Question

For this, please only give feedback for this discussion: This is a discsussion post from a classmate. It does not require answering. Please analyze and chime in on the discussion.

1. Conflict of Interest was identified as a potential ethical issue that may confront a board member of a corporation. For this exercise:

a) Discuss two ways a corporate board member might engage in inappropriate ethical behavior, and explain why each is a problem for the company and shareholders.

The goal of a company is to make money, in that pursuit some leaders might be motivated by the wrong things IE money over risks to consumers, environment, and breaking laws.

1.A.1: One of the easiest ways to do this can be seen in exporting labor to other countries. Doing so is a huge boost to the profit margin because compared to US labor costs China and other countries are a lot cheaper. The ethical issue is not just that the US consumer is enticed by low prices hurting US jobs. The real ethical issue comes in how labor is treated in those countries. “During the organization’s investigation of the Early Light Toy Factory in Shaoguan City, Guangdong Province, which manufactures toys, clothing, and travel accessories for major brands like Hasbro, Mattel, Costco, and Walmart, two workers jumped from the building”(Wu, 2017). The knowledge of these issues is not an unknown to board leaders, but is looked on as a Chinese issue. Wal Mart would likely fail if they lost access to Chinese manufacturing, as that one way they are able to undercut prices of goods by so much. As the public becomes more aware of these practices, pressure is being put on companies to stop allowing the issues to continue.

1.A.2: Another means that companies can use to inflate profits is inflated price fixing. As long as major competitors go along with it, a single industry leader, or an illegal cooperation between two or more companies can allow prices to be inflated. “Financial misconduct includes price-fixing, or an illegal agreement between industry competitors to "fix" the price of a product at an artificially inflated level” (Strain, 2018). EpiPen is one of the very publically known examples. At some point the company that produced this item raised the price to the point that it cost consumers $600 to get one. The kick back that Mylan Pharmaceuticals felt after this gouging became known was massive. They tried to offer discounts to those in need selling a 2 pack for $300, but this price is still way above what it actually cost, and did not help those that needed it and could not afford it. So now a company has developed the technology, and is selling it as a generic for $10 killing the products profitability (Skinner, 2017). The same thing can happen when a product makes so much profit that other companies try to get in on the gains and flood the market with their own versions. Causing prices to drop due to an influx of new options, in the end profits will drop, and shareholders will move on.

1.B: Ways that these issues can be avoided:

In regard to labor practices, if outsourcing is a necessity then ensure that ethical labor practices are followed. Site visits that are unannounced, and talking with workers without their management around can help as well. reprisal is a challenge that will need to be looked into for those workers, as once the outsourcing company leaves, they cannot control the actions of management.

Price gouging and illegal price fixing are challenges that government regulations, and maintaining a good environment for new producers to enter the market. While monopolies in the some areas like pharmaceuticals (until generics are allowed to be produced), electricity and cable television are a necessity due to the high costs of the infrastructure. Competition is the fix in most cases.

Answer 1

The examples cited in the above discussion regarding how a board member can engage in unethical behavior and cause a problem for the company and shareholers are very appropriate and clearly explained.

A.1 Exporting manufacturing to countries with cheap labour is a very common practice, however very much misused. One more example can be cited here where manufacturing facilities used by Nike in Bangaldesh had reported a lot of issues relating to human rights violations. Consequently, Nike's reputation and image was tarnished, affecting its profits and shareholders. The point is its not that top management/board members would not be aware of this, but they might have ignored it.

A.2 Price fixation is also very common practice where cartels are formed by the limited no. of producers or distributors of a product and they control the prices. A perfect example is OPEC with middle-east countries forming a major part. Until US started producing shale oil and gas, OPEC controlled the prices a lot. Oil Crisis of 1970s is an example where the few Arab countries forced oil prices to shoot up. The unofficial Coke-Pepsi cartel is also one example, however, they are not trying to loot the public (with their prices being reasonable for common public to be able to buy their products).

B. Ways to avoid cheap labour issues is to regularly monitor them, which is perfectly explained. Also, price gouging avoidance can also be avoided by involving more competition, which is also perfectly highlighted. Competition, especially in hyper-local form helps reduce cartel's power.