Mb321 - July 05

Question Paper

Business Ethics & Corporate Governance (MB321): July 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.

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? (a) Ethical fundamentalism (d) Corporate citizenship

2.

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

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?

8.

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(b) Fraudulent timing differences (d) Fraudulent asset evaluations < Answer >

Which of the following is not a stage in the ethical decision making process? (b) Judging the decision (d) Establishing a moral intent

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 (d) Bunching

< Answer >

(b) Anti hacking law, 1999 (d) Information Technology Act, 2000

(a) Evaluating the decision (c) Problem recognition (e) Engaging in ethical behavior. 7.

(c) Japanese model < Answer >

(a) Fictitious revenues (c) Concealed liabilities and expenses (e) Improper or fraudulent disclosures or omissions. 6.

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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.

(a) Cyber law, 1998 (c) The IT Act, 2001 (e) E-commerce law, 2002. 5.

(b) German model (e) Russian model.

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

4.

(c) Ethical relativism

In which of the following corporate governance models do financial institutions have a major say in governance mechanism? (a) Anglo-American model (d) Indian model

3.

(b) Utilitarianism (e) Meta ethics.

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

(c) Anonymous Trading

Which of the following is an important difference between utilitarianism and ethical egoism? (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 prescribes how people should act, while ethical egoism explains how people 1

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(e) 9.

actually act Utilitarianism lays emphasis on intent of action and ethical egoism on the outcomes.

The principal recommendations of the Cadbury committee covered which of the following? I. The board of directors and their role. III. Setting up of the organization.

II. Cross shareholding. IV. Capital market issues.

(a) Only (I) above (c) Both (I) and (III) above (e) All (I), (II), (III) and (IV) above. 10.

11.

(b) Only (III) above (d) Both (II) and (IV) above < Answer >

Which of the following should be the governing objective of a company? (a) Higher return on investment (c) Market share leadership (e) Lower return on investment.

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(b) Global cost competitiveness (d) Maximization of shareholder value

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

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(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. 12.

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

13.

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.

Which of the following types of boards lays more emphasis on maintaining cordial interpersonal relations among the members than on effective decision-making? (a) Rubber stamp board (d) Professional board

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A moral responsibility to preserve the environment A moral responsibility to protect animals A radical approach to environmental responsibility An attempt to frame green policies to curb disasters A program for the eradication of illiteracy.

Which of the following directors influence the decisions of the board without formally being present on the board? (b) Shadow director (e) Alternate directors.

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

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(b) Unitarian view of ethics (c) Integration view of ethics (e) Stakeholder concept.

The anthropocentrism approach is

(a) Nominee director (d) Representative director 18.

(c) Country club board

Which of the following endorses that business being an economic entity has the right to make profits, but at the same time, it should discharge the social obligations?

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

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Leader’s style depends on the maturity level of the subordinates Behaviors can be acquired unlike traits which are generally inherited Women are not inferior to men as leaders Leaders have different relationships with different subordinates Leaders have same relationships with all subordinates.

(a) Separatist view of ethics (d) Law of the jungle 16.

(b) Representative board (e) Two-tier board.

The Vertical – Dyad Linkage Theory (VDL Theory) of Leadership is based on the premise that (a) (b) (c) (d) (e)

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To act honestly and with utmost good faith 2

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(c) Non-executive director < Answer >

(b) (c) (d) (e) 19.

To act with the best skills and expertise Not to exceed their authority and powers To convene the annual general meeting To reveal his financial interests in a contract.

Which of the following is not a factor involved in ethical decision-making in operations management? (a) Magnitude of consequence (d) Concentration of effect

20.

(b) Probability of effect (e) Managerial discretion.

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(b) Share repurchase (e) Golden parachute.

II. Fiduciary duties.

(a) Only (I) above (d) Both (II) and (III) above

24.

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III. Duties of care.

(b) Only (II) above (c) Both (I) and (II) above (e) (I), (II) and (III) 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? (b) Compliance certificates (e) Compliance codes.

Corporations operating at which level of ethical consciousness, are driven by the philosophy “might makes right”?

28.

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Increasing consumer awareness Business compulsion rather than choice Public image and positioning Expected increase in profits Organizational concern and commitment to environment.

Which of the following occurs when a company engages in soliciting and hiring certain highly productive or successful employees from one of its competitors? (a) Corporate raiding (d) Corporate control

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

Green initiatives by business is primarily because of (a) (b) (c) (d) (e)

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Encouraging ‘brain drain’ from poorer countries Providing supplier products that are inappropriate to local needs Not accepting responsibility for unsafe products Exploiting host country labor Using expensive technology.

(a) Law of jungle (c) Corporate citizenship (e) Profit-maximization in the long-term. 27.

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(c) Circulated letters

Which of the following is a technology related unethical practice that MNCs are often accused of practicing? (a) (b) (c) (d) (e)

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Protection against improper solicitation of proposals Accurate representation of findings Observe refrain from attacking competitor’s products Right to anonymity Right to be informed of results.

(a) Purchase orders (d) Corporate credos 25.

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(c) Going private

Which of the following is not a practice/right that the marketing research profession in business must ensure towards society? (a) (b) (c) (d) (e)

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(c) Just-in-time delivery

Duties of a director can be divided into which of the following categories? I. Corporate duties.

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(b) Forward buying (e) Piling up of stocks.

