Mb321 - Oct 06

Question Paper Business Ethics & Corporate Governance (MB321) : October 2006 Section A : Basic Concepts (30 Marks) • • • • 1.

Stakeholders of a firm can be categorized as internal stakeholders and external stakeholders. A firm that offers quality goods at reasonable prices, fulfills its responsibilities towards which of the following stakeholders? (a) (b) (c) (d) (e)

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Financial tasks Economic and production tasks Maintenance tasks Political tasks Adaptive tasks.

With a focus on better environment, companies are now-a-days adopting several green initiatives. Which of the following is aimed at encouraging employees to express their concern about environmental issues? (a) (b) (c) (d) (e)

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Age Gender Religion Nationality Educational qualification.

Organizations perform a number of tasks or functions in society. The tasks by which a society responds to change are referred to as (a) (b) (c) (d) (e)

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Employees Consumers Suppliers Creditors Competitors.

Unethical practices in hiring are related to discrimination on various bases. Which of the following is not a basis for discrimination in hiring? (a) (b) (c) (d) (e)

3.

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.

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Green community Green counseling Environmental campaigning Green tourism Green society.

Ethical theories are commonly divided into three subject areas, one of which is normative ethics. Which of the following statements is/are true about normative ethics?

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I. It deals with specific, often controversial moral issues such as abortion, female feticide and infanticide etc. II. It deals with linguistic issues that are concerned with the meaning of key moral terms used. III. The golden rule “do unto others as you would want them do unto you” is an example of normative ethics. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (I) and (III) above (e) All (I), (II) and (III) above. 6.

Which of the following is not a step in making ethical decisions in the business environment? (a) (b) (c) (d) (e)

Analyze the facts to determine the most appropriate moral values Gather the relevant factual information for evaluation of the decision Make an ethical judgement based on the rightness or wrongness of the proposed activity or policy Privilege the outcome desired by the person most injured by the unethical behavior Establish moral intent.

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7.

Ferrell and Gresham have identified three factors that determine the code of ethics framed by marketers as individual factors, significant factors and opportunity factors. Which of the following constitute/s opportunity factors?

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I. Moral values inculcated in a person by family. II. The extent to which reference groups influence marketers. III. Ethical codes and standards promoted in an organization. (a) (b) (c) (d) (e) 8.

Ethical standards vary between cultures and countries. It has been found that moral/ethical development follows a specific sequence of stages, irrespective of cultures and countries. Which of the following stages of ethical consciousness precedes the others? (a) (b) (c) (d) (e)

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(a) (b) (c) (d) (e) 12.

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Use of Socratic questioning of isolate views and confronting reasoning. Encouraging open and integrative discussions. Eliciting the full range of ethical values. Coordination across department in terms of following the same ethical code. Only (I) above Only (IV) above Both (II) and (III) above (I), (II) and (III) above All (I), (II), (III) and (IV) above.

Which of the following is true with regard to ‘morality and ethics’? (a) (b) (c) (d) (e)

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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.

There are various approaches for implementing a corporate code. In this respect, which of the following is/are the approaches recommended by Lickona to help managers address ethical dilemmas in the business world? I. II. III. IV.

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Consistent Universal Published Accepted Enforced.

The anthropocentrism approach is (a) (b) (c) (d) (e)

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Profit maximizing in the short-term Profit maximizing in the long-term Anything for profit Corporate citizenship Stakeholder concept.

Law has certain characteristics. If majority of the members do not obey the law, then it becomes difficult to enforce it. Therefore, laws have to be (a) (b) (c) (d) (e)

10.

Only (I) above Only (II) above Only (III) above Both (I) and (III) above All (I), (II) and (III) above.

Ethics refers to philosophical inquiry and morality to a sociological phenomenon They are synonymous Morality refers to a philosophical inquiry, ethics to a sociological phenomenon Ethics refers to religion, while morality refers to secular reasoning Morality pertains to religion, while ethics pertains to philanthropy.

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To avoid ethical dilemmas managers can follow the approaches by Clutterbuck, and Drummond and Carmichael. Which of the following is included in the “Clutterbuck” approach? (a) (b) (c) (d) (e)

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Acknowledge the personal dimension to ethical behavior Establish openness and transparency into decision making process Communicate ethical position Monitor symptoms of personal ethic related stress Explain your ground- rules to others.

Which of the following statements is/are true about ethical dilemmas?

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I. They involve a range of actions and their corresponding consequences. II. The problems arise due to managers’ involvement in value judgements, which rarely are clear-cut. III. To resolve these dilemmas one has to prioritize values to the extent possible. (a) (b) (c) (d) (e) 15.

The enlightenment matrix is used to measure corporate giving. As per the matrix, a company that is high in philanthropy and high in self-interest is involved in which of the following activities? (a) (b) (c) (d) (e)

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Only (I) above Only (II) above Only (III) above Both (I) and (III) above All (I), (II) and (III) above. < Answer >

Social responsibility Pure philanthropy Cause-related marketing Enlightened self-interest Community involvement.

Which of the following is not a category of duties of a director? (a) (b)

Fiduciary duties Duties of care

(c) (d) (e)

Statutory duties Other duties Social duties.

The issue of corporate responsibility came into focus through industrial revolution. Which of the following statements is/are true about the industrial revolution?

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I. II. III. IV.

