Business Ethics & Corporate Governance (MB321) – ICFAI solved papers

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Question Paper

Business Ethics & Corporate Governance (MB321) : October 2004

Section A : Basic Concepts (30 Marks)

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.

Utilitarianism as a school of ethical thought places complete emphasis upon the outcome, not on the intent of individual actions, therefore the approach may be referred to as

(a) Ethical relativism (b) Behaviouralist theory

Economical theory.

Which of the following committees carries out selection of Directors?

(a) Audit committee (b) Nomination committee

Ethics committee.

The principal recommendations of the Cadbury committee covered which of the following?

(a) The board of directors and their role (b) Cross shareholding

Both (c) and (d) above.

Which of the following should be the governing objective of a company?

(a) Higher return on investment (b) Global cost competitiveness

Lower return on investment.

Business ethics can be best practiced under which of the following circumstances?

No conflict of interest among stakeholders

Maximization of profits sacrificed
- General business environment is favorable
- Conflicts of interests
- No conflict of interest among employees.

Which of the following branches of ethics deals with specific controversial issues like capital punishment, cloning and nuclear war?

(a) Meta ethics (b) Normative ethics (c) Applied

ethics

(d) Virtue ethics (e) None of the above.

In promoting products, a marketing manager’s decision depends on which of the following Overriding factors?

(a) Legal aspects (b) Product demand

Technology.

Which of the following is not a function of the corporate audit committee set up by the board?

To discuss with independent auditors about the problems they experience in completing the audit

To review the interim and final accounts
- To inform the board about the effectiveness of internal control and the quality of financial reporting as pointed out by the independent auditors
- To select the new non-executive directors to the board
- To make recommendations regarding the audit fee, selection and replacement of auditors.

Corporate conscience is best decided by

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(a) Middle level Managers (b) Senior Managers

Board of Directors (d) Employees of the company
- Government.

Which of the following is the main dilemma a multinational company faces in its global operations?

Differences in ethical beliefs and value systems in its home country and the host country

Balancing the company’s own economic interest with the interests of the host country
- Differences in legal controls
- Issue of transfer pricing
- None of the above.

Which of the following refers to the payments made to selected stockholders in order for a company to repurchase some of the large blocks of stock that had been accumulated during a corporate takeover attempt?

(a) Take over fees (b) Green mail

Take over mail.

Which of the following type of boards lay(s) more emphasis on maintaining cordial interpersonal relations among the members than on effective decision-making?

(a) Rubber stamp board (b) Representative board

Both (b) and (c) above.

The Vertical – Dyad Linkage Theory (VDL Theory) of Leadership is based on the premise that

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.

Employees, investors, customers, suppliers, and society are some of the groups that affect or are affected by a business’s operations. Collectively, these groups are known as

(a) Invested parties (b) Shareholders

Both (a) and (b) above.

Which of the following statements is true?

Ethical decisions are much more difficult to make when a person is directly involved in the situation

Ethical decisions are easier to make when a person is directly involved in the situation
- It does not make any difference to the ease or difficulty of an ethical decision whether a person is directly involved in a situation or not
- It is never difficult to make an ethical decision
- Both (b) and (c) above.

A manager practicing which of the following management practices, would view the law as an obstacle to be overcome to accomplish what the company wants?

(a) Immoral (b) Moral (c) Amoral (d) Ethical (e)

Legal.

Selling / Coaching style of leadership are recommended for people who are characterized as having

(a) Low ability, low willingness (b) Low ability, high willingness

High ability, how creativity.

Vinay, President of Bharathi Infotech Ltd., expresses this view of social responsibility: “Our company believes in helping the community. The community provides us with employees, favorable tax benefits, roads, security, and schools for our children. In return, we want to do our part to help the community solve some of its most pressing problems. That is why we are helping the community eliminate pollution.” Which of the following theories describes Vinay’s view of social responsibility?

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(a) Corporate citizenship (b) Moral minimum

Maximizing profits (d) Stakeholder interests
- Ethical relativism.

