Ch 11 - Ethical Organization

Question 1

Learning objectives

Answer 1

1. What is the role of the BOD as it relates to ethical behavior in the firm?
2. What is corporate social responsibility and its strategic role for a firm?
3. What are the implications of the contemporary ethical questions and issues facing companies?

Question 2

TOMS vs. Nike

Answer 2

Social entrepreneurship model

&

Nike using sweatshops and underage labor in China

Question 3

Ponzi Schemes

named after Charles Ponzi 1920s

Answer 3

Paid returns to investors using money from new investors rather than firm profits.

Eventually, this scheme falls apart because it becomes impossible to attract enough new investors to pay existing ones.

Question 4

Enron Scandal

Answer 4

Executives used accounting loopholes to create shell corporations where they hid billions in debt from failed deals and projects.

Ended with the loss of $11 billion in stock value, and prison time for many of the executives involved

Question 5

Adelphia Communications Corporation

Scandal

Answer 5

Fifth largest cable company in the US, father and son (owners of the company) were found guilty of securities violations that tied them to their theft of $100 million. Another one of the Adelphias also admitted to falsifying financial reports.

Question 6

Boeing

Answer 6

Two crashes that grounded their 737 airliner. $20 million in fines, and loss of confidence, and sales. They had failed FAA rules and inspections, and had not trained their pilots on software changes.

Question 7

Chiquita Brands

Answer 7

Had tied to Colombia’s paramilitary group (FARC). Fined $25 mil by the US dept. of justice.

Question 8

Madoff Investment

Scandal

Answer 8

2008 - a modern twist on the ponzi scheme. NASDAQ chairman Bernard Madoff - largest investor fraud ever committed by an individual

Question 9

Sarbanes Oxley Act

SOX - George W Bush 2002

Answer 9

11 key changes that would affect all publicly traded firms:

1. Because of accounting firms being implicated in corp. scandals, an oversight board was created to oversee auditing activities.
2. Standards to ensure auditors are truly independent and not subject to conflicts of interest in regards to the companies they represent.
3. Requiring senior executives CEO & CFO to take personal responsibility for the accuracy of the financial statements.
4. Enhanced reporting - transparency in reporting of a firm’s financial condition
5. Security analysts must disclose potential conflicts of interest
6. CEOs must personally sign the firm’s tax return
7. SEC has authority to censor/bar securities analysts from acting as brokers, advisers, or dealers.
8. Monitoring of any consolidations among public accounting firms, role of credit agencies in sec. market operations, securities violations, and enforcement actions.
9. Criminal penalties for altering or destroying financial records
10. Criminal penalties for white-collar crime
11. SEC can freeze unusually large transactions if fraud is suspected

Question 10

A “whistleblower” hotline

Answer 10

A “whistleblower” hotline is often provided where suspected violations can be reported anonymously.

Question 11

. Anti-retaliation policies

Answer 11

Anti-retaliation policies encourage employees to come forward to report misconduct without fear of retaliation or losing their job

Question 12

CSR - Corporate Social Responsibility

1970s

Answer 12

The goal of CSR is to enhance the success of a business by enhancing the society in which the organization operates. It can take the form of philanthropy or donating funds to causes it believes are important to its stakeholders. Some forms of CSR include corporate volunteerism, such as asking company employees to volunteer to build a Habitat for Humanity house on a Saturday. Improving environmental sustainability is one of the most recognized recent forms of CSR.

Question 13

Triple Bottom Line

Approach to CSR

Answer 13

n the triple bottom line, the company focuses on the three P’s; profit, planet, and people.

Question 14

Agency problem

Answer 14

This separation of interest creates an agency problem wherein the interests of the individuals that manage the company (agents such as the CEO) may not align with the interest of the owners (such as stockholders).

Question 15

Conflicts of interest

Answer 15

A conflict of interest exists when a person could receive personal benefit from decisions they make in their official capacity

Question 16

Takeover Terms:

Corporate Raider

Hostile Takeover

Shark Repellent

Golden Parachute

Poison Pill

White knight

Greenmail

Answer 16

• a corporate raider invades a firm by purchasing its stock.
• Hostile takeover refers to an attempt to purchase a company that is strongly resisted by the target firm’s CEO and/or board.
• Shark repellent - defenses against takeovers
• When executives are desperate to avoid a takeover they may be forced to swallow a poison pill. This involves making the firm’s stock unattractive to raiders by letting shareholders buy stock at a discount
• A firm that rescues a target firm by offering a friendly takeover as an alternative to a hostile one is known as a white knight.
• greenmail -the practice of buying enough shares in a company to threaten a takeover, forcing the owners to buy them back at a higher price in order to retain control.

Question 17

Leveraged Buyout (LBO)

Answer 17

A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company.

Question 18

Golden parachute

Answer 18

a golden parachute that includes a lucrative financial settlement is likely to provide a soft landing for the ousted executive.

Question 19

CSR Pyramid

Answer 19

Question 20

Creating Shared Value (CSV)

Answer 20

Creating Shared Value (CSV) model that argues that firms should address social issues by creating shared value, which is fundamentally focused on expanding the total pool of social and economic resources