978-0134324838 Chapter 4 Solution Manual Part 2

● APPLY YOUR UNDERSTANDING

4-21. Ethical Dilemma:

You were recently hired by ThunderCat Corporation, a major aircraft producer with a

manufacturing presence in numerous countries. ThunderCat’s sales personnel

constantly travel the world, selling fighter jets and commercial aircraft to airlines and

foreign governments. You are keenly aware that countries vary enormously in terms of

culture, laws, and political systems. Top management has asked you to develop a Code

of Ethics to guide ThunderCat employees in their interactions anywhere in the world.

Given the diversity of countries where ThunderCat operates, what sort of code will you

develop? What issues should you consider? Given the diversity of countries around the

world, is it possible to develop a code that guides ethical behavior everywhere?

■ ThunderCat Corporation, a multinational aircraft producer, has an ethical dilemma- it needs a

Code of Ethics.

■ While there is a steady multinational demand for ThunderCat’s products, commensurate

universal guidelines for the corporation’s employees do not exist.

◘ The utilitarian approach emphasizes providing ethical actions which produce more

◘ The rights approach lets the decision maker choose the ethical action that best

◘ The rights approach focuses on which action respects the rights of everyone involved,

◘ The fairness approach mandates that all people should be treated equally and fairly.

◘ The common good approach suggests that ethical actions should be based on the

◘ The virtue approach argues that ethical behavior should embody the character

◘ Out of the five alternative decision modes, crafting a Code of Ethics employing the

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■ Developing a Code of Ethics to guide ThunderCat employees in their interactions anywhere in

■ Selecting one approach over another will underscore one country’s customs and ideals over

■ While it is practically impossible to adhere to the customs of each and every country,

■ The Code of Ethics would be a balance of broad and specific codes tailored to each respected

4-22. Ethical Dilemma:

Royal Dutch Shell has been doing business in Nigeria since the 1920s and has

announced new plans to develop oil and gas projects there. However, over the years

Shell has experienced a series of complex issues. Its operations are centered in Nigeria’s

Ogoni region, where the local citizens have protested Shell’s drilling and refining

activities, which harm the natural environment and reduce the amount of available

farmland. Protestors also accuse Shell of extracting wealth from the region without

adequately compensating local residents. Following sabotage of its facilities, the firm

suspended some of its Nigerian operations. It then came under pressure to divest its

Nigerian operations and pay reparations to the local people. Despite these problems,

Shell has persisted in Nigeria. Management instituted various community development

programs in the region, budgeted at $50 million per year. Using the Ethical Framework in

this chapter, identify steps Shell can take to be a better corporate citizen in Nigeria.

(LO 4.2; LO 4.4; AACSB: Diverse and multicultural work environments)

■ Every country is characterized by diverse political and legal systems that pose significant

■ While the immediate cause of country risk is a political or legal factor, underlying such factors

■ In Nigeria, Shell faces country risk stemming from social factors grounded in citizens’

■ To take advantage of the opportunities and minimize the risks, managers must develop an

■ Improving their corporate citizenship would certainly help Shell better deal with country risk

■ Corporate social responsibility means meeting or exceeding the ethical, legal, commercial,

■ Trend- good corporate citizenship implies that firms should behave not just to maximize their

■ Shell needs to invest in the community that it is profiting from. Perhaps build some schools,

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4-23. Ethical Dilemma:

The American International Group (AIG) is the largest insurance company in the United

States. In the global financial crisis of 2008-2010, AIG faced financial ruin. However, the

U.S. government used taxpayer money to loan the firm over $170 billion in exchange for

an 80% stake in AIG. A few months later, it was revealed that AIG had used part of the

money (at least $30 billion) to pay off banks in Europe, largely for debt obligations it

incurred in foreign transactions. U.S. government officials were furious. The furor

intensified when AIG tried to renegotiate loans with some of its U.S. creditors, implying

they were less important than the European banks. Suppose you were the Chief Financial

Officer at AIG. What would you have done? How would you handle this predicament?