Most ethical decisions have which of the following implications?

(a) Corporate (b) Academic (c)

Personal

(d) Normative (e) Technical.

A person employed by a newspaper or other media organization to handle complaints from audience members who feel they have been mistreated and who criticizes in general the performance of the organization’s personnel is called

(a) Ombudsperson (b) Critic (c)

Booster

(d) Facilitator (e) Mediator.

The two-tier board of an organization is particularly useful in which of the following activities?

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.

The theory which propounds that moral structure and moral ethics are part of business is known as

(a) Integration view of Ethics (b) Unitarian view of Ethics

Ethics.

In order to ensure ethics in advertisements given by companies, it is best to adopt

(a) SEBI regulations (b) Peer Regulation

Both (b) and (c) above.

According to which of the following committee reports, listed companies with either a turnover of over Rs.100 crore or a paid up capital of Rs.20 crore should set up audit committees within 2 years?

Kumara Mangalam Birla Committee report

(b) CII committee report (c) Cadbury committee report

(d) OECD report (e) WTO report.

Which of the following are the important features of corporate body?

(a) Perpetual succession (b) Legal entity status

(a), (b) and (c) above.

Generally, which of the following types of directors is appointed by the Financial Institutions on the Board of Directors of a Company?

(a) Nominee director (b) Nominal director

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?

Fictitious revenues

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

An organization is considered to be ethical if its

‘Espoused values’ are same as the ‘Values in practice’

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(b) ‘Espoused values’ are far better than the ‘Values in practice’

‘Espoused values’ are not entirely the same as the ‘Values in practice’
- ‘Espoused values’ are totally different from that of the ‘Values in practice’
- Both (a) and (b) above.

Which of the following help(s) employees to resolve ethical dilemma at workplace?

(a) Support from the top management (b) The rules of the organization

Disciplinary actions.

Which of the following statements about a corporation is false?

A corporation is a perpetual entity

A corporation cannot act on its own
- A corporation is recognized by the law as an individual
- A corporation can own assets
- A corporation can sell assets.

END OF SECTION A

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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:

Although mergers and acquisitions are aimed at economic well being of an organization, they result in large-scale retrenchment, which raises many ethical questions. Comment on the ethical aspects of mergers and acquisitions.

(9 marks) < Answer >

Would you have fired the plant manager, who served the company for 32 years in the manner it was done in this caselet? What should be the ethical criteria for selecting people for retrenchment?

(8 marks) < Answer >

Harbour Inc., is an industrial conglomerate that has grown rapidly through acquisitions. The company has the reputation of taking over other firms in depressed industries and improving their financial performance through strict cost controls and large-scale staff reductions. Richard Helly worked for Heights Inc for 32 years. He was a plant manager in the compressor division. At the age of 58, Helly had to look for another job. He was a hardworking man, who devoted his life to the company. After a week of the acquisition of Heights Inc. by Harbour Inc, Helly was retrenched and he was given 11 weeks’ severance pay.

Employees in Heights Inc., who retired at the age of 60 years, were given a pension of about $200 per month; an amount which was equivalent to the salary for 30 days, multiplied by their years of service; and medical insurance. But as Richard Helly was retrenched at the age of 58, he got 11 weeks’ severance pay for his service, which deprived him of pension and medical insurance.

Harbour Inc. laid off 40% of its staff to earn profits. The employees who were retained had to work twice as hard to retain their jobs. The company thought that if the older employees were retrenched, it would save money on the pension and medical insurance. According to Fortune, a magazine that published a study of the impact of mergers and acquisitions upon employees of the acquired firm, personal tragedies like Helly’s were very common. It estimated that the largest of 1990’s 1500 mergers, changed the lives of up to 22,000 employees.

Usually, about one quarter to half the employees in the merged organization are directly affected. Some employees are relocated and some others lose their jobs, status, benefits or opportunities. Some even face health problems and problems within the family.

