Mb321 - July 04

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

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.

Fardeen, a marketing executive at Brigade Corporation is considered for the post of executive director in the Board of directors. Which of the following criteria should one satisfy in order to become an executive director?

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I. The individual should be bound by the employment contract II. The individual need not be bound by the employment contract III. The individual should be holding an executive position in the organization IV. The individual may be a non-executive employee. (a) (I) and (III) above above (d) (III) and (IV) above 2.

Which of the following is not a characteristic of a corporation for attracting investments?

(b) Social responsibility (d) Utilitarianism

(e) Universalism.

Which of the following is not an essential feature of the evaluation of a board’s performance? (a) The evaluation of the performance of individual directors (b) The role of the board (c) The working style of board (d) The composition of board (e) The size of the board.

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Which of the following theories is a teleological approach that supports the equitable distribution of goods and services? (a) Altruism (c) Distributive justice ethics.

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(b) Universalism (d) Utilitarianism

A morally correct decision often depends on the circumstances of the person making it There is no universal set of principles by which one can judge the morality of an action An act is ethical when it maximizes happiness An act that does not maximize happiness is not ethically permissible None of the above.

Which of the following is the statutory duty of a director? (a)

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To act honestly and with utmost good faith

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(e) Applied

Which of the following statements is true with reference to the concept of ethical relativism? (a) (b) (c) (d) (e)

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(b) Transferability of stock holding (d) Decentralized management

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

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(e) I and II above.

The right to own and control private property Freedom of choice in buying and selling goods or services Government protection of local industry against threat posed by multinational companies Access to quick, reliable and precise market information Both (a) and (b) above.

(a) Limited liability (c) Legal personality (e) Accountability. 4.

(c) (I) and (IV)

Which of the following is not a prerequisite for the effective functioning of a market system? (a) (b) (c) (d) (e)

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(b) (II) and (IV) above

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(b) (c) (d) (e) 9.

To act with the best skills and expertise To reveal his financial interests in a contract To Convene the annual general meeting Both (a) and (d) above.

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Which of the following is not a way of committing fraud in financial statements? (a) (b) (c) (d) (e)

Showing fictitious revenues in the books Showing miscellaneous expenses Concealing liabilities and expenses Showing wrong timing differences None of the above.

10. Which of the following techniques refers to the communication of product information in a way that suits the needs of customers? (a) Hard selling (c) Stereotyping marketing.

(b) Soft selling (d) Niche marketing

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11. ‘Believe approach’ is used to (a) Detect frauds in financial statements (b) Resolve ethical dilemmas (c) Enhance the efficiency of audit procedures (d) Enhance employee morale (e) All of the above. 12. The moral standards of a person are not based upon (a) Norms Policies.

(b) Beliefs

(c) Laws

(d) Values

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(b) Rights of the stakeholders (d) Establishing good corporate governance mechanism < Answer >

14. Which of the following are given the highest priority when resolving ethical dilemmas? (a) Values of the company (c) Beliefs of the company

(b) Policies of the company (d) Laws of the country (e) Values of country.

15. Which of the following is not related to the recommendations made by the Cadbury Committee? (a) Importance of audit (c) Rotation of auditors

(b) Professional objectivity (d) Fixed auditors (e) Both (b) and (c) above.

16. Which of the following board structure (based on functioning style) is best suited for organizations that want rapid growth? (a) Rubber stamp board (c) Country club board Black board.

(b) Representative board (d) Professional board

(d) minimum time period (e) maximum time period.

(b) Management buy-out (d) Management buy-in

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

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

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18. The use of price-sensitive information by employees to gain undue advantage is referred as (a) Money laundering (c) Insider trading Bribery.

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(e)

17. According to Utilitarian theory, the consequences of a right action should be considered for (a) short run utility (b) long run utility (c) short run and long run utility

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(e)

13. According to the ethics and stakeholder theory, businesses should give importance to (a) Moral values of the organization (c) Right fair, and just decisions (e) Rights of the employees.