Prior to the industrial revolution, businesses in England were marked by bad worker-boss relationships. During the first industrial revolution, cottage industries were replaced by the factory system. The second industrial revolution utilized electricity and improved technology and social life. The shift from agrarian economy to technology based economy transferred the political power from industrial capitalists to landowners. (a) Only (III) above (b) Both (I) and (IV) above (c) Both (II) and (III) above (d) (I), (II) and (III) above (e) (I), (II) and (IV) above.

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Economists like Milton Friedman and Talcott expressed different views about the relationship between ethics and business. Which of the following statements is/are true about the ‘separatist view’ of ethics? I. II.

If ethics were introduced in business, it would lead to a balance in market dynamics. Business should focus on profits and social problems should be tackled by the government and concerned individuals. III. Concerns like reducing production costs, optimizing labor etc. are relevant to the marketplace, not to ethical and moral issues. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (II) and (III) above (e) All (I), (II) and (III) above.

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Which of the following are conclusions about the relationship between moral judgements and law?

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The requirements of law overlap to a considerable extent but do not duplicate the probable moral standards of society. II. The requirements of law tend to be negative, while the standards of morality more often are positive. III. The requirements of the law tend to lag behind the apparent moral standards of society. IV. The law always represents collective moral judgements. (a) (b) (c) (d) (e) 20.

The center for advanced purchasing studies, researched the relationships of American buyers with foreign suppliers. Which of the following is not a result of this study? (a) (b) (c) (d) (e)

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Hedonist Conventionalist principle Utilitarian principle Categorical imperative Distributive justice principle.

A corporation has four characteristics. Which of the following statements pertain/s to the characteristic of ‘transferability’? I. It enables a shareholder to minimize the level of risk. II. It provides the advantage of limited authority/risk to the shareholder. III. It implies that the corporation is distinct from its owners and employees. (a) (b) (c) (d) (e)

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Maintain highest standards of professional and personal conduct Do not involve in unethical firing Strive for personal growth in the field of human resource management Improve public understanding of human resource management Refrain from using official position to secure special privileges.

As per analysis by Hellriegel, Slocum and Woodman, which of the following principles implies that operation managers are guided by personal goals/interests in decision-making? (a) (b) (c) (d) (e)

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Corporate social responsibility and ethical behavior Corporate governance and ethical behavior Corporate culture and ethical behavior Stakeholders and ethical behavior Law and ethical behavior.

Which of the following is not a guideline as per the code of ethics to be followed by members of the Society for Human Resource Management? (a) (b) (c) (d) (e)

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Significant differences did exist between buyers’ and suppliers’ perceptions regarding how involved each believed the other to be in these activities Bribery figured as an unethical practice in the lists of both the buyer and the supplier There is no relationship between the supplier’s nationality and the level of unethical activity in the buyer-supplier relationship Buyers least satisfied with the supplier relationship were those who perceived them to be most involved in unethical activities Buyers who believed that suppliers are involved in unethical practices felt that suppliers are performing less effectively.

Corporate moral excellence focuses on (a) (b) (c) (d) (e)

22.

Both (I) and (IV) above Both (II) and (III) above (I), (II) and (III) above (I), (III) and (IV) above All (I), (II), (III) and (IV) above.

Only (I) above Only (II) above Only (III) above Both (I) and (II) above Both (I) and (III) above.

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Which of the following is not an aspect concerned with the implementation of corporate codes?

26.

(a) Organization structure (b) Coordination (c) Motivation (d) Communication (e) Peer influence. Which of the following aims at checking the actions of a firm that are directed at maximizing long-term owner value and the extent of distributive justice? (a) Social audit (b) Functional audit (c) Ethical audit (d) Philanthropy (e) Enterprise audit.

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In which stage of ethical consciousness, was there a shift in focus from ‘business’ to ‘ethics’? (a) (b) (c) (d) (e)

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Non-executive directors Nominee directors Alternate directors Representative directors Shadow directors.

Which of the following is an anti takeover device where, in order 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) like stock option, bonus etc.? (a) (b) (c) (d) (e)

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Power to investigate any activity within its terms of usage Power to seek information from any employee Power to obtain outside legal or other professional advice Power to secure attendance of outsiders with relevant expertise Power to review with the management the annual financial statements before submission to the board.

Which of the following types of directors are appointed as per the Articles of Association to act as substitutes in absence of an original director? (a) (b) (c) (d) (e)

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Law of the jungle Profit maximizing in the long-term Stakeholder concept Profit maximizing in the short-term Corporate citizenship.

Which of the following is not a power of the audit committee? (a) (b) (c) (d) (e)

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Sand bag Golden parachute Green mail People pill Poison pills. END OF SECTION A

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

This section consists of questions with serial number 1 – 6. Answer all questions. Marks are indicated against each question. Detailed explanations should form part of your answer. Do not spend more than 110 - 120 minutes on Section B.

Caselet 1 Read the caselet carefully and answer the following questions:

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1.

“Too many people find it difficult to balance business ethics and profitability.” Why do managers find ethical decisions to be complex judgements between their social and economic performance? Also explain the multiple analysis framework that organizations can adopt to resolve ethical dilemmas in management.

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(7 marks) 2.

Lack of business ethics has led to the erosion of consumer trust and faith in business organizations. Explain the impact of unethical behavior on trust in various ‘business relations’?

