How Companies should be Weighting Ethical Manner over Maximizing Profits Decisions
- ardybad
- Feb 14, 2017
- 7 min read
Original Title: Stanwood Stereo: An Ethic Case Study
Author: Achmad B. Djauhari
Course: Managerial Accounting
Instructor: Robbin Lawson
Date: February 14, 2017
Introduction
Making decisions that are not breaking the law is a must for every business person. However, should companies consider ethics in terms of the outcome? A former CEO of Turing Pharmaceuticals, Martin Shkreli, increase pills price by over 5,000% for developing toxoplasmosis.
Even though his action is legal, according to the department of medical ethics and health policy, it was an unethical decision due to unreasonable price compare to the other competitors. Shkreli claimed that his action should have maximized profits for the company stakeholders. While satisfied shareholders are important in business practices, experts agreed that in the respected industry, not only making the shareholders happy but responsibility in pricing is also crucial to generate return somewhat (Baldelomar, 2016).
Stanwood Stereo had determined that it would not achieve aggressive revenue growth in 2016. The Chief Operating Officer (COO), John Praxton, and the controller, Maggie Kein, attempted to increase the earning performance by exploiting cost per unit and sales price for achieving more than 25% annual bonus.
While the modifying price per unit and sales are legal business practices, other implications should be viewed as whether the decisions are ethical or not. In order to examine the ethical aspects of these issues, this paper will evaluate the actions by reviewing them via an ethical framework and evaluate the result from shareholders' value viewpoints.
Every decision that has been made affect either short-term or long-term shareholders. Through the ethics framework, an either ethical or unethical decision will remain impact Stanwood Stereo's shareholders. As a result, this paper provides what possible effects happen to the company and the shareholders interchangeably when it decides to take such actions.
How Ethical Situations Differ from the Law Problems
Ethics consists of making a decision that is supported by reasons. Instead, the law emphasizes dictation or guideline for an individual or a group of people. Both concepts deal with the way an individual or people should cooperate; yet, ethics is considered regarding the way people act whether other parties involved or not (Brown University, 2011).
Ethics are divided into three segments: professional, social, and individual.
A company requires professional ethics to be followed by its workers. Professional ethics code can be dilemmas as employees might confront the company's code of ethics, which might not be supported by all conditions in detail. Different from the law, employees will be punished if they do not follow it while ethics are viewed from principles and values (Utah State University, n.d.).
How an Ethics Framework address the Company's Issue
Identifying ethical issues is challenging. According to Santa Clara University (2015), finding the ethical standards and applying appropriate actions to those standards are the two fundamental abstract problems in dealing with ethics. Table 1 defines the framework for ethical decision making that can be used as a guideline to discuss Stanwood Stereo's issue. The framework will address the case by recognizing the ethical issue, getting the facts, evaluating alternative actions, making a decision, and reflecting the outcome.
In this paper, the author will provide whether the issue in Stanwood Stereo was ethical or unethical. Also, the best decision and the outcome will be provided, referring to the framework for ethical decision-making points.
Actions and the Impact on the Shareholders
John and Maggie's actions to offer high price reduction and increase production quantity for personal needs are considered as unethical from the business perspective. Although the overtime pay did not violate business rules and law, decreasing the price of the product, as well as raising production quantity, without significant market demand may only benefit for short term success. Low ethical standards might increase companies' short-term financial grow; however, such grow would damage companies' reputation in the long run (Baldelomar, 2016).
Besides, Both John and Maggie decided to do so mainly for an annual bonus. In fact, the company will still earn revenue, albeit not as aggressive as the firm targeted. Meggie's statement that the business would allocate its January sales into December with no bonus is the indicator the company might only be benefited from 2016 revenue and may have the same situation next year.
In other words, the organization should evaluate either its products or business model to catch up with the valued market. However, if John and Maggie decide to benefit their company in the short run, the result will impact the firm's shareholders' value.
When looking at the impact on the shareholder, the management should also consider the value from its short-term and long-term shareholders. According to Rappaport (2006), focusing merely on income is a lousy approach due to three reasons. First, accountants do not calculate companies' reputation.
Second, businesses compromise the value of either overinvestment or underinvestment for the sake of increasing short-term revenues. Third, reporting blushing incomes by extending tolerable accounting to the limit will finally be reevaluated by the board director. As a result, those practices may not satisfy investors' hopes and undermine the companies' market value.
Even if the business can fulfill its target in the recent year does not mean it will get the same result in the following year. Moreover, continually increase income does not mean a good sign for the firm's stock value. A study examined that excessive growth in a business harms the company's value, albeit the growth is commonly projected for higher value (Ataünal & Gürbüz, 2016).
For short-term shareholders, growing revenue, which results in higher stock prices, will temporarily profit themselves. Short-term shareholders will sell all the equity interest in the short period, while long-term investors will sell all the investment for a more extended period without involving in equity transactions soon. Short-term shareholders focus on short-term stock prices to be sold again in the future.