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(e) Only when executive members accept the proposal. A multinational company operating in a developed country is said to be ethical if it adopts (a) The standards of the home country to frame its policies (b) Standards of the host country to frame its policies (c) Uniform standards in all the countries its operating (d) Best of both the home and the host country standards (e) None of the above said policies. Which of the following is not a normative theory? (a) Teleological ethical theory (b) Virtue ethical theory (c) Meta ethical theory (d) Applied ethical theory (e) Deontological ethical theory. Which of the following processes play a major role in institutionalizing moral standards in to law? (a) Social process (b) Individual process (c) Political process (d) Group process (e) Law process. Which of the following is not the responsibility of a business corporation towards its customers? (a) Providing goods according to the specific needs of consumers, their purchasing power, etc. (b) Offering quality goods at reasonable prices (c) Improving the standards of living by producing goods and services of high quality (d) Ensuring the health and safety of consumers (e) Providing technologically superior goods and services at discounted prices. Which of the following factors does not determine the code of ethics framed by a marketer? (a) Individual factor (b) Significant factor (c) Opportunity factor (d) Tolerance factor (e) Both (a) and (c) above. Which of the following are parts of the marketing mix of services? (a) Product, People and Pricing (b) People, Physical evidence and Place (c) Product, People and Place (d) People, Physical evidence and Process (e) None of the above. The practice of buying raw materials beforehand in order to meet future requirements with the objective of producing and marketing goods at a higher price when there is a shortage of raw materials is called (a) Procurement (b) Discrimination and favoritism (c) Forward buying (d) Backward buying (e) Deceiving suppliers. The content of the financial statements of companies in India is prescribed by the Companies Act of the year (a) 1985 (b)1956 (c) 1948 (d)1952 (e) 1972. The act of buying back outstanding shares by organizations is called (a) Exchange offer (b) Share repurchase (c) Going private (d) Leveraged buy-outs (e) Golden parachute. Which of the following is the highest stage of ethical consciousness in business? (a) Profit maximization in the short-run (b) Profit maximization in the long-run (c) Profit minimization in the long-run (d) Stakeholder concept (e) Corporate citizenship. Which of the following is not an objective of ethical audit? (a) 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. END OF SECTION A

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

This section consists of questions with serial number 1 – 7. 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.

Critically comment on the controversies associated with UCB’s campaigns, with special reference to the ‘deathrow’ campaign. Do you think it was ethical on the company’s part to focus on controversial issues in its advertisements to gain the attention of customers? (9 marks) < Answer >

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Do you think UCB’s advertising strategy was aimed only at creating scandals and contro-versies? Can this strategy be justified by the fact that it resulted in free publicity for the company? Support your answer with reasons. (9 marks) < Answer > United Colors of Benetton