Use the Ethical Framework in this chapter to analyze how AIG might have better handled

the situation.

(LO 4.6; AACSB: Analytical Thinking)

This discussion topic should generate some interesting arguments from several sides of the

political/economic/legal spectrum, and it serves to illustrate how ethics permeates all three of

these systems.

ETHICS

Totalitarianism Command economies:

Severe Regulation

Stakeholders Government-determined

No Regulation

Seen as the root cause of the credit crisis, AIG was heavily exposed to toxic assets that it had

insured. Global financial institutions were implicated in AIG’s failure through the concept of

contagion: allowing AIG to fail would mean worldwide financial catastrophe. As a consequence

of the global financial system, companies worldwide that had invested in/purchased AIG’s

A FRAMEWORK FOR MAKING ETHICAL DECISIONS

1. Identify the problem

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■ Acknowledge the presence of an ethical problem.

■ Ask questions such as:

●Is there something wrong?

2. Examine the facts

■ Determine the nature and dimensions of the situation.

3. Create alternatives

■ Identify potential courses of action.

■ Review any proposed action to ensure it is legal.

4. Implement course of action

■ Put the chosen plan into action.

5. Evaluate results

■ Assess how effective the decision is.

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1. Identify the problem.

■ Managers must learn to recognize and manage ethical problems – proactively anticipate,

confront and scan for ethical challenges.

This Dilemma:

How does a multinational firm with a storied history, a reputation for being extremely well-run

and a coveted triple-A credit rating- held by perhaps a dozen companies in the U.S., meaning

that AIG’s chances of defaulting were as close to zero as it gets- how does such a company

As a rule, insurance companies are typically overcapitalized with low debt ratios because they

must keep a reservoir of cash in the event the disaster (insured) does take place. Not a

The “Collateral Triggers” included in AIG’s derivative contracts mean that if certain triggers take

place, e.g. a ratings downgrade, and then AIG would put up collateral against the billions in

Toward the end of the 1990s, under a set of ill-advised international rules, banks were permitted

to employ their own internal measures of risk to set their capital requirements. The less risky the

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2. Examine the facts.

■ Determine the nature and dimensions of the situation.

■ Have all the relevant persons and groups been consulted?

■ What individuals or groups have a stake in the outcome?

This Dilemma:

Due Diligence would have revealed the following facts prior to rather than after the

payments were made and transparency by the U.S. government and AIG could have

mitigated the fallout if only the pertinent information had been shared and explained.

Total Quality Management or Six Sigma would advocate that being proactive costs far

less than a reactive stance with the fix it later mindset. Here are the pertinent facts

regarding AIG’s payments to countries/banks:

AIG-Related Payments

Source:

http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/german_and_fr

en.html [Accessed August 7, 2015]

The majority of the funds, almost $58 billion, went to banks outside of the U.S. France and

Germany were the big winners with $19.1 billion and $16.7 billion respectively. Is the U.S.

bailing out the world? AIG is proceeding as if the U.S. were the world banker… Does

globalization of American companies mean that the taxpayer bears greater risk?

3. Create alternatives.

■ Identify potential courses of action.

■ Review any proposed action to ensure it is legal.

●If it violates host or home country laws or international treaties, it should be rejected.

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This Dilemma:

Wall Street vs. Main Street

Utilitarian – which action results in the most good and least harm?

Rights – which action respects the rights of everyone involved?

Fairness – which action treats people most fairly?

Source:

http://www.ritholtz.com/blog/2010/06/paulsongeithner-committed-fraud-in-aig-disclosures/

[Accessed August 7, 2015]

◘ Wall Street– AIG has made billions of dollars in profit emanating from deals with some

Common Good – which action contributes most to the overall quality of life of the

people affected?

◘ Main Street– Retaining the money in the U.S. and not paying the European Banks

Virtue – which action embodies the character strengths that you value?

4. Implement course of action.

■ Put the chosen plan into action.

