues Fraudulent timing differences Concealed liabilities and expenses Improper or fraudulent disclosures or omissions Fraudulent asset evaluations.

13. 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

(b) German model (d) Indian model

(e) All of the above. < Answer >

14. The study of the origin and meaning of ethical concepts is called: (a) Normative ethics (d) Virtue ethics

(b) Applied ethics (c) Metaethics (e) Teleological ethical theory.

15. A company made claims in its advertisement that its toothpaste can make teeth whiter in just 14 days, when in reality it could not do so. This is an example of (a) Coercion (e) Normative ethics.

(b) Deceptive information

(c) Theft

16. Which one of these is not the stage of the ethical decision making process (a) Evaluating the decision (c) Problem recognition (e) Engaging in ethical behaviour.

< Answer >

(d) Bribery < Answer >

(b) Judging the decision (d) Establishing a moral intent

17. Which one of these is not an ethical issue in human resource management? (a) Hiring (c) Remuneration (e) Retrenchment.

< Answer >

(b) Equality of opportunity (d) Protecting the natural environment

2

< Answer >

18. An anti takeover device, in which a company gives lucrative benefits to its top executives (benefits that are awarded to those executives who lose their jobs after a takeover) like stock option, bonus etc is called (a) Poison pills (e) Golden parachute.

(b) Sand bag

(c) People pill

(d) Green mail

19. The process by which large amounts of illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having originated from a legitimate source is called (a) Insider trading (c) Anonymous Trading

< Answer >

(b) Election committee (d) Nomination committee < Answer >

21. Forward buying refers to (a) (b) (c) (d) (e)

< Answer >

(b) Money laundering (d) Bunching (e) Bottom Up Investing.

20. Out of the given alternatives identify the committee that is set up by the board of directors to select new non-executive directors (a) Audit committee (c) Remuneration committee (e) Committee of executive directors.

< Answer >

Planning for future purchases Searching for suppliers for future purchases Buying raw materials to meet the future requirements Buying of shares Estimating future demand.

22. The first cyber law passed in India in order to curb growing unethical practices in the field of IT is

< Answer >

(a) Cyber law, 1998 (b) Anti hacking law, 1999 (c) The IT Act, 2001 (d) Information Technology Act, 2000 (e) E-commerce law, 2002. < Answer >

23. Internal stakeholders for a company are: (a) (b) (c) (d) (e)

Shareholders, employees, management Shareholders, consumers, community Shareholders, management, creditors Competitors, suppliers and employees Management, community, consumers. < Answer >

24. Duties of the board of directors include all of the following except (a) (b) (c) (d) (e)

To act honestly and with utmost good faith To act with best of skill and expertise Duty to convene annual general meeting Duty to use unpublished and confidential information belonging to the company, for personal use Exercise reasonable care in managing the affairs of the company.

25. Tilak Khanna, a Marketing manager, assesses the ethical nature of a decision on the basis of its impact on all affected parties. This illustrates (a) Organizational culture (c) Ethical formalism

(b) Social responsibility (d) Utilitarianism

(e) Universalism.

26. Which of the following is not related to the recommendations made by the Cadbury Committee? (a) Importance of audit (c) Rotation of auditors (e) Both (b) and (c) above.

< Answer >

< Answer >

(b) Professional objectivity (d) Fixed auditors

27. Law is a consistent set of universal rules that are widely published, generally accepted and usually enforced. Which of the following is not a process involved in the formulation of law?

< Answer >

(a) Individual process (b) Group process (c) Society process (d) Psychological process (e) Political process. 28. The Japanese have developed the concept of ‘Just In Time’ (JIT) purchasing, with the objective that nothing will be produced until it is needed Which of the following is not a feature of JIT purchasing? 3

< Answer >

nothing will be produced until it is needed. Which of the following is not a feature of JIT purchasing? (a) (b) (c) (d) (e)

Frequent shipment of small lots Commitment to zero defects Stable production schedule Showing favoritism to some suppliers A reliable transportation system.

