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The Pressure to Overstate Stock Valuation
You have been the Chief Financial Officer (CFO) for a large manufacturing company for 15 years. The Company’s year-end is March 31 and you are finishing the year end accounts.
You have recently been advised by the Chief Operating Officer (COO) of a significant level of slow moving stock. The stock in question is now more than nine months old and would normally have been written down some months previously.
The shareholders are trying to sell the Company and the Chief Executive Officer (CEO), who is also the majority shareholder, has told you that it is not necessary to write down the stock in the year end accounts. You are sure that the CEO wants the financial statements to carry an inflated stock valuation because he has found a prospective buyer for the Company. The CEO has mentioned to you that if the proposed deal is successful, all employees will keep their jobs and you will receive a substantial pay increase.
What are the ethical implications of this scenario and how would you resolve them? Are there any ethical theories that might support your answer?
Learning Activities #2
Corporate Social Responsibility: Whats the Big Deal?
One of the most contentious debates among scholars has centered on the proper role for a corporation in the pursuit of its business. In large measure the debate has crystallized around two points of view. On the one hand, some believe that a corporations chief responsibility role is to make and maximize profit. This belief has often been referred to as the Friedman Approach in homage to the economist, Milton Friedman. Friedman espoused the view that as long as a corporation stayed within the rules, its only responsibility was to return the maximum profit to its shareholders. On the other hand, other scholars have asserted that the social responsibility for a corporation extends beyond just making a profit and includes a responsibility to act in a manner that promotes and supports the welfare of society at large.
What do you think about this so called Shareholder vs. Stakeholder� debate? Do you have any personal experiences where you have observed the effects of this debate in terms of corporate actions? On which side of the argument do you come down on and why?
Expert Answer
Ethical Issues and Stakeholders vs. Shareholders debate
There are various ethical implications that result from the failure to write down stocks in the organization at the year end. The ethical implications will result as the decision made will not be in line with the utmost goodwill of the stakeholders. Some of the ethical implications are as indicated below.
Objectivity
This is an ethical issue that requires each of the stakeholders of a company to act in a way that discerns the personal interest and considers the company interest at stake. When the stocks in the organization are not written down, there appears to be a breach of the objectivity rule. The CEO wants the financial statements to carry an inflated figure of stocks in order to secure a buyer (Forkel, et al. 2013). This decision is not objective in that it disregards the buyer welfare and considers personal interest of the CEO.
Professional behavior
The chief financial officer is expected to meet a certain level of professionalism in his dealings with the company. By failing to recognize the write-downs, he breaches the code of conduct that guides the accountancy profession. This will affect all other activities that follow the failure such as misreporting.
Confidentiality
This ethical aspect requires the professionals and the stakeholders to observe the use of private information for the benefit of the organization as a whole. There is a breach of the confidentiality as the CEO is determined to use the information regarding to the stocks level for personal gain at the expense of the potential shareholders.
Theory associated to the argument
The main ethical theory that can be used to support the answer above is the utilitarianism theory. This is a theory that is based on determining the uprightness of the consequences of an action. If the anticipated implications are okay, the decision maker is expected to take an action (Forkel, et al. 2013). If the consequence is seen to be immoral, then the action ought not to be taken in the first place.
What do you think about this so called “Shareholder vs. Stakeholder” debate?
The debate brings about a difference in the action taken by the different management with different points of view. Those that argue for the shareholders side tend to take actions that favor only the profit maximization idea (Tomé, et al. 2013). On the other hand, those that are for the stakeholders’ argument tend to favor actions that will favor not only the profit maximization but also the welfare of the society.
Do you have any personal experiences where you have observed the effects of this debate in terms of corporate actions?
I have had the experience of effects that result from the debate. The managers who argue for the shareholders point of view take actions that will increase profits regardless of the effects on the society around. Some of the actions include laying off employees at a high rate to minimize on the operational costs being incurred. On the other hand, the I have seen that managers who argue for the stakeholders point of view take actions that will favor all parties related to the company (Vilela, et al. 2014). Such actions include the motivation of the employees to deduce productivity. On the other hand, the people around the organization are offered jobs at a higher rate than those from far.
On which side of the argument do you come down on and why?
Of the two sides of the debate, I come down on the stakeholders’ argument. This is because even though the organization needs to maximize profits, it cannot do this without the support of the community around. The support of such community will make it easier for the organization to penetrate into the market and win the community’s goodwill.
References
Forkel, M., Carvalhais, N., Verbesselt, J., Mahecha, M. D., Neigh, C. S., & Reichstein, M. (2013). Trend change detection in NDVI time series: Effects of inter-annual variability and methodology. Remote Sensing, 5(5), 2113-2144.
Tomé, L. C., Mecerreyes, D., Freire, C. S., Rebelo, L. P. N., & Marrucho, I. M. (2013). Pyrrolidinium-based polymeric ionic liquid materials: new perspectives for CO 2 separation membranes. Journal of membrane science, 428, 260-266.
Vilela, C., Sousa, A. F., Fonseca, A. C., Serra, A. C., Coelho, J. F., Freire, C. S., & Silvestre, A. J. (2014). The quest for sustainable polyesters–insights into the future. Polymer Chemistry, 5(9), 3119-3141.