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(9 marks) Phil Frederick at Bangor Floral often pays more for his plants than his competitors. He’ll shell out as much as $1.50 more for an azalea ordered from a Florida nursery than from a government-subsidized Canadian company or an Ecuadorian grower who heavily uses pesticides and chemical fertilizers to produce bumper crops of lush, green plants. “If I have a choice — (even if) it does cost me more to carry the green plants that I do — I’d much rather buy locally,” he says. “I feel better.” To remain competitive, Frederick says he doesn’t pass the extra cost on to customers and he doesn’t spend much time thinking about how that compromises profits. “One thing I’ve learned over the years is that there’s always a cost to doing the right thing. I think for some people, it’s a conscious choice. For others, money is all that matters,” he says. With a national backdrop of a winner-take-all business environment and stunning instances of corporate corruption, decisions like Frederick’s are refreshing examples of a new business ethic engaging greater social responsibility. In recent years, investigations, indictments and trials involving mismanagement within some of the most trusted corporate institutions have shaken consumers’ faith. Frederick and business leaders like him are part of a growing business culture trying to counterbalance a helter-skelter free market environment that invites ethical shortcuts in the race to maximize quarterly earnings. Their decisions consider consequences beyond the bottom line. Why are more people doing wrong to get ahead? Two common excuses can be cited for unethical business behavior: “everyone else is doing it” and cheating is a way to survive. But how does the need to get ahead equate to allegations that Enron executives in California cynically manipulated the energy market to generate profit from chaos, then falsified audit reports? What’s happened to old-fashioned ethics in business? “I don’t think you’re going to get an easy answer,” says University of Maine Assistant Professor of Management Stephanie Welcomer. “It’s like asking: where have our values gone? The question is not when are we going to trust business. It’s when are we going to trust each other?” she says. “We’ve really created this animal.” Ethical behavior isn’t as simple as deciding whether to break the law or deceive stockholders, says Roger King, UMaine associate professor of philosophy who teaches business ethics. It’s hard to hold to firm ethics without firm personal values. Fundamentally, ethics are determined by societal values, adds Ken Nichols, associate professor of public administration, who also teaches ethics in his courses. “The biggest ethical decisions are between right and right, not right and wrong. There are contrasting outcomes and values.” But some decisions are right and wrong. “Everyone looks at Enron, Global Crossing, Tyco, Adelphia and WorldCom and says ‘unethical behavior,’” notes Daniel Innis, dean of the UMaine College of Business, Health and Public Policy. “A lot of people are saying those activities are a sign we need better ethics education at our business schools. I disagree. Those executives knew what they were doing was wrong. They knew the difference, but they chose to do it anyway.” John Mahon, UMaine’s John M. Murphy Chair of International Business Policy and Strategy, says too many people ask the wrong question when it comes to balancing business ethics and profitability. “Can I make money and still do the right thing?” he asks. “That’s a seductive trap.” Mahon prefers to ask, “What’s an ethical rate of return? What’s a reasonable profit? No one asks that question,” he says. “I believe you can succeed in business and be absolutely ethical. I suggest you don’t have to make a choice between doing the right thing and making a ton of money.”

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

Discuss the ethical dilemma faced by Ruth in the case given below. What course of action should Ruth have adopted and why? (7 marks)

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Explain the ethical issues involved in the accounting function and the importance of transparency in disclosure of accounts. (9 marks)

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

"Yup." "But the old price hadn't really been tested yet, had it?" Ruth asked. "No," Peter said quickly, "but Jim was able to sell the courses at the new price, no problem." "How and to whom? Particularly when sales weren't going all that well at the lower price?" she asked incredulously. "Well, a lot of it he bartered. And all of it totally legit," Peter seemed proud to say. "How much of it?" she asked. When Peter told her the extent of the bartered revenue she immediately started to get a sinking feeling. What was going on here? Ruth now knew the truth about why he was leaving the company. Ruth couldn't help but think of the consequences of what she had just uncovered. She believed that although the transactions had theoretically been recorded in accordance with generally accepted accounting principles, those rules were never intended to address companies whose net income – or in this case, net loss – was not important. Accounting for non-monetary transactions required an offset to revenue in the expense line. However, in the world of the dot.com company, revenue was the key figure – not the bottom line. But perhaps even more disturbing was the fact that none of the products or services that Jim had traded had a proven fair market value as far as she could tell. So accurately valuing the transactions was not that easy. Ruth confronted Jim with the discovery but he behaved very rudely with Ruth and refused to even discuss with her about it. Regardless of the accounting theory, once the bank found out that such a large portion of this year's revenue had nothing to do with bringing in cash they would probably call the note. Of course, the company could not pay it off

without a secondary offering. And in just two days the company was scheduled to announce earnings having offered no hint to investors that they would miss the revenue projections. There was no doubt that missing the revenue target this late in the game would cause the stock price to plummet and ultimately eliminate the possibility of a follow-on offering. Ruth knew that she was on the verge of getting a reputation for being a troublemaker. Maybe the auditors would figure it out? Maybe it would be best for her to resign her position? It had only been about three weeks and no one would need to know why she left. Besides, she wasn't responsible for last year's numbers anyway. One thing was certain – if the barter revenues were reversed, Edify.com Company would probably not survive.

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

“Our Board's unanimous decision to create a distinct committee to address corporate governance issues reflects our wholehearted dedication to maintaining best practice standards.” In this regard, discuss the various issues in corporate governance? What are the various measures taken by Citigroup to safeguard its corporate governance? (9 marks)

6.