29. After three months, you discover that a recently hired employee, who appears to be very competent, falsified her employment application; in that she claimed she had a college degree when she did not. As her manager, what do you do?

< Answer >

(a) You’re happy with the new employee, so you do nothing. (b) Discuss the matter with human resources to determine company policy (c) Recommend she be fired for lying (d) Weigh her performance, length of service, and potential benefit to the organization before making any recommendation to anyone (e) Tell her colleagues that she lied. 30. Socially responsible companies engage in all but which of the following activities? (a) (b) (c) (d) (e)

Cause-related marketing Holding themselves accountable only to shareholders Philanthropy Social audits Ethical audit. END OF SECTION A

4

< Answer >

Part B : Caselets (50 Marks) • • • • •

This part 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.

Explain the importance of environmental ethics and why being environmentally responsible has become so crucial for a company in today’s competitive business environment. (8 marks) < Answer >

2.

Discuss in detail the various steps taken by Nokia to ensure that its activities or products are not harmful to the natural environment. Give examples of at least two other companies which are environmentally conscious.

(9 marks) < Answer > Nokia is a company which has recognized and taken up the issue of environmental management seriously. They are very much conscious about environmental ethics and have taken many steps to ensure that they do not cause any harm to the environment . Nokia’s strategy for sustainable environmental development covers the whole value chain and is implemented through four key programs – Design for Environment, Supplier Network Management, Environmental Management Systems and sound End-of-Life Practices. Nokia's environmental strategy focuses on increasing eco-efficiency throughout their operations. This strategy is based on the key elements of Nokia’s business vision – mobility, growth, and quality. Ecoefficiency means producing better results from less material and energy. The environmental attributes of a Nokia product are linked with the use of materials and energy at the different stages of its life cycle. Nokia’s approach is to reduce the adverse environmental impact of a product at each stage of this cycle, from the extraction of raw materials to recycling and the reintroduction of materials into the economic system. Life Cycle Thinking in Practice When implementing life cycle thinking, it is vital to take into account the differing requirements of different products at each stage of the life cycle. For instance: For mobile phones, raw material extraction and component manufacture account for most of the overall environmental impact. For network equipment, energy consumption during use is more significant. Nokia wants to ensure that life cycle thinking is applied to each product group in an efficient way. To this end, they have established four key environmental programs. Design for Environment Choices made during the design phase affect the environmental performance of a product throughout its life cycle. Nokia’s approach to product design is to make their products more environmentally efficient through the Design for Environment program. Nokia's current priorities are: Increasing the energy efficiency of the products, clarifying the content of their products, including the quantity and type of materials used and designing products for efficient use, reuse and recycling. Supplier Network Management Large part of the environmental impact of the Nokia product life cycle arises from the activities of their suppliers around the world. To facilitate cooperation with suppliers, Nokia has established a Supplier Network Management program. The program includes a set of Supplier Requirements that must be met by all suppliers. To ensure compliance, regular audits are conducted by trained Nokia personnel as part of normal supplier assessment. Nokia expects its suppliers to meet the requirements through their own efforts, but can and does provide support if requested. Suppliers are required to apply these same standards to their own suppliers and to support this through audits. Specific environmental audits focus on suppliers who could potentially pose environmental risks. Environmental Management Systems: Nokia is expanding its Environmental Management Systems to encompass all larger facilities around the world. At Nokia, environmental matters are integrated into a unified management system, a set of Nokia-wide standards are applied when a new production site is established anywhere in the world. 5

End-of-Life Practices Nokia supports efforts to reclaim and reuse raw materials from recycled products. End-of-Life Practices (EoL) involve the collection of equipment at the end of its service life so that materials and energy can be recovered and harmful substances properly disposed of. The focus areas of the EoL development work are: maximizing the recyclability of products through Design for Environment, drawing-board decisions about materials and structural design that have a direct bearing on recyclability and ease of disassembly, monitoring, comparing and developing take-back and recycling systems in cooperation with recyclers and other stakeholders and actively reducing the use of potentially harmful substances in products during the design phase.

Caselet 2 Read the caselet carefully and answer the following questions: 3.