Mergers and acquisitions have a human side, which is never considered by top executives, investment bankers and take-over lawyers. In another incident Silverline, an industrial machinery manufacturer, had the reputation of handling the employees of acquired companies roughly. After taking over Hedge Coal Inc. a mining company, it shut down the corporate headquarters, decentralized the company, reduced employment in sick units, shrank benefits and cut down the working capital. Many of the employees were retrenched. The New Society Journal argued the high human cost was necessary for sustaining the company’s operations. It justified Silverline’s action by saying that Hedze Coal Inc., was facing sever problems with operations and lack of proper management to adopt itself to the changing needs of the market and competition from new entrants. Silverline’s president said that after taking over Hedze Coal, its earnings increased.

Caselet 2

Read the caselet carefully and answer the following questions:

Identify the reasons for Shaswati’s unhappiness regarding the composition of the board of directors.

(8 marks) < Answer >

Compare the board structures of Swamy Electronics Limited and Frasier Inc. Do you think the composition of the board impacts its performance?

(9 marks) < Answer >

In 1991, Mr. Narayana Swamy, an electronics graduate, started a new business of marketing an external storage device “magic pen” that enables PC users to store and carry 1.5 GB data on the move. This device can be connected to any PC via the USB Port. Initially Swamy purchased a readymade company registration and renamed it Swamy Electronics Limited. Out of the 1000 shares issued Swamy owned 900 shares, and his wife Shaswati owned the remaining 100. Board meetings were never held as per the law. But Swamy and his wife Shaswati signed all the forms as required by the law with the help of an auditor.

At this stage, the board structure was of little importance to Swamy Electronics Limited, since Swamy was the dominant owner- manager and therefore no board meetings were held.

By 1994, Swamy Electronics Limited prospered and its auditor Raj Gopal advised restructuring of the capital. Swamy increased his capital base to 10,000 shares. He offered 5% of these to his employees who looked after production and marketing. Swamy also invited them to join the board in recognition of their contribution to the company’s growth.

As the business grew, Swamy concentrated less on his family and spent most of his time travelling abroad to meet his foreign clients. Eventually, he and Shaswati were divorced. Swamy tried to dilute Shaswati’s 10 percent stake at the time of capital restructuring, but failed.

Swamy then started holding board meetings regularly. He was the Chairman and CEO of the company. He used to meet his two members of the board to discuss the procurement, production and marketing aspects of the company. But he single-handedly took decisions on most of the financial aspects. The board now had three executive directors, which was dominated by Mr. Swamy.

The first annual general meeting was attended by the three executive directors, Shaswati and her lawyer. In the meeting, Shaswati’s lawyer called for the appointment of independent directors to take care of the interests of minority shareholders. Shaswati also questioned the practice of ploughing all profits back into the business without giving dividends to the shareholders.

Swamy wanted his friend Kumar, a Chartered Financial Analyst, to be appointed as a member of the board. Swamy thought that Kumar’s experience would be valuable to the board and at the same time assure the minority shareholders that the board was balanced.

Shaswati was still unhappy about the composition of the board as Swamy, with 80% of the shares, still dominated the board with the help of his friend and non-executive director Kumar.

By 1996 Swamy Electronics was finding it difficult to grow from retained earnings. The company required additional finance to maintain the present growth rate. At that point, the board decided to invite a merchant bank to provide venture capital by way of a convertible loan, secured on the company’s assets and 20 percent equity holding. The bank demanded a seat on the board in return for the loan.

Now the board had 3 executive directors and 2 non -executive directors (Kumar and the bank’s representative). By 1998, the business grew three fold and there were plans to go public. Frasier Inc., a multinational company, which operated from Tokyo, expressed its willingness to acquire Swamy Electronics Limited. The negotiations went on for a month and finally a deal was struck, according to which the MNC would get 60 percent of the equity and the balance will be retained by Swamy. Swamy would still be the CEO of SF Electronics Ltd. (formerly Swamy Electronics Ltd.) and he was also appointed to the board of Frasier Inc., The two executive directors and Shaswati sold their stake to Frasier Inc.