“Citigroup’s board's primary responsibility was to ensure effective governance to protect the interests of its stakeholders.” In this light, explain the functions of a board in detail. (9 marks)

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“Our Board's unanimous decision to create a distinct committee to address corporate governance issues reflects our wholehearted dedication to maintain the best practice standards” - Sanford. I Weill CEO and Chairman, Citigroup In 2002, Citigroup, headquartered in New York, was the seventh largest company in the world according to the Fortune Global 500.The group generated net revenues of $71.3 billion and net income of $15.3 billion (8% growth over the previous year). Citigroup, formed by the merger of Travelers Group and Citicorp in 1998 had emerged as the largest financial services company in the world offering services to its clients through four global business groups across 100 countries. Citigroup was organized into various business segments. Global Consumer Group (GCG) offered services like banking, lending and investment services; Credit cards and Charge cards such as MasterCard and VISA; truck financing, construction, material handling, healthcare and office equipment finance; and consumer finance and community-based lending services. Global Corporate and Investment Bank (GCIB) provided various services to corporate, institutional and retail investors - fixed income underwriting, syndicated loans, foreign exchange and futures; strategic and financial advisory services like acquisitions, mergers, financial restructurings and cash management; and trade and treasury services like integrated cash management, treasury, trade finance and e-commerce solutions. Citigroup Global Markets (CGM), a division of GCIB, oversaw global private wealth management and equity research, providing comprehensive financial planning and advisory services to high net worth investors. Global Investment Management (GIM) took care of personalized wealth management services for affluent clients, asset management, retirement services, and Insurance. Citigroup International (CI) looked after providing personal finance services throughout the world. Citigroup had triggered off major reforms in the financial industry. The Citicorp-Travelers merger in 1998 gave a major boost for the Financial Modernization Bill. The approval of the bill in November 1999 allowed a single company to run insurance and banking businesses together. Citigroup emphasized the need to adhere to the highest standards of ethical conduct; to report results with accuracy and transparency; and to maintain full compliance with the laws, rules and regulations that governed its businesses, thereby setting industry standards for others to follow. In 2003, Citigroup established a "Business Practices Committee" at the corporate level and its subsidiary units, to help facilitate regular scrutiny of products and practices by senior executives. The committee emphasized on basic values and checked appropriateness of policies at all levels of the organization. The committee identified business practices that could raise integrity concerns, subjected them to rigorous scrutiny and presented them to senior executives for evaluation. The Board's primary responsibility was to ensure effective governance that would protect the interests of its stakeholders. It was also responsible for the formation of committees for various functions and overseeing the management of the organization and compliance with various standards, laws, rules and regulations. END OF SECTION B

Section C : Applied Theory (20 Marks) • • • • 7.

This section consists of questions with serial number 7 - 8. Answer all questions. Marks are indicated against each question. Do not spend more than 25 -30 minutes on section C.

Mr. Dinkar is the purchasing manager at a leather product manufacturing company. His main role as a purchasing manager is to procure materials at a reasonably low cost and to ensure availability of proper quantity or quality of raw material. In discharging his duties Mr. Dinkar was very conscious of not indulging in any unethical practices. In this light, explain the unethical practices that purchasing managers can be charged with.

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(10 marks) 8.

1. The world has become a global village with the increase in cross border trade and business. As a result India has also seen a large influx of MNCs’ in various business sectors. On one hand the opening of the economy to MNCs’ is beneficial for India, but on the other hand these MNCs’ are known to have adopted several unethical practices. In this regard, discuss the unethical practices, in various areas, that MNCs’ have been accused of engaging in.

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(10 marks) END OF SECTION C END OF QUESTION PAPER

Suggested Answers Business Ethics & Corporate Governance (MB321) : October 2006 Section A : Basic Concepts 1. 2.

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(b) A firm that offers quality goods at reasonable prices, fulfills its responsibilities towards its consumers. (e) Educational qualification forms the basis for ethical selection/hiring. Therefore, it cannot be a basis for discrimination. (e) The task by which a society responds to change is referred to as adaptive tasks. (b) Green counseling is aimed at encouraging employees to express their concern about environmental issues. (c) Statements (III) - the golden rule “do unto others as you would want them do unto you” is an example of normative ethics is true about normative ethics. Statement (I) is not true as applied ethics deals with specific, often controversial moral issues such as abortion, female feticide and infanticide etc Statement (II) is not true as metaethics deal with linguistic issues that concern the meaning to key moral terms used. (d) While option demonstrates caring, it is not one of the steps in the model for making ethical decisions. (c) Ethical codes and standards promoted in an organization constitutes opportunity factors. (c) Anything for profits is the second stage in the stages of ethical consciousness and precedes the others. (d) The requirement how to act or not to act has to be accepted. If majority of the members do not obey the law, then it becomes difficult to enforce it. Therefore, laws have to be accepted.

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Answer : (a) Reason : A moral responsibility to preserve the environment is referred to as the 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. Answer : (d) Reason: Statements (I), (II) and (III) are approaches recommended by Lickona. Coordination is an approach recommended by Ferrel and Fraedrich. Answer : (c) Reason : Morality refers to a philosophical inquiry, ethics to a sociological phenomenon. Morality relates to the conduct of a person, therefore is philosophical enquiry and ethics relates to a system of moral principles and principles for applying them, and is a sociological phenomenon. Answer : (b) Reason : Establishing oneness and transparency into decision making process is included in the Clutter buck approach. The remaining options are included in Carmichael and Drummond’s approach. Answer : (e) Reason:

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The following statements are true about ethical dilemmas: I. They involve a range of actions and their corresponding consequences. II. The problems arise due to managers’ involvement in value judgements, which rarely are clear-cut. III. To resolve these dilemmas one has to prioritize values to the extent possible. (a) As per the enlightenment matrix, a company that is high in philanthropy and high in self-interest is involved in social responsibility. (e) Duties of a director can be categorized as fiduciary duties, duties of care, statutory duties and other duties. Therefore, option (e) is the answer. (c) The following statements are true about the industrial revolution: II. During the first industrial revolution, cottage industries were replace by the factory system. III. The second industrial revolution utilized electricity and improved technology and social life. Statement (I) is not true as prior to the industrial revolution, businesses in England were marked by good worker-boss relationships, which were demolished by capitalism. Statement (IV) is not true as the shift from agrarian economy to technology based economy transferred the political power from landowners to industrial capitalists. (d) The following statements are true about the ‘separatist view’ of ethics: II. Business should focus on profits and social problems should be tackled by the government and concerned individuals. III. Concerns like reducing production costs, optimizing labor etc. are relevant to the marketplace, not to ethical and moral issues. Statement (I) is not true because the separatist view endorses that if ethics were introduced in business, it would lead to an imbalance in market dynamics. (c) Statements (I), (II) and (III) are conclusions about law and moral standards. Statement (IV) is not a conclusions as law always does not represent collective moral judgements. (b) According to the research conducted by the center for advanced purchasing studies, bribery did not figure as an unethical practice in either the list of the buyer or the supplier. (c) Corporate moral excellence focuses on corporate culture and ethical behaviour. (b) Do not involve in unethical firing is not a guideline as per the code of ethics to be followed by members of the Society for Human Resource Management.

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Answer : (a) Reason: As per analysis by Hellriegel, Slocum and Woodman, the hedonist principle implies that operation managers are guided by personal goals/interests in decision-making. Answer : (d) Reason: The following statements pertains to the characteristic of ‘transferability’: I. It enables a share holder to minimize the level of risk. II. It provides the advantage of limited authority/risk to the shareholder. Statement (III) does not pertain to transferability as the charateristic of limited liability implies that the corporation is distinct from its owners and employees. Answer : (e) Reason: Peer influence is not an aspect concerned with the implementation of corporate codes. Answer : (c) Reason: Ethical audit aims at checking the actions of a firm that are directed at maximizing long-term owner value and the extent of distributive justice. Answer : (b) Reason: In the fourth stage of ethical consciousness i.e., profit maximizing in the long-term, there a shift in focus from ‘business’ to ‘ethics.’ Answer : (e) Reason: Reviewing with the management the annual financial statements before submission to the board is a function of the audit committee and not a power. Answer : (c) Reason: Alternate directors are appointed as per the Articles of Association to act as substitutes in absence of an original director. Answer : (b) Reason : Golden parachute is an anti takeover device where, in order 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) like stock option, bonus etc (a) Sand bag: The company stalls the attempts in the hope that another more favorable company will try to take them over. (c) Green mail. A potential takeover agent purchases stock in a company. (d) People pill: A defensive strategy for warding off a hostile takeover. (e) Poison pills: The company under target, changes the articles of association so that a group of share holders have special rights, which are evoked by a takeover.

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Section B : Caselets 1.

Too many people ask the wrong question when it comes to balancing business ethics and profitability. “Can I make money and still do the right thing? That’s a seductive trap.” It may be better to ask “What’s an ethical rate of return? What’s a reasonable profit? No one asks that question.” One can succeed in business and be absolutely ethical. One doesn’t have to make a choice between doing the right thing and making a ton of money.” However, ethical decisions for most companies are complex choices between the economic performance and social performance. These dilemmas can pertain to pricing of products, advertising, working conditions, customer service, environment issues, community relations, supplier relations etc. Also these dilemmas are pervasive because managers make decisions and actions that affect people. By ignoring ethical issues, the economic performance may be improved. But social performance, as expressed in terms of obligations to managers, workers, customers, suppliers, distributors and members of the community, may be affected. Therefore in situations that pose a dilemma managers can adopt a multiple analysis – a frame work for decision making. Multiple analysis sub consists of three analyses: Economic analysis: Here the underlying belief is that a market economy has a limited number of resources and when consumers are supplied with thte highest quality goods at lowest possible costs, then those resources are being used as efficiently snd effectively as possible. Legal analysis: Here the underlying belief is that a democratic society can establish its own rules. If people and organizations follow these rules, then members of that society wil be treated as justly as possible. Ethical analysis: Here the underlying belief is that if all the rational men and women in a society acted on the same principles of either benefits or consistency, then members of that society would be trated as fairly as possible. < TOP >

2.

Impact of Unethical Behavior on Trust in Business Relations As suppliers and customers are external to the firm, trust plays a pivotal role in binding suppliers and customers to businesses. The role of trust in supplier, customer and employee relations can be examined as follows:. Supplier relations: Suppliers provide businesses with the goods (raw materials) and services they need to be able to function. When an organisation deals with its suppliers over a period of time an ongoing buyer- seller relationship is built. Such relationship ma)’ be called an ‘exchange relationship’. An exchange relationship can be successful when both parties honor their commitments. This builds tip mutual trust and co-operation. A buyer who engages in unethical practices like playing off one supplier against another, or lying in order to gain an unfair price advantage, soon loses the trust of not only the supplier he is dealing with, but also other suppliers in the market. Customer relations: A company’s sales force play a key role in building the relationship of trust with customers. The manufacturer contacts the customers through the sales force. It is the salesperson who interacts with their customers and earns trust by being dependable, honest, competent and customer-oriented; Customers rely on the sales force for information about goods and services and expect quality products. A salesperson provides customers with relevant product information. Customer orientation encourages the sales staff to give4op priority to the customer. This in turn enhances customer satisfaction and helps the supplier to establish a relationship of trust with the customers. Employee relations: With in the organisation, a climate of trust is of great importance. When relationships among peers, superiors and subordinates are based on trust, there is less friction among employees and a reduction in employee turnover. Trust leads to greater predictability and dependability, and therefore to greater confidence among employees. The following factors promote trust in an organisation: •