Discuss the ethical dilemma faced by Donna in the case given below. If you were in her place what would you do and why? (10 marks) < Answer >

4.

Write a short note on the ethical issues involved in the accounting function and the importance of transparency in disclosure of accounts.

(8 marks) < Answer > "This can't be happening again. Not just three weeks into my new job!" Donna Butler's mind was racing as she laid down the sales contract that she was reading. How did she get herself into this precarious position--again? A couple of weeks ago, Donna acquired a job as the CFO of a young public company called Seagent, one of the new breed of businesses that offered their services over the Internet. Unfortunately, Donna had realized fairly early on that there were some problems with revenue recognition at her new company. She immediately went to the CEO to tell him about her discovery. During their meeting, Donna had matter-of-factly stated that some of the revenue figures would have to be re-evaluated and most likely reduced before the company would be ready to go public. Within a few days of her meeting, the CEO was telling her that she "just wasn't working out." Even though Donna knew that her opinion of the revenue recognition policies was not arguable, she had never before been punished for doing the right thing. After all, she had graduated as the top of her accounting class and this was petty basic accounting theory. Maybe the revenue recognition issue wasn't really the problem and she really wasn't working out? Either way, Donna was devastated and just wanted to put this experience behind her. Then came the offer from ABC.com Company. ABC.com Company produced and published Web-based distance learning courses and sold them to businesses and universities. The company had gone public a year ago last November and was about to report its first full year of earnings as a public company. In evaluating the position, Donna had meticulously read through all of ABC.com's SEC filings. It was a comfort to her that the company was already public and under the watch of the SEC. She was also impressed with the apparent level of candor in the company's financial statement disclosures and management's discussion and analysis. It was no doubt a risky move to go to another start-up, particular one with an unproven business plan and sales just under $1 million the year it went public. But this year, sales would reach $14 million and the industry experts estimated that the total distance learning market was about $20 billion. With a market size that large, there was plenty of room for growth. That potential was critical in Donna's opinion since cash was rapidly being used to develop courseware and ABC.com needed to begin to produce more sales and generate a profit. During her interviews she had met with the CEO, Ivan Green, who founded the distance learning company, she found that Ivan was very intellectual and the epitome of an entrepreneur. His entire fortune was tied up in the company and he believed in the concept beyond a doubt. Ivan had recruited the president, Dan Cole, about two years ago. And Jack, the outgoing CFO, seemed like a nice person. Nice people, candid disclosures, a growing industry-ABC.com Company seemed like a perfect fit. Jack had reassured her that, although the company had missed a few of the bank covenants, he had already talked with the bank officers and they were okay with the slight deviation from the original business plan. All this was a relief to Donna because she really needed to focus on the follow-on offering since time was of the essence. Cash was definitely in short supply--even more so than she had suspected before accepting the position. A clean audit opinion and meeting investors' expectations would be key to a successful secondary stock offering. Then Jack revealed something that took Donna completely by surprise. "So, Jack, what you're saying is that Dan doubled the price of our courses last September?" "Yup." "But the old price hadn't really been tested yet, had it?" Donna asked. "No," Jack said quickly, "but Dan was able to sell the courses at the new price, no problem." "How and to whom? Particularly when sales weren't going all that well at the lower price?" she asked incredulously. "Well, a lot of it he bartered. And all of it totally legit," Jack seemed proud to say. "How much of it?" she asked. When Jack told her the extent of the bartered revenue she immediately started to get a 6