The act of buying back fraction of outstanding shares of common stock by organizations is called (a) Exchange offer (d) Leveraged buy-outs

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(c) Time interval

The practice of buying raw materials or stock beforehand in order to meet future requirements is called (a) Procurement (d) Total quality management

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(b) Corporate competition (e) Corporate strategy.

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(c) Corporate governance

Which of the following theories states that managers/employees cannot be trusted to act in the best interests of the shareholders and should be monitored and controlled to ensure that they follow the set 3

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interests of the shareholders, and should be monitored and controlled to ensure that they follow the set policies, procedures and plans of the corporation? (a) Stewardship theory (b) Agency theory (c) Theory of corporate moral excellence (d) Ethics and stake holder theory (e) Ethics and corporate governance theory. 30.

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 of business (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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Part B : Caselets (50 Marks) This part 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.

2.

Poison pills have become a commonly used tool for companies to counter abusive takeover tactics and unsolicited bids. Discuss some other counter strategies that companies can adopt against hostile takeovers. (8 marks) < Answer > Is the criticism against hostile takeovers justified? Is it ethical for a company to adopt the strategy of ‘Poison Pill’ to counter a hostile takeover?

(7 marks) < Answer > Hostile takeovers have become a part of business life. Firms with money or credit buy up those that can no longer afford to operate independently. Large firms buy small ones at a fraction of their true value. Consider the case of Philippine Long Distance Company (PLDT) - The company armed itself with a “poison pill” as a defense against a possible takeover. This was done, though it did not face any such threat. The company was vulnerable because of its weak stock price, its dominance of the domestic phone market and its easy access to credit. According to the proposal, a hostile bid would automatically trigger a rights offering. This would allow all shareholders - except the raider - to buy new shares at half the market price. Triggers were also fixed. The rights offer would trigger when any investor acquired 10 % or more of the company’s shares or made an offer to acquire 10 %, or when an existing shareholder raised his stake by 5 %. This would have made it expensive for a prospective raider to acquire management control. This was a case where there was no takeover threat. Yet, the company wanted a defense mechanism that would have tied up the ownership and management for all time to come, unless somebody could overcome the prohibitive price tag that was created with the `poison pill'. In the corporate world, companies to avert a hostile takeover create a “poison pill” that the raider will not want to swallow. A “Poison Pill” also known as “Shareholders Rights Plan” is designed primarily to make it difficult, time-consuming and expensive for a hostile acquirer to consummate offers that may not offer fair value to all shareholders. It is usually an issue of convertible preferred stock distributed as a dividend to current stockholders. The preferred stock is convertible into common shares equal to or greater than the number of shares outstanding. The takeover attempt becomes its own poison because it vastly increases the price to be paid for a company. A “Shareholders Rights Plan” works by threatening to substantially dilute the unfriendly acquirer's equity interest. Upon the occurrence of certain takeover events, the company's shareholders (other than the acquirer) can exercise rights or warrants. On exercising this option, the shareholders can buy additional equity securities in the company or of the acquirer at a substantial discount. The risk of dilution, combined with the authority of a target's board of directors to redeem the rights prior to a triggering event, compels the potential acquirer to negotiate with the target’s board of directors, rather than proceeding unilaterally. Steel Technologies Inc., Louisville, adopted a shareholder's right plan under which a preferred stock purchase right was distributed as a dividend on each outstanding share of common stock The plan would protect shareholders in the event of a takeover bid by an outside company. "The company's solid increase in earnings was a factor in the board's adoption of a shareholders' rights plan,” The plan was adopted to protect the interest of shareholders and to help ensure that potential acquirers do not use coercive tactics to deprive the board and officers of the opportunity to determine the company's future and to realise the full value of shareholders' investment in Steel Technologies." In the event that any person or group either acquires or makes a tender offer for 20 % or more of common stock, holders of the rights (other than the acquiring person) will be able to purchase a number of shares for $50 though it has a market value of $100. (50% discount to the prevailing market price in 1998). Adopting a pill is the first step to protect a company against takeovers. A poison pill makes a raider negotiate, and buy 5

time for a target company to get a proper evaluation of the offer. It gives the company an opportunity to investigate other alternatives. Economic studies suggest that takeover premiums are higher when rights plans are in effect. For example, Markel Corp., Glen Allen, Va., launched a $187 million bid to acquire Gryphon Holdings Inc., in October 1998; Gryphon had a "poison pill" provision that would have allowed it to issue new stock. Gryphon, however, did not activate the provision, because Markel Corp. raised its offer from $18 to $19 a share. Even though poison pills may lead to higher premiums and do not reduce bid completion rates, they still might prevent the occurrence of some bids which act against the economic interest of shareholders of the unrealised target companies. Pursuers may be squeezed by the intense competition caused by deregulation and may be desperate for a product market extension or diversification. They may consider the implementation of their strategy to be a survival issue - and acquisition of a possible prey may be the heart of their strategy.

Caselet 2 Read the caselet carefully and answer the following questions: 3. “J&J was lauded for its quick decisions and sincere concern for its customers, during the product tampering crisis in 1982.” Discuss J&J’s strategy, which helped it regain market share and customer trust. 4.

(8 marks) < Answer > Despite bad publicity and costly legal settlements, J&J was reluctant to place adequate warnings on its Tylenol tablets. Why was J&J hesitant in warning the public?

5.