In January 2000, United Colors of Benetton (UCB), Europe’s largest clothing manufacturer, released its ‘death-row’ advertisement campaign featuring prisoners who had been sentenced to death. The campaign appeared on billboards and major news publications in Europe, America and Asia. UCB worked for two years on the campaign, of which a special booklet and video were also released. UCB claimed that leaving aside any social, political, judicial or moral consideration, the campaign aimed at showing the public the reality and futility of capital punishment. The campaign led to widespread protests against the company from customers as well as several governments around the world. The families of the victims (whom the death-row inmates were convicted of killing) objected strongly to the campaign. The state of Missouri in US decided to sue UCB, claiming that the company had deceived the state by using the death-row inmates as part of an advertising campaign. UCB was reported to have falsely told the state that the inmates were being interviewed for a project sponsored by the National Association of Criminal Defense Lawyers. In an out- of - court settlement, UCB had to write apology letters to the families of the victims. UCB was also ordered to pay $50,000 to the Missouri Crime Victims Fund. UCB expected the protests against this campaign to die down, like it happened in case of its earlier campaigns. However, public opposition in US intensified further. The biggest setback for UCB was the termination of its deal with the US retailing major, Sears Roebuck & Co. to open UCB outlets in Sears stores across US. UCB had counted heavily on the deal signed in late 1999, to improve its miserable performance in the US markets during the 1990s. In the early 1980s, UCB had over 700 stores in US, and the number had declined to 200 by 1999. After the release of the ‘death row’ campaign, Sears stores across US were picketed and numerous letters of protest written by the families of the victims. Alarmed by the protests over its association with UCB, Sears opted out of the deal in February 2000. Sears was not the only store alarmed by the public’s reaction to UCB’s advertising campaign. Analysts commented that most of the 500 UCB stores in US were closed because of the storeowners’ personal conflicts with the company’s campaigns. Meanwhile, reports appearing in CNN, Wall Street Journal and Advertising Age revealed that the campaign was not liked by a majority of US consumers. However, UCB defended its campaign. The company’s US director of communications said, “Once again, it’s very hard for people to see what we’re doing and understand that it’s not advertising, that it’s a way to get people to think.” UCB had been credited as pioneering a new era of advertising by removing its product from its advertisements, and focusing only on colors and the selection and placement of items on the copy. Till the 1980's, UCB advertisements focused on the products, with the logo of a stylized knot of yarn with ‘UCB’ printed under it and contained within a dark green rectangle. In 1982, Oliverio Toscani (Toscani), a prominent fashion and advertising photographer, joined the UCB group. On Toscani’s recommendation, Luciano Benetton, the founder of UCB, handed over UCB’s advertising activities to Eldorado - a small advertising agency in Paris. The initial advertisements were conventional in style, showing groups of young people wearing UCB clothing. Toscani soon

convinced Luciano that UCB’s campaigns should promote UCB as a ‘lifestyle accessory’ rather than a clothing brand.

In 1984, the ‘All the Colors in the World’ campaign was launched, showing groups of teenagers from many countries and ethnic groups dressed in UCB clothing, with the company logo in the corner. In 1985, Toscani created the immensely popular ‘United Colors of Benetton’ theme, aimed at presenting the message of racial unity. By now, Toscani’s ‘rebel’ streak had become rather evident, and complaints had been made against the use of the United States flag in one of the advertisements. In 1989, UCB terminated its contract with Eldorado, and began managing its advertisements internally. The new campaigns neither showed the product, nor used any slogan. The knot in the UCB logo was replaced with the small green rectangle. By 1991, Toscani’s photographs were reported to have completely shifted from being slightly disturbing to socially and politically incorrect ones. The company’s campaigns appeared only on billboards, at art shows and in select print media. Since UCB wanted its advertisements to appear ‘exclusive and art-oriented,’ it did not use electronic media like the radio and television. Throughout the early 1990’s, UCB’s advertisements – featuring a war cemetery, many different brightly colored condoms, a baby with the umbilical cord, a priest and a nun kissing – invited severe criticism. Though UCB covered sensitive issues such as child labor, death penalty, poverty, the abuse of nature, violence, intimidation, AIDS and peace between the Arabs and Israelis, the portrayal was almost always a subject of controversy. During the late 1990's, UCB seemed to have become even bolder, increasingly featuring nudity in its advertisements. Even Luciano himself posed naked for a campaign. In 1998, Luciano said, “It’s our prerogative to photograph a new collection in unusual places: we’re more interested in discovering people than in selling them dreams. So here is the search for real people and real stories, here is the discovery of beauty without stereotypes; here is diversity highlighted by uniqueness.” In 1995, government authorities in Germany banned UCB advertisements featuring child laborers, the human body stamped ‘HIV-positive,’ and a waterfowl stuck in an oil slick. A German appeal court claimed that these advertisements were unacceptable as they exploited suffering. The ad showing the newborn baby had to be withdrawn following a public outcry in Italy, France, and U.K. All along, UCB claimed that these advertisements were designed to prompt debate on serious social issues and to draw public attention to the victims of these issues. According to UCB sources, “Bitterly attacked by some and internationally acclaimed by others, UCB’s campaigns managed to tear down the wall of indifference, contributing towards increasing the awareness of universal problems among world’s citizens. At the same time, they have paved the way for innovative modes of corporate communication.” The notoriety that UCB’s campaigns portrayed ensured that the company was in news all over the world. Thousands of articles were written on the company’s campaigns. This ‘free publicity’ helped the company’s brand become globally popular. While UCB’s advertisements seemed offensive and tasteless to some people, to others they were a crusading effort to promote social values. UCB worked hard to promote itself as a socially responsible business by supporting social organizations and discussing moral issues in its print campaigns all over the world. The fact that Toscani’s photographs won awards and were displayed in art galleries around the world strengthened the company’s claim regarding the artistic value of its campaigns. According to the company, the death row advertisement was intended to highlight the ‘human aspects’ of the murderers and express the company's opposition to capital punishment. The bitter experience of the ‘death row’ campaign seemed to have made UCB realize the damage its advertising strategy was causing. The fact that many people had decided not to shop at UCB as a result of its campaigns could no longer be denied. A document posted on the UCB website revealed that the company also felt the need to change its advertisement campaign. The document stated, “We need to have models wearing clothes by UCB in our advertisements. We need to show consumers that we are in actual clothing line, and not a political or governmental company. By picturing our stylish clothes, we will attract more business. Consumers want to buy our clothes because they are attractive and have a high quality reputation. People who respect our clothing line are the only ones who actually buy it, despite the political issues that we represent.” Though UCB had always been a supporter of several human causes, such as the fight against racial discrimination, whale hunting, ozone layer depletion, land mines, and North Korean girls being sold into marriage and so on, it stepped up its involvement in these non-controversial social issues. UCB made special efforts to project itself as a responsible company by sponsoring sport events and focusing on racial integration through its magazine, ‘Colors’. UCB also organized AIDS benefits and educational programs around the world. With this new-found focus on moral and ethical self-policing, UCB seemed to be working hard towards non-controversial advertising.