sinking feeling. What was going on here? Donna now knew the truth about why he was leaving the company. Donna couldn't help but think of the consequences of what she had just uncovered. She believed that although the transactions had theoretically been recorded in accordance with generally accepted accounting principles, those rules were never intended to address companies whose net income--or in this case, net loss--was not important. Accounting for non-monetary transactions required an offset to revenue in the expense line. However, in the world of the dot.com company, revenue was the key figure--not the bottom line. But perhaps even more disturbing was the fact that none of the products or services that Dan had traded had a proven fair market value as far as she could tell. So accurately valuing the transactions was not that easy. Donna confronted Dan with the discovery but he behaved very rudely with Donna and refused to even discuss with her about it. Regardless of the accounting theory, once the bank found out that such a large portion of this year's revenue had nothing to do with bringing in cash they would probably call the note. Of course, the company could not pay it off without a secondary offering. And in just two days the company was scheduled to announce earnings having offered no hint to investors that they would miss the revenue projections. There was no doubt that missing the revenue target this late in the game would cause the stock price to plummet and ultimately eliminate the possibility of a follow-on offering. Donna knew that she was on the verge of getting a reputation for being a troublemaker. Maybe the auditors would figure it out? Maybe it would be best for her to resign her position? It had only been about three weeks and no one would need to know why she left. Besides, she wasn't responsible for last year's numbers anyway. One thing was certain--if the barter revenues were reversed, ABC.com Company would probably not survive.

Caselet 3 Read the caselet carefully and answer the following questions. 5.

Discuss the ethical dilemma that the CEO of S & Co. Ltd is facing with respect to the given case. (7 marks) < Answer >

6.

If you were the CEO of S & Co. Ltd, whom will you select and why? (8 marks) < Answer >

S & Co. Ltd was an organization manufacturing consumer durables. The Company had a large number of workforce white collared for office and factory management and blue collared for factory work. There were a number of technical supervisors in the factory. While the managers at all levels were at the corporate office, the technical supervisors of the factory have also had a channel/avenue for promotion to the management cadre in the corporate office, provided the corporate office had a separate wing dealing with any special aspect of a particular shop. There were some shops like the finished product section, millright, sample testing sections, etc., which fell in this category. Mr Ram, who has also specialized in Human Resource Development was the Personnel Manager of the Company (in the middle management cadre––directly reporting to the top). Mr. Krishna is a colleague of Mr. Ram, dealing with technical matters of the company and belonging to a different department. Whenever any promotion is sought to be given by the company to any of the posts in the category of lower level managers, the recommendations of these two are required to be submitted which the top brass considers and orders the promotion. There arose one vacancy for lower level manager in the finished product division at the corporate office. This section was facing problems with workers. Apart from handling his normal duty, the new manager had to handle workers problems also. Recommendations were to be made. Mr. Prasad and Mr. Kumar were the eligible contenders for that post. Papers were accordingly put up, stating that both of them were good in their work. Mr. Prasad was a go-getter, used to take quick decisions (sometimes wrongly also) while Mr. Kumar was a non-interfering type, permitting decisions to be taken at lower levels. There were also reports that on one or two earlier occasions, Mr. Prasad was sought to be charged, owning to his certain unpalatable decisions, which could not ultimately be implemented. Work turnout under his supervision was very good and a number of workers liked him for the simple reason that he used to take decision one way or the other without procrastination though some subordinates branded him as a controversial person. Another reason for calling him as a controversial person was that he had been following some unethical practices in the organization like producing false medical bills and claiming money for that, using organizational resources like stationary and telephone for his personal use etc. Mr. Kumar, a non-interfering, non-controversial person and was giving suggestions whenever required, but still did not want any one to quote him anywhere (particularly to the top or whenever his guidance has resulted in something going wrong). Mr. Ram, the Personnel Manager, wanted to recommend Mr. Prasad on the ground that he was a go-getter and good at 7

decision-making. Mr. Krishna, however, wanted to recommend Mr. Kumar for that post on the ground that he was noninterfering and had never involved himself in any unethical practice. The Personnel Manager argued with his colleague in favour of his recommendation stating that in an organization, particularly at the level of Manager in a section be it lower, middle or higher, performance is very important. Decisions, he argued, depend upon many factors including circumstances, and may be unpalatable to some and this cannot be avoided. Mr. Krishna, argued that Mr. Prasad is a controversial person since he used to show his authority and assert himself and this was not advisable in the present day context and present position where he had to handle a very important section of blue collared staff and he was also unethical in his conduct. Mr. Ram did not agree with this view and argued that since Mr. Kumar is one who plays safe and avoid, whenever occasion permits, taking decision, he may not be a good manager. Also that Mr. Kumar considers Krishna as good, since he was not keen in enforcing the systems and thus not causing inconvenience to any one, which may not good for the organization in the long run. It is human nature that some persons cannot keep quiet without commenting on others and their action. They have to say something bad or adverse about the performers and this makes them controversial. Since they did not see eye-to-eye, they sent in their recommendations separately to the CEO recommending both Mr. Prasad and Mr. Kumar, respectively, giving inter-alia the reasons mentioned above leaving the choice to the head. The CEO found that Mr.Prasad was a very close relative of his wife and he could have personal problems, if he did not select prasad. He knew very well that though Prasad is definitely a good performer he has indulged in unethical behaviour many times. Now, the CEO faces an ethical dilemma. END OF PART B