(6 marks) < Answer > Do you think there is a conflict between the economic tasks and social tasks performed by J&J, in the Tylenol overdose controversy? Explain. How do you think J&J should have handled the controversy, when it arose the second time? (8 marks) < Answer >

In September 1982, deaths caused by intake of Tylenol caused a nationwide panic and grave losses for the manufacturer Johnson & Johnson (J&J). Responding to the situation, J&J acted immediately and alerted consumers across the US, (through the media), not to consume any Tylenol product until the extent of tampering could be determined. The three national television networks reported the deaths on their evening news broadcasts. The company recalled all Tylenol bottles and publicized the recall with full-page newspaper ads. Consumers were asked to return the bottles to the stores and exchange them for Tylenol capsules that were not subjected to cyanide tampering. The company shut down the production, distribution and advertising of the medicine temporarily. The Food and Drug Administration also advised consumers to avoid taking Tylenol capsules. J&J recalled 31 million bottles of extra strength Tylenol worth over $100 million from all retail stores in the US. In addition, the company offered to exchange tablets for capsules at no extra cost for all customers. According to an analyst, J&J suffered a loss of $1.24 billion due to the depreciation of the company’s brand value. Tylenol’s share fell from 37% of the US analgesics market in early 1982 to just 7% by late 1982. According to media reports, the sudden deaths occurred because the Tylenol capsules had been laced with cyanide. The capsules had been opened and filled with 65 mg of cyanide. After eight million recalled capsules were tested, only 75 capsules from eight bottles were found to have actually been laced with cyanide. In spite of the deaths, J&J was praised for its quick action and sincere efforts in recalling Tylenol and giving consumer safety top priority, especially when this was not an easy decision for them. A month after the crisis, J&J launched an aggressive campaign to re-build Tylenol’s image. The company decided to relaunch the product in a new triple-tamper-resistant package the end of 1982. It’s efforts paid off and the company was able to recapture 32 of its original 37 percent market share just six months after the cyanide poisoning incidents. According to analysts, the manner in which J&J handled the crisis made it the role model for crisis management and demonstrated its commitment to customer safety and the quality of its product, rather than thinking about financial implications. J&J’s openness and communication with the public helped the company maintain a high level of credibility and customer trust. In 1986, when the public fear about Tylenol has started subsiding, J&J was again in the news due Tylenol tampering. J&J had to once again recall all capsule products. The company decided to permanently discontinue capsules. It replaced the product with new solid caplets that were relatively less susceptible to tampering. The incident, however, attracted negative criticism from analysts. They said that after the 1982 incidents, J&J should have been more proactive and vigilant about product safety. In 1989, J&J faced yet another problem when deaths occurred due to the over doses of Tylenol. There were reports of overdoses amongst children causing liver damages too. The infant drops were three and half times stronger than other children medicines. Therefore, overdoses were proving disastrous, especially for children. 6

In the following years, there were hundreds of deaths and severe liver damages that were all attributed to Tylenol’s main ingredient – acetaminophen. Acetaminophen was used to treat mild to moderate pain and fever including simple headaches, muscle aches and mild form of arthritis. The drug was more useful for patients who could not use Aspirin or Ibuprofen, because of gastrointestinal ulcers or bleeding disorders. Acetaminophen could also be harmful for people with liver problems, if taken along with alcohol and certain other medicines or on an empty stomach. Slowly, people became aware that though safe in proper doses, Tylenol could be dangerous even in a little overdose. For children, Tylenol came in kid-pleasing flavors and was marked as a “SAFE” alternative to Aspirin. As children liked the flavor, they could just take another dose. It was also found that in many cases, one parent was not aware that the other had given the dose, and accidentally gave a second dose. Moreover, parents were not aware about the right doses of Tylenol line of products. However, Tylenol was marketed with the tag line “Nothing’s Safer.” The required warning labels as per the US Food and Drug Administration rules only stated alcohol-related risks.. According to analysts, in spite of the bad publicity and legal settlements, which cost the company millions of dollars, J&J refused to put explicit warnings on its Tylenol labels. The company had only made cosmetic changes on the warning label. After the 1989 case, J&J added to the extra strength package: “Not for use for children.” In 1994, it added a statement warning customers against using a pain reliever after a drink. Analysts said that J&J resisted writing the kind of label that would really alert people about the dangers of taking overdoses. However, according to a company's spokesman, it resisted warning customers about possible liver failure because the company felt that “organ specific” warnings would confuse people. Similarly, the company resisted warning about the risk of death to avoid suicides. In response to the studies revealing Tylenol-related liver damages, J&J advised its sales representatives not to discuss the issue with doctors. Rather than taking some concrete measures to prevent patients from taking overdoses, J&J recommended that the patients should keep a log for doses taken. The recommendation was made in a patient education brochure given to the doctors. According to media reports, at least 100 suits had been filed against J&J over acetaminophen poisonings between 1990 and 1997. In four cases, the company reportedly made out-of-court settlements under agreements that required the plaintiffs to maintain silence about the terms. The fact that acetaminophen was available at about half the price suggested that J&J’s profit margin was very high. J&J spent a major part of this profit to strengthen Tylenol’s image. In September 1997, the FDA’s OTC drug advisory committee recommended additional changes in the labeling for acetaminophen used in painkillers. The FDA wanted manufacturers to explain the correct dosages for children under two years, instead of simply directing parents to consult a doctor before using the medication. In October 1997, J&J announced that it would inform parents about Tylenol’s side effects on children through labels and advertisements. The new labels cautioned consumers against overdose. From November 1997, J&J also released magazine and TV ads informing parents about correct dosages for children.

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

Codes for corporate governance serve only as a guideline and effective corporate governance depends on the people of an organization. What is corporate governance? What are the contributing factors to a lack of corporate governance in the Indian public sector? (8 marks) < Answer >

7.