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

What are the Ethical issues that are involved in this case? (5 marks) < Answer >

4.

From the angle of Corporate Governance, what kinds of checks and balances would serve effectively to stop such practices? (7 marks) < Answer >

Slowsturdy Services Ltd. (SSL) is a well-known manufacturer of Geo-textiles, used in the construction of Highways, Runways of Airports etc. Recently a new Factory Manager has joined SSL. According to him, there is a considerable scope for getting huge volume orders in view of the new “Quadri-lateral” Expressways proposed by Government of India. For getting big orders, he instructs his team to adopt any method including bribing the concerned “decision makers”. As per the resolutions passed 2 years ago by the Board of Directors of SSL, the company decided not to adopt corrupt practices. If there are any deviations, it would be necessary to make detailed note containing information regarding the circumstances in which deviation was made, the nature of deviation, the total size of the order obtained, and the benefits it would give to the company. The Factory Manager does not want to inform the Board or take their prior permission. He wants to just go ahead and get the orders, in the “long term interest of the company”. He is confident that the Board would support his decision, even if they find out later the methods adopted in obtaining orders. When the Company Secretary advised him that such action would be violating the Board Resolution, the Factory Manager told him “it is very rare that such things can be found out, provided you co-operate and keep quiet”. He added, “I am getting such huge Orders. Without adopting such tactics how can you do business? Listen my friend, no person has ever got Orders of the size I am aiming at for SSL and you have to take risk to maximize profits for your shareholders”.

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

Was the practice of disconnecting odometers in test driven cars an ethical one? Give reasons for your answer? (7 marks) < Answer >

6.

According to Mr.Adarsh “ This is not a product recall, the only thing we're recalling here is our integrity". How effective do you think is his response to this incident? (7 marks) < Answer >

7.

What impact does unethical behavior have on the trust between customers and manufacturers?