Frasier Inc. appointed new executive directors for the subsidiary who also figured on the board. The vice-president of overseas operations of Frasier Inc., became the new chairman of SF Electronics Limited.

It was a new experience for Swamy – the board meetings were more professional and dominated by the policies of the parent company.

Swamy as a director of the parent company saw that the board of Frasier Inc. had only 5 executive directors on the board of 15. The CEO of Frasier was always kept informed by the board on the various issues related to the functioning of the company.

Back home, Swamy felt that the parent company was diverting funds from SF Electronics Limited to other subsidiaries abroad. Swamy tried to oppose this but was voted-out at the board meeting. Swamy felt that his interests were being overlooked, so he sold out his 40% stake to Frasier and walked out of the company.

Caselet 3

Read the caselet carefully and answer the following questions:

5. Why does the fact that the majority owner is a nonprofit make a difference in this case?

(8 marks) < Answer >

Who are the stakeholders in this case, and what are their interests in a decision to either sell or keep the stock?

(8 marks) < Answer >

Hershey Food is a well-known manufacturer of chocolate and candy, selling numerous well -known products under its own brand and other brand names such as Reese’s. Although the stock is publicly traded, the Hershey Trust, a nonprofit organization, owns over half of the shares. The mission and major activity of the Trust is to support the Milton Hershey School, which provides free room, board and education to over 1,000 needy students annually in Hershey, Pennsylvania.

In the summer of 2002, the Trust, seeing that more than half of its own net worth (which is called “fund balance” in the nonprofit world) was tied up in Hershey Food stock, decided to sell its Hershey Food stock. The Trust’s reason for making this move was that it wanted to diversify its holdings. Initial interest in acquiring the stock came from Kraft, Nestlé, and Cadbury-Schweppes.

The announcement prompted a wave of criticism. The major issues that emerged were that selling the company to an outside owner puts the city of Hershey at risk, and that the Trust does not need to sell the stock to fulfill its mission. Hershey Foods is the dominant economic force in the community. While it is a major corporation, it is still mainly a local company.

Consequently, there has been scrutiny of how the Board of the Trust came to their decision to sell. One sign of the controversy has been that the Attorney-General of Pennsylvania decided to challenge the sale (during his election campaign to be Governor). Another is that the alumni of the school have been organizing to fight the sale. There have been public demonstrations by workers. The web of relationships between the players is being stretched by the possibility of a sale of the Food Corporation.

END OF SECTION B

Section C : Applied Theory (20 Marks)

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.

Sagar Chemicals limited (SCL) is a public limited company run by Mr.Vishaal Singh and his family. The capital of the company consists of equity from shareholders and loans from financial institutions and other creditors. For efficient running of the organization, the company’s management wants to introduce a corporate governance mechanism. How should the board of the company be constituted?

(10 marks) < Answer >

When is a takeover bid labeled ‘hostile’? What are the popular anti-takeover measures taken by companies to protect themselves from unruly predators?

(10 marks) < Answer >

END OF SECTION C

END OF QUESTION PAPER

Suggested Answers

Business Ethics & Corporate Governance (MB321) : October 2004

		Section A : Basic Concepts
1.	Answer :	(c)		<TOP>

	Reason : This approach is referred to as ‘Teleological approach’.
2.	Answer :	(b)		<TOP>

	Reason : ‘Nomination committee’ carries out the selection of directors in the company.
3.	Answer :	(a)		<TOP>

	Reason :	The principal recommendations of the Cadbury committee covered ‘The board of directors and their
		role’.
4.	Answer :	(d)		<TOP>

	Reason :	‘ Maximization of shareholder value’ should be the governing	objective of a company.
5.	Answer :	(b)		<TOP>

	Reason :	Business ethics can be practiced when the ‘Maximization of profits is sacrificed’
6.	Answer :	(c)		<TOP>

	Reason :	Applied ethics deals with specific often controversial moral issues such as abortion, female feticide
		and infanticide, displacement of tribal people due to huge hydro electrical projects, cloning, testing
		drugs on animals etc.