How can effective corporate governance be implemented in India? (5 marks) < Answer >

In the event of globalization, when investments take place in emerging markets, the investors want to be sure that not only are the capital markets or enterprises with which they are investing, run competently but they also have good corporate governance. In other words, when investments take place across national borders, the investors want to be sure that not only is their capital handled effectively and adds to the creation of wealth, but the business decisions are also taken in a manner which is not illegal or involving moral hazard. Corporate governance therefore calls for transparency in decision-making, accountability – which follows from transparency because responsibilities could be fixed easily for actions taken or not taken – and the accountability is for the safeguarding the interests of the stakeholders and the investors in the organization. Implementation of corporate governance has depended upon laying down explicit codes, which enterprises and the organisations are supposed to observe. The Cadbury’s code in United Kingdom was the starting point, which led to a number of other codes. In India itself we have the Kumaramangalam Birla code as a result of the committee headed by him at the behest of the SEBI. Earlier we had the CII coming up with the code for corporate governance recommended by the committee headed by Shri Rahul Bajaj. The codes, however, can only be a guideline. Ultimately effective corporate governance depends upon the commitment of the people in the organisation. The very first issue of corporate governance in India is – do the India managements really believe in corporate governance? 7

Corporate governance depends upon two factors. The first is the commitment of the management for the principle of integrity and transparency in business operations. The second is the legal and the administrative framework created by the government. If public governance is weak, there cannot be good corporate governance. The dramatic Enron case has highlighted how companies, which were the darlings of the stock market and held up as models for vigorous and innovative growth can ultimately collapse like a house of cards as they were based on fraud and dishonesty. The association of the accounting firm Anderson has also raised a doubt about the credibility of even well regarded global players. In the Indian context, the need for corporate governance has been highlighted because of the scams that are almost an annual feature ever since liberalisation from 1991. India has seen the Harshad Mehta Scam, Ketan Parikh Scam, UTI Scam, Vanishing Company Scam, Bhansali Scam and so on. In the Indian corporate scene, global standards must be inducted so that at least while the scope for scams may still exist, the scope can be reduced to the minimum. The legal and administrative environment in India provides excellent scope for corrupt practices in business. As a result, unless a management is committed to be honest and observe the principles of propriety, the atmosphere is too tempting to observe good corporate governance in practice. The corporate governance issue in India should be approached not merely from the point of view of the guidelines but look at the entire network of various rules and regulations impinging on business so that there is a integrated wholistic system created for ensuring that transparency and good corporate governance prevail. The ethical temperature of any business or capital market depends on three factors. The first is the individual’s sense of values. The second is the social values accepted by the business and industry. When the Harshad Mehta Scam took place, it was claimed that the manner in which the bank receipts were being treated was the prevailing norm. Perhaps a similar argument would have been given in the Ketan Parikh Scam. In other words, practices, which are later on found to be highly objectionable, become acceptable because that was the prevailing market practice. Social values will depend upon the standards set up by professional bodies like the Association of Chartered Accountants or Cost Accounts of India and so on. The third and perhaps the most decisive factor is the system. It is here that India faces the main challenge. The Indian system encourages lack of corporate governance. In India today the system has a poor level of public governance. There is no fear of punishment at all. This is not to override that there are honorable companies in India, which are following ethical practices but if the general environment is such that there is no fear of punishment, people are bound to be tempted to indulge in corrupt practices and moral hazards, which go totally against corporate governance. In order to bring in better corporate governance, introduction and strict observance of the code mentioned above is necessary. In the ultimate analysis, it is the observance of corporate governance at the enterprise level or at the level of a body like the capital market will depend upon the top managements in-charge of the organisation or the body. It is necessary that they remember the three way tests for the ethics - a) Is the decision being taken legal? If it is not legal, it is not ethical. b) Is the decision being taken fair? In other words, it should be a win-win situation for both the parties entering into an agreement or if it is a general policy or a multi-level agreement, there should be equal risk and reward to all concerned. If it is not fair then the decision is not ethical. c) If the decision being taken is such that if known publicly through the media, it will make its endorsers feel ashamed, then it is not an ethical decision. Better corporate governance and corporate management may result from more exposure to other companies' ways of doing this, and the need to self-organize in ad hoc committees or other reactive bodies. Ultimately, corporate governance is the net result of the individual sense of values, the values held in society or part of a society like professional bodies or business associations and finally the system of public governance. If those who violate the norms are effectively punished, then there is a fear and there will be adherence of the principles of corporate governance.

END OF SECTION B

Part C : Applied Theory (20 Marks) This part 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.

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8.

Humans use an excessive number of animal products for food, clothing, cosmetics and health care products. For a law banning the use of animals in consumer products to be enacted, what would be the four processes involved? (10 marks) < Answer >

9.

The evolution of the corporate structure took into account needs of the society and aimed at the corporation’s own perpetuity and growth. Discuss the four basic characteristics of a corporation that attracts investors. (10 marks) < Answer >

END OF SECTION C END OF QUESTION PAPER

Suggested Answers

Business Ethics & Corporate Governance (MB321): July 2005 1.

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

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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.

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

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Answer : (d) 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.

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5.

Answer : (a) 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 nonexistent 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.

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

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Answer : (b) Reason : The process by which large amounts of illegally obtained money is given the appearance of having originated from a legitimate source is called money laundering. (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.

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8.

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.

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9.

Answer : (a) Reason : The principal recommendations of the Cadbury committee covered ‘The board of directors and their role’.