Open communication

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Sharing of critical or important information

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Encouraging employee participation in decision-making

• Sharing of perceptions and feelings. The following five factors enhance trust in one’s employer: •

Perception of open and honest communication both up and down the organization ladder

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Fair and consistent treatment of employee groups

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Shared goals and values between workers and supervisors

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Autonomy from close supervision, a sign of personal trust in employees

• Feedback about employees’ performance and responsibilities. Thus, for a business in order to function smoothly and be successful in the long run, it has to build up relationships of trust with all its stakeholders. This can be done only by eschewing all unethical practices. < TOP >

3.

Ruth Harris had joined a company called Edify.com as Chief Financial Officer. Edify.com Company produced and published web-based distance learning courses and sold them to businesses and universities. The company had gone public a year ago and was about to report its first full year of earnings as a public company. It was a comfort to Ruth that the company was already public and under the watch of the SEC. She was also impressed with the apparent level of candor in the company's financial statement disclosures and management's discussion and analysis. However, just when everything seemed well, Ruth discovered that Jim had doubled the price of the courses. Jim was able to sell the courses at the new price as he had bartered a lot of it. When Peter told her the extent of the bartered revenue she was startled. Although the transactions had theoretically been recorded in accordance with generally accepted accounting principles, those rules were never intended to address companies whose net income – or in this case, net loss – was not important. Accounting for non-monetary transactions required an offset to revenue in the expense line. However, in the world of the dot.com company, revenue was the key figure – not the bottom line. But perhaps even more disturbing was the fact that none of the products or services that Jim had traded had a proven fair market value as far as she could tell. So accurately valuing the transactions was not that easy. Ruth was confused about whether she should stay on or resign. Whatever was happening was not ethical so the dilemma she faced was whether she should be with the unethical practice or disclose to the auditors that most of the revenue was bartered and there was no cash coming in or just quit because the CEO would not listen to her. Once the bank found out that such a large portion of this year's revenue had nothing to do with bringing in cash they would probably call the note. Ruth’s course of action should definitely have been to disclose details of the revenue to the auditors and investors because anyway if the bank found out they would create problems and then paying them would be impossible without going for a second offering but that also is doubtful in these circumstances. So it would be most

4.

appropriate for Ruth to disclose the matter and be ethical in her conduct. < TOP > Accurate accounting can provide fair reporting of the financial position of a business. The ethical issues pertaining to accounting practices are: under reporting income, falsifying documents, allowing or taking questionable deductions, illegally evading income taxes and engaging in fraud. Fraud in financial statements can be committed in five ways. They are: 1. Fictious revenues. 2. Fraudulent timing differences. 3. Concealed liabilities and expenses. 4. Improper or fraudulent disclosures or omissions. 5. Fraudulent asset valuations. Transparency and accountability are essential for maximizing long-term owner value. Rules and procedures in finance for gathering data must be consistent else different departments in the organizations can misinterpret data. Calculations can be manipulated to provide to provide a misleading picture. This makes a fair allocation of funds difficult. Transparency in disclosure of accounts by all the departments is essential for long-term success of an organization. < TOP >

5.

Issues in Corporate Governance Corporate governance practices are a set of structural arrangements that are emerging in free-market economies to align the management of companies with the interests of their shareholders (in particular) and other stakeholders, and society at large. Corporate governance addresses three basic issues: ¾ Ethical issues: Ethical issues are concerned with the problem of fraud, which is becoming wide spread in capitalist economies. Corporations often employ fraudulent means to achieve their goals. They form cartels to exert tremendous pressure on the government to formulate public policy, which may sometimes go against the interests of individuals and society at large. At times corporations may resort to unethical means like bribes, giving gifts to potential customers and lobbying under the cover of public relations in order to achieve their goal of maximizing long-term owner value. ¾ Efficiency issues: Efficiency issues are concerned with the performance of management. Management is responsible for ensuring reasonable returns on investment made by shareholders. In developed countries, individuals usually invest money through mutual, retirement and tax funds. In India, however, small shareholders are still an important source of capital for corporations as the mutual funds industry is still emerging. The issues relating to efficiency of management is of concern to shareholders as there is no control mechanism through which they can control the activities of the management, whose efficiency is detrimental for returns on their (shareholders) investments. ¾ Accountability issues: The management of a corporation is accountable to its various stakeholders. "Accountability issues" emerge out of the stakeholders' need for transparency of management in the conduct of business. Since the activities of a corporation influence the workers, customers and society at large, some of the accountability issues are concerned with the social responsibility that a corporation must shoulder. •

The growing scale of corporations and their style of functioning have raised many new issues that must be addressed by corporate governance. Some of these issues are:

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The growth of private companies

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The magnitude and complexity of corporate groups

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The importance of institutional investors

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Rise in hostile activities of predators (take over.)