(6 marks) < Answer > The Classic motors was accused of selling new cars and trucks that were test driven up to 400 miles with disconnected odometers. Some of the vehicles were used by executives of the company for their personal works. These vehicles were then shipped to the dealers by reconnecting their odometers. In January 1990, the government filed an indictment against Classic motors. The government even claimed that some of the test driven cars had undergone repairs, after a few accidents while testing. The buyers of these cars were not told of these facts before the vehicles were delivered to them. The government claimed that Classic had been following this practice for the past forty years. It was said that between February 1988 and December 1999 at least 50,000 of such tested vehicles were sold. However, the vice president of Classic, Mr. Kailash, denied the charges that the vehicles were extensively used by the executives of the company. Though, Mr. Kailash admitted that the odometers of the cars were disconnected while testing, he defended this practice saying that it was necessary. To make sure that there were no quality or safety defects, the vehicles were often driven forty miles, sometimes even 70 miles. Mr. Kailash claimed that in 15 years only 40 cars met with accidents and those cars had been fully refurbished before being handed over to the dealers. In May 1989, during the period of investigation by the government, Classic stopped disconnecting odometers and the test drives were limited to 65 miles. Classic also began to keep notices in the glove compartments of tested vehicles, informing customers that the car had been test driven. In July 1989, Classic's president Mr. Adarsh defended the company's actions: “The only law we broke was the law of common sense” Mr. Adarsh expressed concern that the government’s action would cause buyers to lose faith in the

company. Mr. Adarsh said that they have asked their customers to trust them, and they did. Now they’ve been given reason to question that trust. Simply said, that’s unforgivable.” Referring to the disconnection of the odometers, Mr. Adarsh said; “Did we screw up? You bet we did. I’m dammed sorry it happened and you can bet it won’t happen again, and that’s a promise.” Classic then took several initiatives to restore trust among customers. It announced a current five-year or 50,000-mile engine-and power-train warranty on the vehicles which were test driven. The warranty also covered the air-conditioning system and the brakes. Owners of these cars could get their vehicles inspected for free. A brand new car or truck was offered to the owners of vehicles which had been damaged and repaired prior to shipment. The company ran ads on television and in newspapers apologizing for disconnecting odometers in cars used for tests. These ads even gave details of their compensation programs. Classic's president supported this activity stating that this should not be considered as a legal settlement. He said, “this is not a product recall the only thing we’re calling here is our integrity."

END OF SECTION B

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

8.

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.

Transparency is a prerequisite for good corporate governance. Explain the role played by different accounting personnel in ensuring the transparency of the financial activities of an organization. (10 marks) < Answer >

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Of late, the remuneration of directors has become a controversial issue. Discuss the norms framed by different committees with regard to the remuneration of the directors. (10 marks) < Answer >

END OF SECTION C END OF QUESTION PAPER

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

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Answer : (a) Reason : The person in order to become an executive director should be bound by the employment contract and should be holding an executive position in the organization. Answer : (c ) Reason : ‘Government protection of local industry against threat posed by multinational company’ is not a prerequisite for the effective functioning of a market system. Answer : (d Reason : ‘Decentralized management’ is not a characteristic of a corporation, which attracts investments. Answer : (d) Reason : This illustrates ‘Utilitarianism’. Answer : (a) Reason : ‘The evaluation of the performance of individual directors’ is not an essential feature of the evaluation of a board’s performance. Answer : (c) Reason : ‘Distributive justice’ is a teleological approach that supports the equitable distribution of goods and services. Answer : (b) Reason : ‘There is no universal set of principles by which one can judge the morality of an action’ is true with reference to the concept of ethical relativism. Answer : (c) Reason : ‘To reveal his financial interests in a contract’ is the statutory duty of a director. Answer : (b) Reason : ‘Showing miscellaneous expenses’ is not a way of committing fraud in financial statements. Answer : (b) Reason : ‘Soft selling’ refers to the communication of product information in a way that suits the needs of customers. Answer : (e) Reason : ‘Believe approach’ is used to do all of the above activities. Answer : (c) Reason : The moral standards of a person are not based upon ‘Laws’. Answer : (b) Reason : According to the ethics and stakeholder theory, businesses should give importance to ‘rights of the stakeholders’. Answer : (a) Reason : ‘Values of the company’ are given the highest priority when resolving ethical dilemmas. Answer : (d) Reason : ‘Fixed auditors’ is not related to the recommendations made by the Cadbury Committee. Answer : (d) Reason : ‘Professional board’ ) is best suited for organizations that want rapid growth. Answer : (c) Reason : According to Utilitarian theory, the consequences of a right action should be considered for ‘short run and long run utility’. Answer : (c) Reason : The use of price-sensitive information by employees to gain undue advantage is referred as ‘Insider trading’.