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10. Answer : (d) Reason : ‘ Maximization of shareholder value’ should be the governing objective of a company.

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

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12. 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.

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13. Answer : (c) Reason : The country club board lays emphasis on maintaining cordial interpersonal relations. Concern for effective decision-making takes a back seat.

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14. Answer : (d) Reason : The Vertical – Dyad Linkage Theory (VDL Theory) of Leadership is based on the premise that ‘Leaders have different relationships with different subordinates’.

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15. Answer : (c) Reason : The integration view expresses that business being an economic entity has the right to make profits, but at the same time, it should discharge the social obligations. (a) The separatist view endorses that the only aim of business is to generate profits. (b) The Unitarian view of ethics implies that if businesses want to exist, survive and flourish, morality and ethics cannot be separated from the operation of the business in the long run. Therefore, business should concentrate on society and it has a major role to play in serving the society and ushering in society welfare. (d) Law of jungle and (e) stakeholder concept, are two stages of the ethical consciousness in business.

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16. Answer : (a) Reason : A moral responsibility to preserve the environment is referred to as the

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anthropocentrism approach. (b) The anxiological approach is a moral responsibility to protect animals. (c) A radical approach to environmental responsibility is referred to as the eco-centric approach. Options (d) and (e) do not refer to any specific approaches. 17. Answer : (b) Reason : A shadow director influences the decisions of the board without formally being present on the board. This type of directorship is seen in some family owned companies. They are however, responsible for the acts of the company along with the board of directors.

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18. Answer : (e) Reason : ‘To reveal his financial interests in a contract’ is the statutory duty of a director.

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19. Answer : (e) Reason : Managerial discretion is not a factor involved in ethical decision making in operations management.

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20. Answer : (b) Reason : Forward buying is 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.

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21. Answer : (b) Reason : The act of buying back fraction of outstanding shares of common stock by organizations is called share repurchase.

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22. Answer : (d) Reason : Duties of a director can be divided into four categories – fiduciary duties, duties of care, statutory duties and other duties. Therefore, option (d) is the correct answer. 23. Answer : (c) Reason : Refraining from attacking competitor’s products is not a practice/right that the marketing research profession in business must ensure towards society.

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24. 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.

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25. Answer : (a) Reason : Encouraging ‘brain drain’ from poorer countries is a technology related unethical practice that MNCs are often accused of following.

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26. Answer : (a) Reason : Corporations operating at the law of jungle stage of ethical consciousness are run on brute strength and believe in “might makes right”.

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27. Answer : (e) Reason : Green initiatives by business is primarily because of Organizational concern and commitment to environment. Green Initiatives in business range from environmentally friendly technological innovation green tourism, green community, environmental campaigning and environmental counseling.

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28. Answer : (a) Reason : Corporate raiding occurs when a company engages in soliciting and hiring certain highly productive or successful employees from one of its’ competitors.

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29. Answer : (b) Reason : Agency theory assumes that the agent manager will not always take decisions that will maximize long-term owner value. Managers often take decisions, which further their own interests but are detrimental to the interests of the organizations. This theory states that agents/managers/employees cannot be trusted to act in the best interests of the shareholders and should be monitored and controlled to ensure that they follow the set policies, procedures and plans of the corporation

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30. 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. An ethical audit measures business standards and procedures against principles of maximizing owner value, distributive justice. An ethical audit does not measure business conduct against the varied moral or religious standards of a community. The main objectives of an ethical audit are: • 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. • To help in providing a critical assessment of how well a business is actually run by systematically evaluating its business practice. • To help in scrutinizing the basis on which accounts are drawn and also evaluates whether management has reliable information in running the business. • To help businesses undergo major alterations like restructuring,. Ethical audits are important for investigating into acquisitions or restructuring operations. • 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. Hence option (c) is the answer.

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Part B : Caselets 1.

Managements use many strategies jo to protect themselves from unruly predators. They are commonly referred to as Shark repellants. Some of the counter strategies that managements adopt, besides poison pills, to protect themselves from unruly predators are. Greenmail Greenmail occurs where a potential takeover agent purchases stock in a company. After the purchases have totaled five percent, the agent must announce his intention to take over the company, if that is the intent to takeover the company. The stock price goes up in anticipation of the takeover battle The takeover agent ends up selling the shares back to the company for this increased price or somewhat higher negotiated price, when the attacked company struggles to thwart the takeover. Management of the target company sends greenmails to prevent a shareholder from taking over the company by himself or by teaming up with any other competing company. Greenmails are considered unethical because the target company may be forced to incur debts to raise funds to finance the buyback of the shares at a premium price. Generally, the management is responsible for this unethical practice as they usually send greenmails financed by owners' money without their knowledge. The acts of the potential bidder are also considered unethical if he increases his stake in anticipation: of getting a greenmail from the company. The use of greenmail is unethical because instead of using a company's money productively, it uses the money to avert the takeover. However, greenmail is not inherently unethical as it is not a form of extortion where a business is forced to pay a price. Golden Parachute When a company is taken over, many top executives are likely to lose their jobs. So to discourage an unwanted takeover attempt, a company gives lucrative benefits to its top executives- benefits that are awarded to those executives who lose their jobs after a takeover. Benefits include stock options, bonuses, and severance pay, etc. Such Golden parachutes can run into millions of dollars and can cost the firm a lot of money. Another quality of golden parachutes is that they act as a deterrent to anti-takeover tactics. The presence of a parachute allows management to evaluate a takeover bid more objectively. Without a golden parachute provision in place, executives might selfishly implement costly defensive tactics to save their jobs, regardless of what is in the best interest of shareholders. Whether a golden parachute dissuades a takeover or not, it can benefit a corporation by attracting top executives, thwarting costs associated with takeovers and promoting stability. People Pill This is a defensive strategy for warding off a hostile takeover. In this case management threatens that, in the event of a takeover, the entire management team will resign. This is a very effective method if they are a good management team. in place. the loss of which would harm the company. But if the manager act in their own interest rather than the company’s long term value then they are acting unethically. Sandbag This is another tactic used by management to stop takeover attempt. The company stalls the attempts in the hope that another, more favorable, company will try to take them over. Management should no waste too much of time in trying to find a more favorable company.