Business too face many controversial moral issues such as misleading advertising, insider trading, bribery and corruption etc.

Meta ethics is the study of the origin and meaning of ethical concepts.

Normative ethics is the branch of ethics that guides human conduct.

Virtue ethics is concerned with attaining these dispositions of character or personality that an individual desires in himself or others.

Teleological ethics states that an action is considered morally correct if the consequences of that action are more favorable than unfavorable.

7.	Answer :	(d)		<TOP>

	Reason : In promoting Products, a Marketing Manager’s decision depends on ‘Long term Consumer interest’.
8.	Answer :	(d)		<TOP>

	Reason : Selecting non-executive directors to the board is not the responsibility of the corporate Audit
		committee. Some of the functions of a corporate audit committee are:
		•	To discuss with independent auditors any problems that they experience in completing the
			audit.
		•	To review the interim and final accounts in toto
		•	To inform the board about the effectiveness of internal controls and the quality of financial
			reporting as pointed out by the independent auditors.
		To make recommendations regarding the audit fee, selection and replacement of auditors.
9.	Answer :	(c)		<TOP>

	Reason : Corporate conscience is best decided by ‘Board of directors’.
10.	Answer :	(a)		<TOP>

	Reason :	‘Differences in ethical beliefs and value systems in its home country and the host country’ is the main
		dilemma a multinational company faces in its global operations.
11.	Answer :	(b)		<TOP>

Reason : ‘Green mail’ refers to the payments made to selected stockholders in order for a company to repurchase some of the large blocks of stock that had been accumulated during a corporate take over attempt.

It refers to fees paid during the process of Take over.

It is a defensive strategy for warding off hostile takeovers.

Golden parachutes are agreements made by a company to compensate executives with

bonuses and benefits if a merger or demotion displaces them.

Answer : (c)

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

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’.

Answer : (c)

Reason : Employees, investors, customers, and suppliers are collectively known as ‘Stake holders’. The stakeholders of an organization are all those who participate in some way in the activities of the organization. The stakeholders of a company can be as follows:

Any group of people who have a stake in the business

Those who are vital to the survival and success of the organization Any group that is affected by the activities of the organization.

Answer : (a)

Reason : Ethical decisions are much more difficult to make when a person is directly involved in the situation .

Answer : (c)

Reason : The Manager is practicing ‘Amoral’ management. Amoral is beyond morality having no moral principles.

Immoral refers to contrary to accepted moral principles.

Moral refers to the principles of right and wrong

It is a system of moral principles governing the conduct of individuals and groups

It refers to set of rules established to govern the behavior of individuals within the society:

Answer : (b)

Reason : Selling/Coaching style of leadership are recommended for people who are characterized as ‘Low ability, high willingness’.

Answer : (a)

Reason : Vinay’s view of social responsibility is described by ‘Corporate citizenship theory’. It proposes a higher level of ethical consciousness and redefines the mission of business in society.

Moral minimum theory does not describe Vinay’s view of social responsibility.

Maximizing profits will not describe Vinay’s view of social responsibility

Stakeholders interests will not describe Vinay’s view of social responsibility

Ethical relativism argues that there is no universal set of principles of which to judge morality.

Answer : (c)

Reason : Most ethical decisions have ‘Personal’ implications.

Answer : (a)

Reason : ‘Ombudsman’ is the person employed by a newspaper or other media organization to handle complaints from audience members who feel they have been mistreated and who criticizes in general the performance of the organization’s personnel.

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.

Answer : (b)

Reason : The theory which propounds that Moral Structure and Moral Ethics are part of business is known as ‘ Unitarian view of Ethics’.

