BUSINESS ETHICS AND CORPORATE GOVERNANCE

REAL LIFE CASE STUDIES FOR DISCUSSION

CASE 1
Sunil, the finance director of Rank Electronics, has started the day well when he got the
news, that the companys Managing Director, Gautam, was returning after a successful
trip to America from where trial orders for their TV sets has been secured through his
efforts. On reaching office, Sunil wanted to congratulate Gautam for the orders.
However, as he entered his cabin, his secretary met him in a state of shock. Sir, there is
no money in the bank as the Purchase Director had given a cheque of twenty-five crores
to one of the suppliers, which has been paid by the bank. Sunil went around finding the
facts and he realized that twenty-five crores had been debited to their account leaving
very little in the bank. He, really got worried as to how he would be able to arrange
finance for the new prestigious order. On inquiry from Tiwari the Purchase Director, Sunil
got the needed confirmation in this regard.
The Purchase Director Tiwari, Sunil knew, was a distant relative of Gautam and Gautam
trusted Tiwari to a fault. Sunil started investigating the problem and found that with the
purchase the companys inventory had become topside. While the newly purchased
product was stocked for six years production some major components were in stock only
for a weeks production. That evening Sunil decided to visit Tiwaris house to discuss this
problem in ordering. Nearing Tiwaris house, Sunil heard loud voice coming from the
house as a party was in progress. There he found the supplier of the new order having a
good time with Tiwari, who had taken a hefty sum from him for placing the order,
especially as Gautam was away on tour and there was no one to question his actions.
Issues for discussion:

1. Was Tiwari justified in placing the order on the pretext that prices could
go up?
2. What action should be taken so that such problems do not reoccur?
3. What action if any, should be taken against Tiwari?

1. Was Tiwari justified in placing the order on the pretext that prices could go up?
A. According to my opinion Tiwari should not have placed order for such huge
amount and for such a long period, as the inventory may add on. And on the top
major components where in stock for only few weeks. Even if we consider that he
has placed order thinking that prices could go up, but still at least not for six
years. Whether he has done market analysis for that particular product. Whether
he has cross checked with other supplier for the availability of that particular
product. What if in the mean time any new advanced product is being launched,
then the product that is being stocked as inventory will be considered as waist.
Another possibility that there may be chances that the price may come down
after a year or so. Or otherwise he needs to use those products in the production
as calculated for six years but may have to sell the final product at lower rate, in
order to clear those stocks.
Another reason though in Business there is practice to pay bribe. But in ethical
sense it is not the right way just thinking of self interest and putting the business
in to trouble. Tiwari has taken undue advantage of being distant relative of
Managing Director Gautam and has taken his own decision without doing any
proper analysis in the market neither discussed with Managing or Finance
Director.
2. What actions should be taken so that such problems do not occur?
A. As mentioned in the earlier answer Tiwari should have done complete market
analysis for that product and also should have checked the availability of the
product whether it is easily available and are there any chance that there will be
hike in price. Tiwar should have discussed the same with the Managing Director
once he returned from his tour or even he could have discussed with Finance
Director before issuing the cheque whether there is so much of fund available
apart from ordering the new product that will be sufficient enough to run day-today activity. He should have given the estimated budget or analysis report to the
Finance Director before placing the order or the quotation that supplier might
have given it to him. Jointly together should have discussed on the issue whether

how much quantity of that new product is required for the production for the
present year and for the coming year depending on the availability of funds. The
Finance Director might also have contributed some valuable suggestion which
might have saved the company by not incurring such a huge expense on one
particular product. It was a complete one sided decision. This is not considered as
good practice in Business.

3. What action if any should be taken against Tiwari?

A. He should be made to realize about his mistake of taking decision of his own in
the Board Meeting. By pinpointing the areas where he needs to take decision or
suggestions of others as well. Though certain powers may be assigned to him but
it may restrict to his domain and not in others domain. If he uses unethical
means by paying bribe and putting the Company in loss in such case Memo
should be issued to him and certain amount should be charged as fine from his
salary. So that it remains lesson to others as well.

CASE 2
The CEO was interested in doubling the sales and profits in the shortest possible time.
One of the major components of manufacturing in his factory was power. He decided to

have a chat with the engineer from the power company and this is what transpired
during the meeting.
CEO: Sir I want you to bill us only to the extent of 10% of my power consumption and I
am prepared to meet any of your demands.
Engineer: How can that be possible? Anyway, even if I could do what you want me to, I
would be in danger of losing my job.
CEO: If you, get ten lakhs per month tax free will it be worth your while? I promise you
will get ten lakhs each month for a minimum period of three years.
The deal was struck at fifteen lakhs per month for a period of five years. The engineer
realized that in his government service he would never be able to earn this kind of
money in the entire career.
The CEO knew that with less power consumption he could show lower production upto
only 10% on the present level, pay income tax, excise duty and sales tax only on that
level of production. He stood to gain almost ten lakhs per day. He decided that even
after giving the money to the engineer and to some other government employees like
excise and sales tax inspectors he would still be a big gainer in the deal.
However, with the transfer of the engineer two years after their agreement, the scam
surfaced and the CEO found himself behind the bars.

Ans. We all understand that it is usually Business practice to show less production and make
huge profits in order to avoid tax, by paying bribes to all the Government employees in
order to get the work done. Some think that it is one of the Business tactics, some think
that they are smart by paying bribes they can easily achieve what they want. In real
time that is the practice still going on.

Though for a while it might be profitable but not in the long run. One day or the other
such scams are likely to be brought into light. They not only tend to lose their money,
power, credit and they even lose their image in the society.
In this case everybody is unethical as they are more inclined to be greedy. Right from
CEO of the Power Company to all the Government Officials who wants to make fast and
easy money no matter even if they tend to lose their job. Government authorities have
Utmost faith on them that they will do their best and help the Government to get the
right amount of tax from the right person, which can be further utilized for the
betterment of the society.
It is a kind of fraud, cheating, and unethical means to the society. Though the CEO of
the power company had planned for bigger gain deal but after two years he was behind
the bars and has to pay tax with heavy penalty. Example - Sahara case.
Power is considered to be the most important aspect of our life. The CEO could not abide
with Corporate Governance.