2.

Hostile takeovers are often criticized for not taking into consideration the interests of the target company. But this is not a legitimate criticism as the bidding company’s main objective is to maximize its own long-term owner value and not that of its target company, The likelihood of conflict is more in hostile takeovers because of involvement of number of opposing parties, like the takeover company and the target company, their managers and boards and minority and majority shareholders. Some of the criticisms levied against hostile takeovers are not justified. One technique where the criticism against hostile takeovers is not valid is the two-tier tender offer- one of the American bidding techniques. In this type of takeover 51 % of the shareholders, who tender their shares to the bidder receive a premium over the then market price, while the remaining 49% receive only promissory notes for the tender amount, which are encashable in the future. This process has been criticized, as it is being unethical as it offered different shareholders different prices for their shares. But when shareholders sell their shares through stock exchanges, the prices they receive for the shares depend upon the market conditions and the same case can be considered for the two tier tender offer. The bidding technique is ethical, as the bidder does not use coercion or violence to force the shareholders to sell their shares. ‘Poison pill’ is an anti-takeover devices used by a company's management to make a takeover prohibitively expensive for the bidders. The company under target changes the' Articles of Association' so that a group of shareholders have special rights, which are evoked by a takeover. These rights include, special voting rights, and the right to buy and sell preferred stock at highly favorable prices (at times below market price). These rights can be exercised only when someone is attempting a takeover to make the takeover prohibitively expensive. Properly designed poison pills can make a company bid proof or shield the company from the threat of takeovers. ‘Poison pills’ are prohibited in Britain by the Takeover code because they prevent open competition between the bidders for shares and the bidders who are favored by the management of the target company succeed in their takeover attempt. But devising Poison pills is considered legal in the United States of America. When companies face

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hostile takeovers, the shareholders have the right to buy or sell shares to their own company or potential acquirer at a non market price. The use of poison pills is ethical if they are designed to protect the shareholders against unwanted takeover bids. If however they are used to protect the management at the expense of the shareholders, then they are being used unethically. Poison pills have been used unethically, especially in the management dominated boards. They have been used to diminish long-term owner value. The power vested in management to prevent takeovers can sometimes be misused. Sometimes managers reject takeovers, as they are contrary to their own interests. Taking such decisions is unethical. It is therefore necessary to have properly structured boards that are represented by members who are fully committed to maximizing long-term owner value

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3.

Tylenol received a major setback in late 1982 when it was found that many bottles of Tylenol extra strength capsules were laced with cyanide. The publicity about the poisoned capsules has led to a nationwide panic. J&J acted immediately, by alerting consumers across the US, not to consume any type of Tylenol product. The drove through Chicago where the incidents were first reported, announcing the warning over loudspeakers, and all the three national television networks reported the deaths on their evening news broadcasts. The company asked its consumers not to use the product until it determined the extent of tampering in Tylenol. J&J recalled all Tylenol bottles and publicized the recall through full-page newspaper advertisements. The company asked the consumers to return the bottles to the stores and exchange them for Tylenol capsules that were not subjected to cyanide tampering. The company temporarily stopped the production, distribution and advertising of the drug. Right from the initial days of the news breakout, J&J worked with federal investigators to find the reasons behind the deaths. After testing the eight million capsules that were recalled, J&J determined that the bottles were been tampered on the shelves of the drug stores. As per the analysts, it was not an easy task for J&J to recall all Tylenol products. Executives were concerned about the panic that could raise in the industry over such a wide scale recall. A month after the crisis, J&J launched an aggressive campaign to regain its market share and customer trust. Towards the end of 1982, the company `decided to re-launch the product in a new triple-tamper-resistant package. The efforts put in by the company paid off, as it was able to recapture 32 of its original 37 percent market share within six months after the cyanide poisoning incidents. < TOP >

4.

Despite growing fatal incidences from the use of Tylenol, J&J refrained from warning customers about possible liver failure. The company justified this by stating that “organ specific” warnings would confuse people and to avoid the risk of suicides. According to media reports, at least 100 suits had been filed against J&J over acetaminophen poisonings between 1990 and 1997. In four cases, the company reportedly made out-of-court settlements under agreements that required the plaintiffs to maintain silence about the terms. This loss of revenue could have been the main reason behind J&J’s reluctance to make people aware of Tylenol’s side effects. Moreover, it would affect J&J’s image, bring down consumer trust and loyalty. This could also have had a rub-off effect on its other brands. < TOP >

5.