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Insider trading

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Litigations against directors

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Need for restructuring of boards

• Changes in auditing practices. Citigroup emphasized the need to adhere to the highest standards of ethical conduct; to report results with accuracy and transparency; and to maintain full compliance with the laws, rules and regulations that governed its businesses, thereby setting industry standards for others to follow. Citigroup established a "Business Practices Committee" at the corporate level and its subsidiary units, to help facilitate regular scrutiny of products and practices by senior executives. The committee emphasized on basic values and checked appropriateness of policies at all levels of the organization. The committee identified business practices that could raise integrity concerns, subjected them to rigorous scrutiny and presented them to senior < TOP executives for evaluation.

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6.

Functions of the Board The primary function of the Board of directors is to take responsibility for the performance of the corporation and work to promote its interests on behalf of the shareholders, to whom it is accountable. Corporate boards oversee the performance of the corporation, its CEO and the top-level managers. The board ensures that timely and accurate reports are provided on corporate performance, including the financial conditions and non-financial indicators of the corporation. It monitors corporate performance by closely following the progress of the corporation towards the pre-set goals and targets. The board provides strategic guidance to the corporation. It studies the future trends so that the corporation has the necessary and adequate resources to secure its long-term position. The board has to maintain good relations with the stakeholders and try to keep the shareholders happy. Apart from carrying out the above functions, the board enacts various performance and conformance roles. ¾ Strategic Role of the Board The primary role of the board is to supervise the quality of strategic thinking of the executive committee. When necessary, the board can take corrective measures to guide the top management to develop strategies to achieve corporate goals. The board has a final say in the strategy that decides the fate of the company. The board has the right to either pass the decisions taken by the executives or question the effectiveness of these strategies. Hence it is the responsibility of the executives to come up with proposals for the board to agree on, to improve on using their collective experience and expertise in various fields of business. The board, therefore, plays a key role in leading and directing the organization. At times, non-executive directors on the board identify and warn the CEO about operational issues that may lead to a crisis situation. The board performs its role in strategy development in the following levels. Systematic level strategy formulation is based on the board's understanding of what is happening in the national, international and global environment. The board's knowledge about the external environment extends to many areas: socio-political environment, potential market trends, the impact of changes in technology and the international competitive forces that have an effect on the company. Since the board members scan the external environment regularly, they can provide the executives/management crucial inputs for effective decision-making. Structural and portfolio strategy is concerned with decisions regarding the structure of the company and the businesses that it should enter into. The board addresses issues like what changes can be done in the structure of the company to achieve the growth aspirations of the board. This level of strategic thinking involves discussions among the board of directors and the management, relating to acquisitions, mergers, strategic alliances or sale of a part of the business. Implementation strategy is concerned with the board's role in ensuring that the strategy is feasible. The board ensures that a broad game plan for implementing the policies and strategies is in place, so that the management can deliver the desired results. ¾ Policy Making Role of the Board The board of directors frames guidelines or policies to ensure that the business plans and management decisions conform to the corporate strategy. These policies cover all the key areas like marketing, finance, personnel, operations, customer relations and research and development. The board develops broad policies for the above areas and the executives of the organization draw up derived policies (pricing, advertising, sales and distribution in the marketing field). These policy statements are usually, published and made available to employees. Monitoring and Supervisory Role ¾ The board monitors and supervises the corporation to ensure that it adopts the right strategic direction. It regularly checks whether the business is following the policies laid down for achieving the goals and inquires into the causes of deviations, if any. The board reviews the plans, policies and strategies of the corporation in the light of the changing competitive environment. If necessary it makes changes in the corporations' strategies. For effective executive supervision, a board has to monitor all the activities of the company that are crucial for ensuring consistent growth and building market share. For example, the board of a manufacturing company may have to monitor the activities concerned with financial performance, market performance, product and services performance, technological performance, management and organizational performance, employee relations, < TOP > acquisitions and divestments, corporate social responsibility etc.

7.

Most purchasing managers are charged for adopting the following unethical practices: Accepting free gifts: Buyers are reluctant to acknowledge that suppliers are bribing them. Studies indicate that most buyers are honest and ethical in working with suppliers. Deceiving suppliers: Purchasing personnel often resort to deception (making exaggerated questions about the quality of the suppliers) to pressurize the suppliers to cut prices and to get orders. Managers defend their purchasing personnel by arguing that such deception is necessary to increase competition among suppliers and get