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

7.

This part 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.

There have been cases in India where companies, which were apparently very efficiently managed, landed in serious trouble due to poor governance. Explain the difference between corporate management and corporate governance and also specify the role, responsibilities and duties of the board of directors in ensuring good corporate governance. (10 marks) < Answer >

8.

Samsung’s Guide Dog school was established to help the visually impaired both in the workplace and at home. Through loving companionship and assistance from these dogs, Korea's visually impaired are able to live more active and independent lives. Corporate social responsibility and accountability have become a very integral part of business activity. In this context discuss the various tasks that a business entity is expected to perform in the society. (10 marks) < Answer >

END OF PART C END OF QUESTION PAPER

8

Suggested Answers Business Ethics & Corporate Governance (MB321) : January 2005 1.

Answer : (a) Reason : Utilitarianism theory states that an action is morally right if the consequences of that action are more favorable than unfavorable to everyone whereas Ethical egoism treats self-interest as the foundation of morality.

< TOP >

2.

Answer : (e) Reason : They will be protected by their community, is not a rational assumption that managers make to justify their behavior in resolving ethical dilemmas.

< TOP >

3.

Answer : (b) Reason : Culture can be defined as shared beliefs and practices of a group of people that identify the particular place, class or its operations. Cultural relativism is the practice of adopting the norms of the country in which an organization has its operations.

< TOP >

4.

Answer : (a) Reason : A director can be removed by’ passing an ordinary resolution’.

< TOP >

5.

Answer : (c) Reason : Nominee directors are those who are appointed to the board of directors by the major shareholders or financial institutions like banks, mutual funds etc. These directors work towards safeguarding the interests of their principles. Even though external stakeholders like banks appoint them, they along with other directors should act in the overall interest of the company.

< TOP >

6.

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.

< TOP >

7.

Answer : (c)

< TOP >

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) Metaethics is the study of the origin and meaning of ethical concepts. 8.

Answer : (c) Reason : An employee who goes public about an unethical or illegal business practice, when finding no resolution through normal channels, is described as ‘ Whistleblower’. He is an individual who discovers and tries to put an end to company’s unethical, illegal, and socially irresponsible actions by publicizing them.

< TOP >

9.

Answer : (a) Reason : All of the following are the business’s responsibility towards employees except ‘a’ i.e. ‘Discrimination in hiring, firing and promotion practices.

< TOP >

10.

Answer : (d) Reason : Many multilateral agreements that can help companies make ethical and socially responsible

< TOP >

9

decisions, deal primarily with all of the following except ‘Foreign exchange rates’. 11.

Answer : (c) Reason : ‘Corporate Governance’ is the system by which business corporations are directed and controlled. It makes sure that all the regulations are properly adhered to by the organization.

< TOP >

12.

Answer : (a)

< TOP >

Reason : Fictitious revenues are those, which are shown in the books but are not actually earned. The method by which this takes place is booking 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. Comparing financial statements over a period of time, examining unusual journal entries and verifying, supporting sales documents and unusual sales transactions, can detect fictitious revenues. 13.

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.

< TOP >

14.

Answer : (c) Reason : (a) Normative ethics guides human conduct. (b) Applied ethics is a branch of ethics that deals with specific often controversial moral issues e.g. misleading ads etc. (d) Virtue ethics is concerned with attaining dispositions of character that an individual considers to be good. (e) Teleological ethical theory holds that an action is considered morally correct if the consequences of that action are more favorable than unfavourable.