J&J certainly faced a conflict between the social tasks and the economic tasks that it was expected to perform. An organisation is socially responsible if its treatment of employees, customers and community is unbiased. It further, involves the organization getting involved in community service activities. Looking from this perspective, J&J should have been concerned about the health risks that Tylenol posed to its consumers; and therefore J&J should ideally have placed a warning sign on its product and made its consumers aware of the risks of overdose. The company took good care the first time the controversy happened and built good consumer trust. It did not care about the financial implications either. But when the problem persisted and the controversy came to limelight again, the company had second thoughts. The economic tasks a company must perform are all tasks related to the creation and maintenance of wealth. In J&J’s case, loss of revenues was affecting the company performing its economic tasks. Hence, J&J faced a conflict in striking a balance between the two. Since J&J handled the situation well the first time, it could have definitely worked out a way the second time also. Ultimately after a long tussle, J&J was forced to comply with the requirements to place warning labels on its products. The heavy losses the company suffered during this duration and the loss of reputation could have been prevented if the company had adopted this course in the beginning itself. < TOP >

6.

Corporate governance is the system by which business corporations are directed and controlled. The corporate governance 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. Corporate governance calls for transparency in decision-making, accountability – which follows from transparency because responsibilities could be fixed easily for actions taken or not taken – and the accountability is for the safeguarding the interests of the stakeholders and the investors in the organization. Implementation of corporate governance has depended upon laying down explicit codes, which enterprises and the organisations are supposed to observe. The following factors have contributed to a lack of corporate governance in India: 14

The very first issue of corporate governance in India is – do the India managements really believe in corporate governance? Corporate governance depends upon two factors. The first is the commitment of the management for the principle of integrity and transparency in business operations. The second is the legal and the administrative framework created by the government. If public governance is weak, there cannot be good corporate governance, which is the case in India. • The legal and administrative environment in India provides excellent scope for corrupt practices in business. As a result, unless a management is committed to be honest and observe the principles of propriety, the atmosphere is too tempting to observe good corporate governance in practice. •

When Harshad Mehta Scam took place, it was claimed that the manner in which the bank receipts were being treated was the prevailing norm. Perhaps a similar argument would have been given in the Ketan Parikh Scam. In other words, practices, which are later on found to be highly objectionable, become acceptable because that was the prevailing market practice. The ethical temperature of any business or capital market depends upon three factors – the individual’s sense of values, the social values accepted by the business and industry and the system. Social values depend upon the standards set up by professional bodies like the Association of Chartered Accountants or Cost Accounts of India and so on. The system is where India faces the main challenge. The Indian system encourages lack of corporate governance.

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The India system has a poor level of public governance because there is no fear of punishment at all. Although there are many honorable companies in India, which are following ethical practices, in a general environment where there is no fear of punishment, people are easily tempted to indulge in corrupt practices and moral hazards, which go totally against corporate governance. < TOP >

7.

The need for corporate governance in India has been highlighted because of the scams such as the Harshad Mehta Scam, Ketan Parikh Scam, UTI Scam, Vanishing Company Scam, Bhansali Scam and so on. In the Indian corporate scene, global standards must be inducted so that at least while the scope for scams may still exist, the scope can be reduced to the minimum. Corporate governance in India does not merely require guidelines but an entire network of various rules and regulations impinging on business so that there is a integrated wholistic system created for ensuring that transparency and good corporate governance prevail. Introduction and strict observance of a code that leads to accountability is required. To observe corporate governance at the enterprise level or at the level of a body like the capital market will depend upon the top managements in-charge of the organisation or the body. Managements can adopt to three way tests for ethics a) Is the decision being taken legal? If it is not legal, it is not ethical b) Is the decision being taken fair? In other words, it should be a win-win situation for both the parties entering into an agreement or if it is a general policy or a multi-level agreement, there should be equal risk and reward to all concerned. If it is not fair then the decision is not ethical c) If the decision being taken is such that if known publicly through the media, it will make its endorsers feel ashamed, then it is not an ethical decision. Better corporate governance and corporate management may result from more exposure to other companies' ways of doing this, and the need to self-organize in ad hoc committees or other reactive bodies. Ultimately, corporate governance is the net result of the individual sense of values, the values held in society or part of a society like professional bodies or business associations and finally the system of public governance. If those who violate the norms are effectively punished, then there is a fear and there will be adherence of the principles of corporate governance. < TOP >

Part C: Applied Theory 8.

Law is a consistent set of universal rules that are widely published, generally accepted and usually enforced. Laws can be enforced only if they are widely accepted i.e. laws are framed to be accepted. Four processes are involved in the formulation laws. Individual Process Society comprises of different individuals, with different moral standards, based on their norms, beliefs and values for moral standards. These moral standards are the outcome of their different cultural, family and social backgrounds. Let us understand the meaning of the terms norms, beliefs and values. Norms can be defined as the criteria for behavior. They reflect society's expectations of the way people should 15