Executives are suggested to aim and capitalize on long-term shareholders. Giving more value to long-term shareholders would make the organization more desirable in the market, according to Fried (2015). Beyer et al. (2014) also claimed that firms need long-term investments to avoid distractions from short-term performance burdens; by attracting long-term investors, businesses can generate competitive advantages in the markets. Additionally, a survey revealed that over 60% of firms agree that the domination of short-term investments distract strategic decisions as companies should focus on short term result.
Michael Porter suggested long-term shareholder value should be the obvious business goal. Managers should describe decisions for long-term shareholders' value as well (Fried, 2015). Accordingly, keeping the long-term value investment may help the company keeps its money for evaluating its products or business model that potentially increase the demand in the following year.
Recommended Action in Addressing the Issue
As a matter of fact, John and Maggie are concerned about their bonus. Due to annual earning that will not meet the target, they may receive a bonus of about 2%, instead of over 25%. Therefore, they planned to lower the products' prices and take advantage of fixed costs to reduce the cost per unit. Through this framework, the author analyzes whether the actions to lower the selling price and price per unit are ethical or not. Therefore, assessing the issue will be based on what option is best among the company its employees.
Companies that take ethics solemnly often triumph over dubious customers and media (Weinstein, 2007). John and Maggie should rethink their actions to lower the selling price and price per unit. Instead, John, as the company COO, may consult with his executives about other possible options to increase the company sales. If the sales for the current year is not as high as the company expected, the executive should be able to evaluate its products or remodel the business practice. As a survey by Beyer et al. (2014) revealed about long-term investment, the company should have been to worry about the short-term circumstance. However, rethinking business or sales practices might boost firm performance in the following year.
Jiambalvo (2016) agreed that When management performs ethically, they gain the confidence of their customers, suppliers, subordinates, and company stockholders, and that trust is likely to turn into a benefit to the firm's stock price. Accordingly, John and Maggie should be able to manage the case to be more ethical in terms of lowering price per unit and sales price for the sake of a personal bonus. The result will likely merely help for short-term investment; notably, they have taken a risk that they will encounter the same problems and solutions.
Conclusion
Ethics and law are the two different aspects that employers and employees should follow. From the law standpoint, the court will punish parties that involve in breaking the law; however, parties that are considered to be unethical will lose the value for social trust. In this paper, Stanwood Stereo faced the unethical situations by its COO and Controller who attempted to utilize fixed costs, to get the lower price per unit, and decrease the selling price for gaining income.
Although the actions are not breaking the law, excessively using the company resources for personal needs, which is an annual bonus, is an unethical action. Examining the issue by a framework for ethical decision making, the author found that both John and Maggie can address their issue by offering such evaluation either on products or business practices to help the company gain the expected sales not only in the short term but also in the long term.
As studies claimed, long-term stakeholders can support companies survive in the long run. Stanwood Stereo should remain focus on its long-term stakeholders because the investment will benefit the firm for further business and operational development. Therefore, albeit the current year did not result in an expected amount of sales, keeping the ethical action for Stanwood Stereo may keep the customers and stakeholders trust that will affect the company performance in the future.
References
Ataünal, L., & Gürbüz, A. O. (2016). Shareholder Value Creation at Excessive Growth Levels: Empirical Evidence from Turkey. Maliye Finans Yazilari, 30(106), 9-27.
Baldelomar, R. (2016, July 21). Where is the line between ethical and legal?. Forbes. Retrieved from http://www.forbes.com/sites/raquelbaldelomar/2016/07/21/where-is-the-line-between-what-is-ethical-and-legal/#7d0c824615d5
Beyer, A., Tayan, B., & Larcker, D. F. (2014). Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making. Standford Graduate School of Business. Retrieved from https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-survey-2014-investment-horizon.pdf
Brown University. (2011). A Framework for Making Ethical Decisions. Brown University: Science and Technology Studies. Retrieved from https://www.brown.edu/academics/science-and-technology-studies/framework-making-ethical-decisions
Fried, M. J. (2015). The Uneasy Case for Favoring Long-Term Shareholders. The Yale Law Journal, 124(5), 1346-1835.
Jiambalvo, J. (2016). Managerial Accounting: ebook (6th ed.). Hoboken, NJ: John Wiley & Sons.
Rappaport, A. (2006). Ten Ways to Create Shareholder Value. Harvard Business Review. Retrieved from https://hbr.org/2006/09/ten-ways-to-create-shareholder-value
Santa Clara University. (2015, August 1). A Framework for Ethical Decision Making. Markkula Center for Applied Ethics. Retrieved from https://www.scu.edu/ethics/ethics-resources/ethical-decision-making/a-framework-for-ethical-decision-making/
Utah State University. (n.d.). Law vs. Ethics. Retrieved from http://tarlab.usu.edu/htm/et/law-ethics
Weinstein, B. (2007, October 15). If It's Legal, It's Ethical…Right?. Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2007-10-15/if-its-legal-its-ethical-right-businessweek-business-news-stock-market-and-financial-advice
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