< TOP >

15.

Answer : (b) Reason: Making false claims will be deceptive information and not coercion or theft or bribery or normative ethics.

< TOP >

16.

Answer : (c) Reason : Problem recognition is not part of the ethical decision making process.

< TOP >

17.

Answer : (d) Reason : Hiring, equality of opportunity, remuneration and retrenchment are human resource management issues.

< TOP >

18.

Answer : (e) Reason : (a)

< TOP >

Poison pills: The company under target, changes the articles of association so that a group of share holders have special rights, which are evoked by a takeover. (b) Sand bag: The company stalls the attempts in the hope that another more favorable company will try to take them over. (c) People pill: A defensive strategy for warding off a hostile takeover. (d) Green mail. A potential takeover agent purchases stock in a company.

19.

Answer : (b) Reason : (a) Insider trading refers to trading on price sensitive information by company employees or individuals closely connected with the firm. (c) Anonymous Trading: Visible bids and offers on the market without the identity of the bidder and seller being revealed. (d) Bunching: The combining of odd-lot or round-lot orders for the same security so that they may be executed at the same time (e) Bottom Up Investing: An investment approach that de-emphasizes the significance of economic and market cycles. This approach focuses on the analysis of individual stocks.

20.

Answer : (d)

< TOP >

< TOP >

10

Reason : The committee that is set up by the board of directors to select new non-executive directors is the nomination committee. 21.

Answer: (c) Reason : Forward buying is done to assure supplies to the production department in case there is expected shortage of raw material in the market or to produce more and sell at high prices during shortage.

22.

Answer : (d)

< TOP >

< TOP >

Reason : The first cyber law passed in India in order to curb growing unethical practices in the field of IT is the Information Technology Act, 2000. < TOP >

23.

Answer : (a) Reason : Share holders, employees and management are the internal stakeholders of a company.

24.

Answer : (d) Reason : Rest all are part of the duties of the board of directors.

< TOP >

25.

Answer : (d) Reason : This illustrates ‘Utilitarianism’.

< TOP >

26.

Answer : (d) Reason : Fixed auditors’ is not related to the recommendations made by the Cadbury Committee

< TOP >

27.

Answer : (d) Reason : Law refers to a set of rules established to govern the behaviour of individuals within the society. Laws can be enforced only if they are widely accepted .There are four processes involved in the formulation of the laws. ‘Psychological process’ is not involved in the formulation of the laws.

< TOP >

28.

Answer : (d) Reason : The Just -in-time purchasing concept has changed the traditional relationship between buyers and sellers The emphasis is now on product quality, delivery ,performance schedules and price. Showing favoritism to some suppliers is not a feature of Just-in-time purchasing.

< TOP >

29.

Answer : (d) Reason: Since the employee is competent, it will not be ethical to fire her, tell her colleagues, keep quiet or talk to the HR department .The best thing to do here will be to first weigh her performance, length of service, and potential benefit to the organization before making any recommendation to anyone.

< TOP >

30.

Answer : (b) Reason : ‘Social responsibility’ implies the responsibility of a corporation to treat its employees, customers, suppliers, and community in an unbiased manner. Socially responsible companies engage in all of the following activities except ‘b’ i.e. ‘holding themselves most accountable to shareholders’. (a) Social responsible companies engage in ‘Cause related marketing’. (c) Philanthropy refers to the desire to help mankind. (e) Social responsible companies engage in ‘Social audit’. (f) Social responsible companies engage in ‘ethical audit’.

< TOP >

11

Part B : Caselets 1.