Section C: Applied Theory

the best terms possible. But professional purchase managers feel that these kind of tactics can destroy the trust that is vital for maintaining vendor relations. Encouraging free and honest communication among buyers and suppliers can eliminate such practices. Discrimination and favoritism: Showing favoritism and discrimination between suppliers is also considered unethical purchasing behavior. Purchase managers often favor suppliers who are also good customers. Thus developing a mutually beneficial relationship. In some cases, purchasing managers discriminate in favor of suppliers who are close to the top management so that they can gain the support and confidence of the top officials. Such discrimination denies an opportunity to those suppliers who can supply better quality products. In some instances suppliers are directly asked to deal with other departments. These departments may not be following a strict professional approach to procurement requirements. Allowing suppliers to bypass the purchase department hinders open and free competition and as a result, prevents the firm from procuring the best quality supplies at the most favorable terms possible Thus asking suppliers to deal directly with other departments raises questions about the professional ethics of the purchase manager. Disclosure of confidential information: Disclosure of confidential information is a serious issue in purchasing. In exchange for confidential price related information, suppliers promise to reward the purchase manger. Purchase managers in turn operate a tendering system in which the criteria for selection are revealed only for some suppliers, thus putting other suppliers at a disadvantage. Sometimes, companies leak the bid amount so as to encourage other bidders to quote the lowest possible prices. This selective leakage of information goes against the concept of ethical purchasing. Forward Buying: In order to ensure the availability of raw materials buyers often resort to ‘Forward Buying’ or buying the stocks to meet the future requirements. If the purpose of this kind of buying is to assure supplies to the production department, and not make speculative profit against inventory then it is justifiable, but if the main objective is to produce goods and market them for high prices by taking advantage of its shortage then it becomes unethical. In a scarcity prone economy it is difficult to estimate the exact amount of goods required for a particular period. To provide some guidelines in this regard the Tandon Committee has laid down certain norms for the inventory requirements. The other unethical aspects in purchasing is bribing, Indulging in such unethical activities can sometimes lead to sale of unsafe products. Consumers will have a negative message about such products. Ford motors has been criticized for knowingly marketing a product with serious design flaws that costed lives in traffic accidents. Though Ford has shifted the blame to Firestone tyres, consumer safety groups believe that Ford’s design has made it even more dangerous. Thus organizations should have a code of ethics that is applicable to them as well as their suppliers or partners. < TOP >

8.

Ethical Issues in Multinational Companies (MNCs’) MNCs have been accused of indulging in unethical practices in several areas as follows: Political Activities: MNCs have been accused of: •

Supporting repressive regimes

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Paying bribes to secure political influence

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Not respecting human rights

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Paying protection money to terrorist groups

• Destabilizing national governments of which they do not approve MNCs in reality are owned and controlled by the nationals of just a handful of Triad countries and therefore MNCs domination of world markets effectively represents economic imperialism’ on the part of these states. Subsidiaries of MNCs take their order from company headquarters in another country staffed by managers who owe their allegiance to a foreign nation. Hence MNCs subsidiaries might act as de facto instruments of the foreign economic policy of another state. The vast resources of large multinational companies enable them actually to challenge the sovereignty of smaller nations. In particular their ability to transfer economic activity around the world can undermine underdeveloped countries’ abilities to pursue national economic objectives. Sales, Marketing and Advertisement: The practices of MNCs in these areas raise the following ethical issues: •

Their advertising and marketing methods sometimes undermine ancient cultures and traditions.

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Some MNCs engage in misleading and deceitful advertising in Third World countries

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Some of the marketing practices promote goods that waste valuable resources in poorer nations

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Many MNCs provide products that are inappropriate to local needs

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MNCs do not always accept responsibility for unsafe products

Environmental degradation • Environmental: Environmentalists criticize multinational companies for:

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Depleting natural resources

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Polluting the environment

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Not paying compensation for environmental damage

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Causing harmful changes in local living conditions

• Paying little regard to the risks of accidents and causing major environmental catastrophes Multinational companies are sometimes accused of using developing countries as dumping grounds for environmentally ‘hazardous’ activities and products, although it is known that many MNCs are at the forefront of environmental practice and management. Critics also allege that large multinationals tend to cause greater damage to the environment than domestic businesses and that they generally ensure only the minimal environmental standards required by host governments. Technology: Most MNCs do not develop technologies that are relevant to the needs of host nations. They find it cheaper to transfer an existing technology to a foreign country than to devise a new one that is better suited to local conditions. Other unethical practices in this area include: •

Not engaging in research and development in host countries

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Encouraging ‘brain drain’ from poorer countries

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Making host countries technologically dependent on the home country

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Not giving local employees access to information about key technologies.

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Not training local nationals in the use of imported technologies

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Not transferring latest technology

• Dumping old or outdated technologies to earn revenues Most MNCs adopt capital-intensive production methods in less developed countries. This undermines local businesses, which use labor-intensive technologies to make similar items. Capital-intensive production methods also create unemployment, hence accentuating unemployment problems. Economic Activities: MNCs have impeded rather than facilitating economic development of many poorer countries, through concentrating economic activity in few countries instead promoting balanced economic development among developing countries across the world. MNC’s operations in underdeveloped countries have led to ‘dual’ economic structures with foreign-owned capital-intensive high-technology high-productivity industry sectors operating in parallel with labor-intensive low-productivity industries. The foreign-owned sectors exported most of their outputs at lower price. The technical progress not only resulted in higher incomes for local residents, but also lowered the prices, which favor consumers in developed nations. And lower import prices for advanced countries further stimulate their economic development, enabling them to dominate the world. MNCs sometimes choose to import raw materials for their foreign subsidiaries, rather than procure them locally. Scarce foreign exchange is used to pay for the imports. and the host country’s balance of payments suffers. Personnel Management and Industrial Relations Some of the unethical practices of MNC’s in the area of Human Resource Management include: •

Refusal to recognize trade unions who engage in collective bargaining

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Not ensuring Equal opportunity policies for all in the workplace.

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Using expatriate staff for all significant managerial positions

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Ignoring the occupational health and safety needs of local workers

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Exploiting host country labor

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Not involving local employees in management decision-making.

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Trade unions in some Western countries have criticized MNCs for:

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Exporting jobs through investment in foreign production

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Exploiting low-paid foreign workers.

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Transferring skills to other nations and enabling the latter to compete more fiercely in the home country market.

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Taking advantage of the benefit of the tax advantage, investment grants and subsidies offered by foreign governments.

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Circumventing home country laws on business competition, labor relations. etc., through shifting production among countries.