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(a) A director can be removed by’ passing an ordinary resolution’. (d) A multinational company operating in a developed country is said to be ethical if it adopts ‘best of both the home and the host country standards’. (c) ‘Meta ethical theory’ is not a normative theory. (c) ‘Political process’ play a major role in institutionalizing moral standards in to law. (e) ‘Providing technologically superior goods and services at discounted prices’ is not the responsibility of a business corporation towards its customers. (d) ‘Tolerance factor’ does not determine the code of ethics framed by a marketer. (d) ‘People, Physical evidence and Process’ are parts of the marketing mix of services. (c) The practice of buying raw materials beforehand in order to meet future requirements with the objective of producing and marketing goods at a higher price when there is a shortage of raw materials is called ‘Forward buying’. (a) The content of the financial statements of companies in India is prescribed by the Companies Act of the year 1985. (b) The act of buying back outstanding shares by organizations is called ‘Share repurchase’. (e) ‘Corporate citizenship’ is the highest stage of ethical consciousness in business. (c) To measure business conduct against the varied moral or religious standards of a community in which it operates.

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Section B : Problems 1.

UCB's strategy of eliminating its core products from its advertisements might have been effective in gaining substantial attention of its target customers, but at the same time, highlighting the socially sensitive issues did have a damaging effect. The ethical nature of the advertisements can be judged only when the motives of the company and the impact of these ads are clear. Before determining whether an advertisement is ethical or not, it is necessary to decide whether the advertisement is trying to make people think about a serious social issue or to gain their attention to a rather mundane product. Advertisements that draw attention to important social issues can be considered unethical when they cause more displeasure in the society than awareness towards social evils.

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The idea behind UCB's advertising strategy might not be only at creating scandals and controversies. The intention might be to create social concern for such issues. But, as its controversial advertisements triggered many demonstrations and agitation against the company, they helped create free publicity for the company. Moreover, the company publicly stated that its intention behind such advertisements was to create a social awareness and to show its concerns towards the society. As advertisement is a tool for communication, it can be said that there is nothing wrong within it. Controversies arise because of the gaps in people's perception. Different individuals in different societies have different sensitivity levels. So what seems right to people in one society might not seem right to people in another society.

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Ethical issues: For the Factory Manager: Compliance of the directions of the Board Resolution versus Stakeholder value maximization by getting (i) huge order and earning good profits (ii) Procedural violations Vs. Performance as seen by actual figures achieved (iii) Getting exposed due to perhaps Company Secretary not co-operating For the Company Secretary (i) Whether to go with FM and keep quiet or to report to the Board the violation (ii) Whether the Board will support even if report the violation By reporting he jeopardizes his working relationship with the FM but by not reporting, he exposes himself to the Board’s possible action against him for not reporting even after coming to know about this. < TOP >

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Constitution of audit committee. The audit committee should be authorized to look into propriety of some of the important decisions having financial impact. An Officer with appropriate position in the hierarchy may be given the responsibility of acting as Ethics Officer. He may supported by appropriate team. The board of directors either by itself or through audit committee formulate ethics code of conduct. The audit committee can also be authorized to supervise the functioning of ethics committee. < TOP >