Answer : (d)

Reason : In order to ensure Ethics in Advertisements given by companies it is best to adopt ‘Self Regulation’

Answer : (b)

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Reason : According to CII committee report companies with either a turnover of over Rs 100 crores or a paid-

		up capital of Rs 20 crore should set up audit committees within two years.
		Audit committees should consist of at least three members, all drawn from a company’s non-
		executive directors, who should have adequate knowledge of finance, accounts and basic elements of
		company
25.	Answer :	(e)	<TOP>

	Reason : ‘Perpetual succession’, ‘ Legal entity status’ and ‘Limited liability’ are the Important features of
		Corporate body.
26.	Answer :	(a)	<TOP>

	Reason : ‘Nominee Director’ is appointed by the Financial Institutions on the Board of Directors of a Company
27.	Answer :	(a)	<TOP>

	Reason : Fictitious revenues are those, which are shown in the books but are not actually earned. The method
		by which this takes place is to book non-existent revenue and simply creating journal entries by
		debiting accounts receivable and crediting sales. Sometimes false sales are shown to existing
		customers. Smart accountants select transactions with a few major customers, such as large
		organizations and governmental agencies that they know will be difficult to confirm.
		Fictitious revenues can be detected by comparing financial statements over a period of time,
		examining unusual journal entries and verifying, supporting sales documents and unusual sales
		transactions.
28.	Answer :	(a)	<TOP>

	Reason : Espoused values refer to a company’s statements credos and code of ethics. They describe the
		organizations purpose and ethical perspective.

An organization is considered to be ethical if its ‘Espoused values are same the ‘Values in the practice’.

An organization is not considered to be ethical if its ‘Espoused values’ are far better than the ‘Values in practice’

(c ) An organization is not considered to be ethical if its Espoused values’ are not entirely the same as the ‘Values in practice’

An organization is not considered to be ethical if its ‘Espoused values’ are totally different from that of the ‘Values in practice’.

29. Answer : (c) ^<^TOP^>

Reason : ‘Beliefs and values’ help employees to resolve ethical dilemma at workplace.

30. Answer : (b) ^<^TOP^>

Reason : ‘A corporation cannot act independently on its own’ is false about a corporation.

Section B : Problems

Mergers and acquisitions seem to be justified from an economic point of view, as they are aimed at using the available resources in an efficient way. But they raise many ethical questions as they disrupt the existing arrangements and pose hardships to people who lose their jobs. Many mergers and acquisitions result in organizations with excess manpower and capacities. In such cases, the management is forced to downsize the staff and in this process, unproductive assets may be sold out and excess manpower retrenched. The ethical dilemma occurs when one tries to weigh the benefits of mergers and acquisitions against the problem caused by them.

Economic analysis: According to the microeconomic theory, market forces should not be relied on to achieve a balance between economic and social performance gives a definite ethical content. It is true that in many of the merged companies, most of the employees lose their jobs due to which they face many problems, as in the case of Richard Helly, who had to search for another job at 58, and was deprived of pension and medical insurance by his employer.

Legal analysis: A democratic society can establish its own rules and if people and organizations follow those rules, employees will be treated as justly as possible. Workforce reduction and closing down of plants are unpleasant, but it was never felt that they are so harmful to the people involved that a law to prohibit them is required. If they cause major problems, a law can be passed to deal with the situation.

<TOP>

The number of years of service of an employee may not be a criterion for evaluating the ethical nature of the retrenchment decision. But the way a person is deprived of his pension because of retrenchment seems to be unethical. It is unethical for a company to deny an employee his due share of the provident fund, for his services to the organization. This act is unethical because it aims to gather profits for the shareholders at the cost of the employee who has 32 years of devoted service.

According to normative theory the choice between “right” and “wrong” should be based on the concept of “the greatest good for the greatest number”. When Harbour Inc acquired Heights Inc it should have developed a rule for workforce reduction and plant closings on the basis of the above principle. By doing so, it would have acted in a fair and consistent manner towards the employees of Hieghts Inc.

An ethical criterion for retrenchment would be remove those employees who contribute the least towards the long-term owner value. Considering age, gender or years of service as criteria for retrenchment amounts to ignoring the efficiency of an employee in contributing towards the long-term owner value.