5. Evaluate results.

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This Dilemma: Students may discuss the following points in addition to those generated

by the students themselves.

◘ Why pay the European banks while AIG is reporting losses?

◘ For payments, creditors (European banks) are in line before shareholders (U.S. taxpayers)

◘ Pay the European Banks while incorporating transparency- explain what you are doing and

● GlobalEDGE™ INTERNET EXERCISES http://globaledge.msu.edu

4-24. Various organizations have devised international standards for ethical corporate

behavior. These include the United Nations “Universal Declaration for Human Rights”

(www.un.org), the OECD’s “Guidelines for Multinational Enterprise” (www.oecd.org), the

International Labour Organization’s “Minimum Labor Standards” (www.ilo.org) and the

U.S. Department of Commerce’s “Model Business Principles” (www.commerce.gov). Visit

these online portals and prepare a set of guidelines firms can follow in pursuing

acceptable ethical standards in international business.

■ Let’s examine one such program. The Good Governance Program (GGP) of the United States

International Trade Administration is a six-phase Business Ethics Program oriented for the

private sector to

(1) build awareness and dialogue on good business practices, transparency, accountability,

Phase 1: Raise Awareness

The Business Ethics program works with the private sector to build awareness and dialogue on

Phase 2: Develop Base Guidelines for Codes of Business Conduct

Phase 3: Business Ethic Training

Phase 4: Business Ethics Manual and Other Resources for Regions

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Phase 5: Private-Public Sector Cooperation

Phase 6: Sustainable Initiatives

4-25. Transparency International (www.transparency.org) publishes information about the

nature of corruption around the world. Suppose you worked at a firm that makes

computer software and wanted to begin doing business in Brazil and Russia. Your task is

to examine reports and indices on these countries at the Transparency International site

and write a brief report explaining how your firm should conduct business in these

countries, with a view to avoiding problems associated with corruption. Key issues to

consider include bribery and threats to intellectual property.

■ According to Transparency International’s Corruption Perceptions Index, Brazil recently

had a rating of 43 and Russia’s rating was 27.

◘ The Index rating ranges from 1 to 100, in which a lower score implies a higher level of

corruption.

◘ The Index assesses the extent to which corruption is perceived to exist among public

■ How should firms deal with corruption in Brazil and Russia?

◘ Initially the firm must engage in continuous scanning, in order to be on the lookout for

◘ The firm needs to design an appropriate system of corporate governance. Such a

◘ Management should scan the country and potential partners for the possibility of

◘ Corruption might arise in situations related to labor conditions, partner firms,

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◘ When possible corruption is detected, the manager should try to obtain relevant facts

◘ The manager should review any proposed action to ensure it is legal, as per host or

◘ The goal is to arrive at the most appropriate course of action that addresses the

4-26. The websites for:

Lenovo (China; www.lenovo.com)

Nokia (Finland; www.nokia.com)

Banco do Brasil (Brazil; www.bb.com.br)

click on ‘English’) contain substantial information about how these firms undertake

corporate social responsibility (CSR). Visit each website and write a report in which you

compare and contrast each firm´s CSR. Which firm appears most effective in CSR? How

does the CSR of a bank differ from that of manufacturing firms such as Lenovo and

Nokia? Lenovo and Banco do Brasil are based in emerging markets, while Nokia is in an

advanced economy. What differences in the firms´ CSR orientations can you detect

based on this distinction? Justify your answer.

The CSR information is incorporated below from each one of the three firm’s websites. The

following table summarizes some key similarities and differences. Ask students what additional

variables might be important to consider, and whether they agree or disagree with this table:

Lenovo

www.lenovo.com

Nokia

www.nokia.com

Banco do Brasil

www.bb.com.br

Market Stage

Country

Emerging market-

China

Advanced

Economy- Finland

Emerging market-

Brazil

Easy to

understand

Lenovo www.lenovo.com

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Emerging market- China

Manufacturing

Link to Performance: NOT CLEAR

Social Responsibility Structure

◘ Environment

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