Environmental ethics is a branch of applied ethics, which examines the moral basis of environmental responsibility. Environmental responsibilities have to be weighed against the responsibilities against the responsibilities to stakeholders and societal benefits, as any damage caused to environment has an impact on society as well as on stakeholders. Environmental issues such as toxic waste, contamination of ground water, oil spills destroying the seashores, usage of fluorocarbon that deplete the ozone layer etc can be tackled by espousing environmental ethics. Thus, the goal of environmental ethics does mainly revolve around the concern about the environment and also the moral foundation of environmental responsibility. A successful foundation for environmental ethics should fulfill two tasks. First it has to explain how human beings have degraded the environment. Second, it must explain how human beings can protect the environment. Being environmentally responsible has become crucial for any company today. Corporate environmental management encompasses greening of manufacturing, greening of communication, greening of strategy and greening of marketing. Organizations adopt green initiatives due to the following reasons: 1. Economic benefits from increased efficiency. 2. Competitive advantage through innovation. 3. Public image. Green initiatives in business range from environmentally friendly technological innovation, green tourism, environmental campaigning and environmental counseling. If companies do not take up the responsibility of whatever harm they have done to the environment, they will be the ultimate sufferers.

2.

1.

3.

Donna butler was working for a company called ABC.com as chief financial officer. ABC.com Company produced and published Web-based distance learning courses and sold them to businesses and universities. The company had gone public a year ago last November and was about to report its first full year of earnings as a public company. It was a comfort to Donna that the company was already public and under the watch of the SEC. She was also impressed with the apparent level of candor in the company's financial statement disclosures and management's discussion and analysis. The she came to know that Dan doubled the price of our courses Dan was able to sell the courses at the new price. he bartered a lot of it. When Jack told her the extent of the bartered revenue she immediately started to get a sinking feeling. Although the transactions had theoretically been recorded in accordance with generally accepted accounting principles, those rules were never intended to address companies whose net income--or in this case, net loss--was not important. Accounting for non-monetary transactions required an offset to revenue in the expense line. However, in the world of the dot.com company, revenue was the key figure--not the bottom line. But perhaps even more disturbing was the fact that none of the products or services that Dan had traded had a proven fair market value as far as she could tell. So accurately valuing the transactions was not that easy. Donna was confused about what she should do. Should she stay on or resign. Whatever was happening was not ethical so the dilemma she was facing was whether she should be with the unethical practice or disclose to the auditors that most of the revenue was bartered and there was no cash coming in or just quit because the CEO would not listen to her. Once the bank found out that such a large portion of this year's revenue had nothing to do with bringing in cash they would probably call the note.

< TOP >

Nokia is very much conscious about environmental ethics and have taken many steps to ensure that they do not cause any harm to the environment. 2. Nokia’s strategy for sustainable environmental development covers the whole value chain and is implemented through four key programs – Design for Environment, Supplier Network Management, Environmental Management Systems and sound End-of-Life Practices. 3. Increasing eco-efficiency throughout their operations. 4. Design –for- Environment. 5. Supplier Network Management. 6. Environmental Management Systems. 7. End-of-Life Practices. 8. Maximizing the recyclability of products. Examples of other companies: Samsung: Has green policies in place. Motorola: has a environment management system in place which takes care of the environmental activities and control < TOP >

12

If I were in Donna’s place, I would have definitely disclosed the details of the revenue to the auditors and investors because anyway if the bank found out they would create problems and then paying them would be impossible without going for a second offering but that also is doubtful in these circumstances. So I would disclose and be ethical in my conduct. < TOP >

4.

Accounting provides a system of rules and principles, which govern the format, and content of financial statements. By adhering to the principles and practices in the system of an organization, accounting can provide fair and accurate reporting of the financial position of a business. The ethical issues surrounding accounting practices are: under reporting income, falsifying documents, allowing or taking questionable deductions, illegally evading income taxes and engaging in fraud. Fraud in financial statements can be committed in five ways. They are: 1. Fictious revenues. 2. Fraudulent timing differences. 3. Concealed liabilities and expenses. 4. Improper or fraudulent disclosures or omissions. 5. Fraudulent asset valuations. Transparency and accountability are essential for maximizing long-term owner value. Rules and procedures in finance for gathering data must be consistent. If rules are not applied consistently, different departments in the organizations can misinterpret data. Calculations can be manipulated to provide to provide a misleading picture. This makes a fair allocation of funds difficult. Transparency in disclosure of accounts by all the departments is essential for long-term success of an organization. The UTI, Ketan Parekh and Harshad Mehta scandals were the result of transparency in the financial sector. The institute of chartered accountants of India has laid out certain rules for disclosure of accounting policies. Accountants also play a very important role in this context.

