Topic: Sources of Financing
Characters: Joe Brown, financial planner
If it weren’t for its inability to obtain enough of Part P6729, a critical component in its newest and fastest selling product, Ajax Inc. would have been well on its way to financial success. But the delayed delivery of that part significantly increased the new firm’s work in process. That, in turn, increased the demand for working capital as the firm stockpiled unfinished product in anticipation of delivery of Part P6729. In addition to its cash reserves of $616,000, Ajax needs $300,000 for the next few months to finance its temporary increase in working capital.
Joe Brown, a financial planner at Ajax, has been asked to suggest how to temporarily obtain the additional funds. In order to look as good as it can to the financial community, Ajax wants to make its financial statement be as attractive as possible. For this reason, Ajax would prefer to avoid borrowing from its banks or other financial institutions, or collateralizing any of its assets.
Joe is considering slowing the payment of Ajax’s accounts payable. While the firm takes full advantage of its trade credit, it does carefully observe its trade credit terms. Joe maintains that by quietly delaying the payment of its bills by four additional days on the average, Ajax can obtain the use of an additional $300,000. He feels the firm will be able to do this for at lease a couple of months before suppliers begin to complain. By then, the firm will no longer need the additional funds.
Joe discussed his proposal with some of his colleagues. Some wondered if the firm’s suppliers would go along with the plan. Others doubted extending payment by only four days would raise that much money. But Edward Smith, a colleague whose opinions Joe respects, questions whether the firm should even be considering the proposal. He was not concerned about whether the plan is practical, feasible, or do-able. Rather, he felt it was not the ethical thing for the firm to do.
These discussions have left Joe wondering what he should recommend. Author: Philip Pfaff, Associate Professor-Finance, Canisius College
What Are the Relevant Facts?
1. Carol, the assistant treasurer for a medium-sized manufacturing company, is responsible for monitoring the performance of three fixed-income managers of her company’s pension plan. She also recommends how new pension monies are allocated to the three fixed-income managers.
2. Carol has been invited by SNB, one of the fixed-income managers, to attend the annual conference for their best clients.
3. SNB will pay for all of Carol’s expenses except airfare.
4. Carol’s boss, Mary Ann (the treasurer), had previously attended SNB’s conferences.
5. The conference meets each day in a resort area until 10:30 a.m. and after 4:30 p.m.
6. Carol will travel on Wednesday morning and return on Sunday.
7. The other two fixed-income managers have shorter, smaller conferences in New York City.
8. Carol expects to gain significant information that will help her to do her job more effectively.
What Are the Ethical Issues?
1. Is there an appearance of a conflict of interest?
2. Would Carol’s attendance at the SNB conference constitute a conflict of interest?
3. Would a decision by Carol not to attend the conference bring into question the propriety of her boss’s trips to previous SNB conferences?
4. Who Are the Primary Stakeholders?
- Mary Ann
- Pension fund beneficiaries
- other two fixed-income managers
What Are the Possible Alternatives?
1. Attend the conference.
2. Attend the conference but have her own company pay all of the expenses.
3. Discuss the conflict of interest with her boss, Mary Ann.
4. Refrain from attending the conference.
What Are the Ethics of the Alternatives?
- From a “utilitarian” perspective, what are the net costs and benefits of Carol’s attending or not attending SNB’s conference? How would you measure the potential costs and benefits? For example, how could the benefits of “new information” and a better sense of the “current investment climate” be valued? Or how could you measure the cost of a possible loss of objectivity for Carol or the cost of conflict of interest?
- Discuss from a “rights” perspective what rights each stakeholder has in this situation and the corresponding duties that those rights impose on Carol. You might want to focus the discussion on the area of conflict of interest and the duties it creates.
- Ask questions from a “justice” perspective concerning the fair distribution of benefits and burdens amount stakeholders. For example, explore the fairness of Carol’s attending or not attending SNB’s conference (when she probably does attend the meetings of the other two managers in New York).
What Are the Practical Constraints?
1. If Carol raises this decision with her boss, Mary Ann, is Carol jeopardizing her own job?
What Actions Should Be Taken?
1. Should Carol attend this conference?
2. Which ethical theories have the greatest influence on your decision?