Ethics question on use of internal business resources.

Discussion in 'Growing and Managing a Business' started by TimothyD, Sep 12, 2012.

  1. TimothyD

    TimothyD
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    I have a scenario that I would like feedback on, especially focusing on how it relates to business ethics. Not that interested in the wisdom of the strategy, but more on how it might affect the culture of the company, and even if there might be some potential legal issues. The main company in question is a small privately owned corporation with the stockholders consisting of a few individuals.

    It is well known that one of the major responsibilities of the CEO is to use the company's resources to maximize ROI and ROE and thus bring a good return to the stockholders. Let's say the CEO starts up a separate company not owned or officially affiliated with the main company he operates. Now let's assume he uses his company resources, both human and financial to further the goals of the newly formed company. Is this ethical? What are the issues? The strategy is that the new company should eventually be "good" for the main company, ultimately improving profits and/or business for it, but it is a gamble as any new start-up is. The new company is apparently NOT owned in proprtional amount by the main company stockholders. Isn't this a mis-use of company resources? I don;t believe there is any detailed accounting going on, such as billing main company resource usage to the second company, but rather the CEO is just issuing tasks that contribute to the second company's strategic goals. It is almost as if employees of the main company have been "conscripted" to work for the other company, although no separate paychecks are forthcoming.

    In one case of a specific department, the department head is given a budget to work under. Now he is asked to perform work tasks for the other company, but is not able to "bill" the other company to replenish the budget resources spent on those tasks.

    Please respond with any insight, suggestions, observations, follow-up questions, etc...

    Concerned,
    Tim
     
  2. Business Attorney

    Business Attorney
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    If you didn't have the sentence "The strategy is that the new company should eventually be 'good' for the main company, ultimately improving profits and/or business for it ..." I would say that the situation is not only unethical but also a violation of the CEO's "duty of loyalty" to the company under corporate law.

    The problem with drawing any conclusion is that you have introduced a valid corporate reason why management of the company might invest resources in a company it doesn't own. In one sense that is not any different than a company handing out marketing dollars to a distributor it doesn't own. The fact that the distributor might also benefit from the marketing dollars doesn't make the payments to the distributor unethical or a violation of a fiduciary duty. Even if the wife of the CFO owned the distributor, the payments still would not be unethical if they were arms length and would have been made with or without the family relationship.

    Without knowing more, it is hard to say whether the use of the company resources in your scenario is proper or not. If the benefits that the company stands to receive are proportionate to the amount of its resources invested in the new company, then the fact that it benefits by way of increased business and profits rather than by direct ownership does not make it unethical.
     
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  3. MarkTaylor

    MarkTaylor
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    Hi TimothyD,

    This is a great question and an interesting situation.

    I would briefly challenge the assumption that the sole aim is to maximise ROI/ROE in the age of the triple bottom line - however, I don't think I could sustain the argument for long!!

    In terms of the scenario you describe, it seems questionable ethically because it appears to involve diverting resources and incurring risk. However, I guess it depends on the degree of transparency and whether or not there is some kind of JV or similar agreement in place. If there any legal, tax or accounting issues here then I would say that constitutes an ethical issue... however, the area is of course open to interpretation...

    It would be interesting to hear a little more...

    M.
     
  4. NormanAvila

    NormanAvila
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    Totally weird situation here.

    However, I don't really think it's ethical. You know, two things support my thought of "something smelling fishy around here":
    1) Using company resources for other purposes, even more disturbing once it's his separate company, not linked to this company
    2) You are concerned. I don't think you'd be concerned if your instincts wouldn't tell you "hey buddy, something is just NOT okay"

    I don't know what your further thoughts would be on this, but I would simplify this situation to the above mentioned 2 points.
    The reason for this is because people generally DO NOT FIND SOLUTIONS TO PROBLEMS because they have a needle and a haystack
    separately and still looking into the haystack while the needle is there in front of their eyes .... I hope this simple example is not
    too complicated and I hope you have a sense of what I am trying to say here.

    Regards,
    Norm
     
  5. TimothyD

    TimothyD
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    Thanks for the great responses!

    Thanks Norm, M. and B.A.!

    Great food for thought from you all.

    I feel much better having read back my point you (B.A.) reflected on the ultimate strategy of the investing resources in the other company having an expected positive return for the main company. Reading your analogy of helping a distributor with marketing resources really helps highlight and illuminate the situation making it more clear to me.

    My understanding I take from this is that, if the real strategy is indeed to provide a positive return for the main company and not no underhanded attempt at diverting resources from the main company to the other for unethical reasons, then the situation is ethical and most likely legal as well (I guess any illegal activity would subsume unethical behavior.) I am certain the strategy is the former, so I am resting much more at ease now.

    I guess my concern was mostly prompted by the fact that the other company was explicitly formed with no attachment to the main one, and I questioned the reasoning for this. The reasons given upon questioning, I determined through research to contain false statements. However, I believe the statements were held to be true in the mind of the one who professed them, because there is some confusing literature on the matter.

    Thanks again all of you for the great points and insight.

    I like this forum!!!!

    Best Regards,
    Tim
     

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