ideally act. An example of a norm in Indian society could be respect for elders. Belief refers to the way an individual expects people to think. For instance, an individual may believe that environmental preservation is a moral act because it prevents pollution. Similarly, individuals may also expect from others in society to take part in environmental preservation activities. Norms differ from beliefs since beliefs do not have any follow up action. A chemical firm must have an Effluent Treatment Plant (ETP) as a norm. This norm is associated with the belief about the benefits of clean environments and the adverse effects of chemical pollution on society. Values are the priorities that a person establishes for his or her norms. Norms and belief do not have the same weightage or importance at all times. The importance or weightage given to norms are based on beliefs, which are in turn based on a person's values. Though norms, beliefs, and values differ, they form the basis for moral standards. Individuals who share common beliefs, norms and values form a group. Group Process Every society has its own unique set of interlinked elements like religious teaching, cultural traditions, economic conditions, technological developments, social structures and political processes. These elements influence an individual's selection and development of his set of norms, beliefs and values.. Moral standards may differ from individual to individual. Although, the influence of elements like religion, economy, technology etc, cannot be measured accurately, their influence can easily be observed in a' person's set of moral standards and his resultant behavior. Any subsequently will lead to changes in the law. For example, the shift from heavy manufacturing industry to knowledge based industry opened up many employment opportunities for women. Thus, any change that occurs on the economic, technological or political fronts will indirectly influence the moral standards of people, and hence the law.changes in the basic set of elements of society will influence the moral standards of individuals and, Social Process All individuals are bound to be exposed to social, political, economic and religious factors. These exposures change over a period of time. Such changes have an impact on the social and political process. The social process is concerned with accretion of power. It implies that individuals sharing common norms, beliefs and values form small groups. These groups then become part of larger organizations, such as business firms, labor unions, political parties, charitable agencies etc. Over a period of time, these groups (larger organizations) may achieve an acceptable compromise on norms, beliefs and values or split themselves into smaller organizations to achieve a compromise. Political Process Law does not accommodate all the norms, beliefs and values of organizations, groups and individuals. Hence, sometimes there is a conflict between the law and the moral standards held by an individual or organization. The political process plays a major role in minimizing this conflict by institutionalizing these moral standards into law; standards are institutionalized by being incorporated into the laws of the country. For example, when the majority of the citizens objected to feticide of girls, the government enacted a law prohibiting scanning for identifying the gender of the child. Many issues may not muster the same sentiments of the citizens, hence governments should adopt a consistent and universal approach in institutionalizing the divided opinion of the people. There are various theories that explain this institutional process: presidential leadership, institutional compromise, congressional bargaining and constituent pressure. Although these names used at central and state level differ, the basic process is almost similar. Various institutions, government agencies, and Non Governmental Organization's (NGO's) try to influence the law making mechanism. Usually, democratically elected representatives of the people are given the power to make laws through the democratic system (parliamentary process). But, in a country like India people are not in a position to influence law making, as public opinion/issues differ in various regions of the country, segments of the population, and sectors of the economy. In many cases, the ruling government has to strive hard to establish coalitions to pass legislation. In the present day political scenario of splintered electoral opinion, it is very difficult for the ruling party to gain the support of the majority of the house for even passing a legislation that supports legitimate cause (women's reservation bill). Considering the fact that the electronically method is a costly affair, many doubt the motives of the elected representatives in supporting or rejecting some legislation. But one should bear with the present political system until we discover or invent a new system that is more moral than the present democratic system in the governance of the country. < TOP >

9.

The four basic characteristics of a corporation, which attracted investors, are limited liability for investors, free 16

transferability of investor interests, legal personality and centralized management. Limited Liability The concept of limited liability can be traced back to 2000 BC, when merchants financed seagoing vessels in return for a share in profits resulting from trade, but in case of shipwreck, their loss was limited to the amount invested. Although the concept of "Limited liability is old" this term was first used by the English courts during the fifteenth century. At that time limited liability implied that the corporation was distinct from its owners and employees. Effectively what was owed to the corporation was not owed to the individuals and what was owed to the individual was not owed to the corporation. Thus, if corporations were to become bankrupt and when sued by its creditors for recovery of debts; the members of the corporation were not held liable individually. In a partnership firm, partners are held personally liable for debts to unpaid creditors and employees, for misbehavior of co-partners or any others claims made by the customers against the business. But in case of a corporation, the risk of loss is limited to the amount invested. Partners have equal rights in the running of the company. The liability of a partner can be commensurate with his share of power. Relatively the shareholder enjoys a lower level of risk. Transferability Transferability of stockholding attracts investment. The facility of free transfer of shares enables a shareholder to minimize the level of risk. So, when a shareholder finds that his stock is losing value, he can sell his stock. Transferability provides the advantage of limited authority/risk to the shareholder. The shareholder tries to control his own risk/authority by selling shares when they are losing value. Legal, Personality As per law, a partnership firm ceases to exist when one of its partners dies or opts out of the partnership. But a corporation can continue to exist as long as it has capital to run its business. A corporation is a legal person, enjoying the following rights: • Corporations can give reasonable protection to individuals working for it from penalty or jail, which individuals would not enjoy as outsiders to the corporation. • Corporations can make donations to political parties and thus can push a agenda in favor of it. • As legal person, a corporation can own property, including real estate, copyrights and intellectual property. Thus a corporation enjoys by virtue of being conferred the status of a legal person. Centralized Management The activities of a partnership firm are carried out on the basis of a consensus or majority vote of the partners. Every partner has an equal say in the business. But in the case of a corporation. the board of directors is empowered to plan the company's overall direction. Further, it empowers managers to manage the day-to-day operations of the company. The characteristic of the centralized management of the corporation is a result of the limited authority given to the investors in day-to-day operations. Shareholders exercise their right to take decisions on general issues, thereby enabling the company to operate with maximum efficiency Earlier, corporations were required to obtain the approval of the state by being granted the Charter. This charter would enable corporations to engage in business activities. But by the late nineteenth century. Corporations were granted permission to manage their activities. Lawfully according to the Act, without any specific approval of the government. This change in relationship between corporations and the government inf1uenced the relationship between corporations and their shareholders. The increase ill number of shareholders resulted in a spread of ownership. As the size and age of the corporations increased, liquidity in the market also increased. < TOP > < TOP OF THE DOCUMENT >

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