If Harbour Inc wants to retrench the older employees, it should give them a compensatory package including the benefits of pension, medical insurance and an amount, so that the employees who are above 50 need not search for a job at that age.

<TOP>

Shaswati may be unhappy with the number of executive directors on the board. After her divorce from Swamy, she might be thinking that Swamy may take decisions to dilute her stake in the company. She might also be thinking that as a minority stakeholder her voice may not be heard on the board which is dominated by Swamy and his friends. Therefore, she might want to have more number of outside or independent directors who can question the decisions taken by Swamy.

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Initially Swamy electronics started as a family owned company where swamy and his wife held 100 percent stock in the company. The board was constituted to satisfy the Laws and it functioned as a rubber stamp to ratify the decisions of the board. Thus Swamy Electronics initially had an all-executive board and then it shifted to a majority executive board. But on the other hand Frasier Inc., had a majority outside board, it also had members of its subsidiaries working on the board. It is also clear that every decision taken by Frasier was questioned by the board, which never happened at Swamy Electronics.

Yes, the composition of the board will definitely enhance its performance. If a board has non-executive directors, who are experts in different fields they can evaluate the performance of the management from various angles and advise them appropriately.

<TOP>

If the majority owner was a profit-making enterprise, it is less likely that such a move would be challenged as severely. In general, nonprofits are expected to pay more attention to fulfilling their missions than to maximizing their value, which for the Trust means managing the operations of the School. Although it may be good financial management for the Trust to reduce the weight of Hershey Food Company stock in its overall portfolio of assets, it doesn’t seem to be as necessary for the overall governance of the Trust and the achievement of its mission. Similarly, nonprofits are expected to monitor the needs of different communities and populations they serve. The

Trust doesn’t seem to have done this very effectively.

<TOP>

There are numerous stakeholders here. The public stockholders (besides the Trust) are probably interested in a sale because it will probably boost the value of the stock. The workers at the Food Company and the community of Hershey are concerned about the loss of local control. Marketing managers of the Food Company may be concerned about how to manage the various Hershey brands if they are wrapped up in a larger company. The alumni of the school are concerned about the traditions of the school. The customers of the company probably would not expect to see that much of a difference, but the suppliers would probably expect to incur some difficulties if control of the Food Company leaves local control and goes to a national or global company.

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Section C: Applied Theory

Efficient functioning of Sagar Chemicals requires an efficient board that should consist of executive directors, non-executive directors, nominee directors, alternative directors and shadow directors. Shareholders are the owners of the organization. As each and every shareholder cannot become the member of the board, executive directors are appointed on behalf of the shareholders and they protect the rights of the shareholders. Some executives should also be appointed to the board to facilitate decision-making with regard to the operations of the firm. The employees of the organization are the executive directors. According to the company law, executive directors are responsible to the shareholders. SCL should, therefore, nominate employees who can take up the responsibilities of the executive director, after which the shareholders can elect the most suitable candidate.

Financial Institutions that financed SCL should also be given a chance to appoint their representatives to the board. Such directors are known as nominee directors. These nominee directors look after the interests of the principals, which usually are the financial institutions like banks and mutual funds. To safeguard the interests of stakeholder groups, representative directors are appointed to the board of directors.

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Hostile Takeovers are those that elicit opposition from the boards or employees of the target company. Some of the popular ways in which companies can use to protect themselves from unruly predators are.

Poison Pills

Greenmail

Golden parachute

People pill

Sandbag

‘Poison pill’ is an anti-takeover device 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 has 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 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.

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 takeover the company, if that is the intent. 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 parachutes: 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 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 managers act in their own interest rather than the company’s long-term value, then they are acting unethically.

Sand bag is another tactic used by management to stop a takeover attempt. The company stalls the attempts in the hope that another more favorable company will try to take them over. Management should not waste too much of time in trying to find a more favorable company.

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