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Classic violated the micro perspective ethics. Trust is one of the major variable of micro perspective of ethics. From a firms perspective ethics, is closely associated with trust. It is necessary for any business that not only their behavior is ethical but the customers have trust in them. The one single variable which influences interpersonal and intergroup behavior is trust. Classic Motors has violated this major ethical norm. Trust acts as a risk-reducing mechanism which is developed over a period of time and which reduces the perceived risk of dealing with the parties. As trust is defined as the reliance by one person, group or firm upon a voluntarily accepted duty on the part of another person, group, or firm to recognize and protect the rights and interest of all others engaged in a joint endeavor or economic exchange. Thus the act of Classic motors in disconnecting the Odometers during test run is unethical as it breached the trust of its customer. < TOP >

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When the government accused Classic for disconnecting odometers for the test driven vehicles. Classic was on the verge of losing its customers trust without the company’s president Mr.Adarsh immediate response the delay would have cost the company heavily. But Mr.Adarsh immediate step helped the company to recover in time. Though Classic did not admit that they were indulging in unethical practices they have realized that their act has depleted the customers trust in the company. So to gain the trust Classic has undertaken many steps like extending the warranty on the test driven cars from 5 years to 7 years. Free inspection of the cars which were test driven. Offering new cars or trucks in placed of the cars being damaged during testing. Since all the responses of Classic

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By being ethical sellers create the needed trust to support the exchange relationships with buyers. Trust promotes productivity. Trust in the business reduces costs, makes life more pleasant and improves efficiency. Trust brings with it predictability, dependability and faith. Businesses or its customers cannot easily adapt themselves to change. If we trust some one we can accept the unpredictable. Trust cannot be gained in a short period of time it is developed over a period of time. Trust acts as risk-reducing mechanism. Dependability provides assurance that one can be counted on to perform as expected faith is the belief that an individual possess that one will continue to be predictable and dependable. As customers are the external stakeholders of a firm, trust plays a vital role in binding the customers to the organization. A company’s salesforce play a major role in building the trust with the customers. The manufacturer contacts the customers through the sales force. It is the salesperson of an organization who interacts with their customers and earns trust by being dependable, honest, competent and customer-oriented. Customers rely on the salesforce for information about the organizations' goods and services and expect quality products. A salesperson provides customers with relevant product information. Customer orientation encourages the sales staff to give top priority to the customer. This in turn enhances customer satisfaction and helps the supplier to establish a relationship of trust with the customers < TOP >

Section C: Applied Theory 8.

The role of accountants in ensuring transparency is increasing as a large number of investors, who do not have any knowledge of accounting, depend on them for information relating to the financial well being of the company they invest in. The management accountant, the financial accountant and the auditor play a major role in building trust in stakeholders and ensuring the efficient functioning of the organization. The Management Accountant: The main task of a management accountant is to provide trustworthy and credible information on which the management can base its decisions. The Management accountant provides information that the management needs for formulating polices, planning and controlling the activities of employees, making decisions communicating with shareholders and others who are external to the business, communicating with employees and safeguarding the assets of the organization. The Financial Accountant: The role of financial accountant is to advise directors regarding the items that have to be selected for inclusion in the financial statements and the method for measuring them and presenting them. A financial accountant is responsible for providing economic information to investors, employers suppliers and outside people associated with the organization. The auditor: Independent professional accountants are appointed by shareholders to audit a particular company, in which they have invested. The auditor is an outside party, whose role is to perform an audit for the benefit of the public, the shareholders and the government. < TOP >

9.

Remuneration of top managers in organizations has been a highly debatable issue these days. The remuneration of a director is determined either by the articles of association or by a resolution of the general body or by a special resolution. The remuneration for a director can paid in the following ways: •

In the form of fee for each board meeting attended by him.

•

According to Section 309(3), a managing director may be paid a fixed remuneration on a monthly basis or as a specified percentage of the net profits of the company or a mix of these two elements.

•

Directors (other than the full time directors and managing directors) can be paid on a monthly, quarterly or annual basis. They can be paid in the form of a commission, provided a special resolution is passed authorizing such payment. This payment should not exceed 1% of the net profit of the company. < TOP > < TOP OF THE DOCUMENT >