5.

The ethical dilemma faced by the CEO is whom to select for the post of the lower level manager.

< TOP >

Mr. Prasad and Mr. Kumar were the eligible, entitled contenders for that post. Papers were accordingly put up, stating that both of them were good in their work. Mr. Prasad was a go-getter, used to take quick decisions (sometimes wrongly also) while Mr. Kumar was a non-interfering type permitting decisions to be taken at lower levels. There were also reports that on one or two earlier occasions, Mr. Prasad was sought to be charged, owning to his certain unpalatable decisions, which could not ultimately be implemented. Work turnout under his supervision was very good and a number of workers liked him for the simple reason that he used to take decision one way or the other without procrastination though some subordinates branded him as a controversial person. Another reason for calling him as a controversial person was that he had been following some unethical practices in the organization like producing false medical bills and claiming money for that, using organizational resources like stationary and telephone for his personal use etc. Mr. Kumar, apart from being a non-interfering, non-controversial person, also wanted, whenever required, others in the organization to come to him for guidance but not to quote him anywhere (particularly to the top or whenever his guidance has resulted in something going wrong). Inspite of the fact that Mr. Prasad was a great performer and was capable of taking decisions quickly, he was unethical in his conduct whereas Mr. Kumar was ethical even though a little slow. < TOP >

6.

If I were the CEO of S & Co Ltd, I would choose Mr.Kumar.Firstly, even though he is a little slow in making decisions, he has always carried out the job assigned to him. The most important point is that he is an ethical person. So, he will be model for his subordinates and other employees. In the future also there may be many decisions to be made where Mr. Prasad can show unethical behaviour. Even though Prasad is a performer and can take decisions quickly but his conduct is not right. By indulging in unethical practices he is violating the organizational culture and code of ethics. This can also prove as a bad example to other employees. < TOP >

Part C: Applied Theory 7.

Corporate governance is the system by which business corporations are directed and controlled. The corporate structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. Difference between corporate governance and corporate management: 13

Corporate governance Corporate management 1. External focus 1. Internal focus 2. Governance assumes an open system. 2. Management assumes a closed system. 3. Strategy oriented 3. Task oriented. 4. Concerned with where the company is going 4. Concerned with getting the company there. Governance involves the monitoring and overseeing of strategic direction, socio-economic and cultural context, externalities, and constituencies of the institution. On the other hand, management is more of hands on activity. A board of directors carries out the function of governance. Directors can be of various types like executive directors, nominee directors, representative directors, alternative directors, shadow directors, associate directors etc. The board can be an all executive board, majority executive board, majority outside board or a two tier supervisory board. A director assumes two roles: The performance role. The conformance role. Responsibilities of directors: 1. Responsibility to share holders 2. Obligation to maintain honesty and integrity. Duties of directors: 1. Exercise care in the discharge of functions. 2. Attend board meetings and devote sufficient time and attention to the affairs of the company. 3. Not to be negligent and not to commit or let others commit tort-liable acts. 4. Not to misuse power. 5. Act in the bets interest of the company and its stockholders and customers. 6. Protect the interest of the creditors. 7. Maintain confidentiality. 8. Not to make secret profits. 9. Not to exercise powers for a collateral purpose. 10. Not to waste company assets. < TOP >

8.

Business and society are bound by contracts in which they operate. As business depends on the community in which it operates, society also expects business to make its contribution to the community. The effectiveness of an organization nowadays depends on its ability to develop itself into a social organization. Corporate responsibility and accountability are considered the building blocks for any organization. As a result, organizations have evolved overtime to perform a number of functions or tasks in the society. These tasks include: 1. Financial tasks. 2. Economic and production tasks. 3. Maintenance tasks. 4. Adaptive tasks. 5. Managerial or political tasks. 6. Social tasks. < TOP > < TOP OF THE DOCUMENT >

14