Economics, Questionnaire Example

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Questionnaire

When a company boss frames an ethical deontological decision rule and one of the lower level managers gives her subordinates ethical teleological decision rules, what happens when there is a clash between the two types of rules? Make up a sample set of rules—one deontological and one teleological—and discuss in a paragraph or two how they might clash with one another (contradict or be against the purposes of one another) and what the subordinate should do in that situation. (15 pts.)

The meaning of a corporate raider has evolved over time. Carl Icahn is usually portrayed as the prototypical “corporate raider” due to his role in 1980s takeovers of firms like TWA and RJR Nabisco among others. The primary motive behind the actions of a corporate raider is to “unlock value.” All corporate raiders claim their targeted firms are pursuing the wrong strategies and harming the interests of the shareholders. They provide different evidence to support their claim such as management holding onto a loss-making business unit, not expanding into new markets that would create valuable new revenue streams, and resisting being acquired by a firm that would result in a substantial payout for shareholders. Often these operational criticisms are meant to imply that the leadership of the targeted company needs to change.

Although it didn’t substantial press in the United States, the proposed takeover of Korea’s Tobacco and Gingseng has been one of Icahn’s most successful transactions in recent years.  According to a report by the Wall Street Journal on February 7, 2006[1], Icahn used traditional tactics in his proposed takeover bid of the firm. As a state-owned firm with an administrative monopoly, Korea Tobacco and Gingseng boasted high revenue and profit levels but the shareholders did not benefit from the performance, given the firm’s dividend policy. Icahn vowed to change this through one of his only overseas transaction.

Icahn’s strategic moves in the purported takeover were classic.  First, he developed a substantial stake in the publicly traded firm in Korea and after building a substantial stake of about 10%, Icahn went public asking KT&G to change the composition of its board, divest the ginseng business, and boost the dividend payments to shareholders.  The company resisted Icahn’s suggestions despite the fact that Icahn continued to build up stake in the business. Icahn’s actions do raise the point whether he ever thought of truly “taking over the firm” or just saw value that was not being unlocked by current management practices.  Indeed, Icahn ultimately divested his stake in KT&G but made handsome profit in the process.

What is a poison pill and what happens when greenmail occurs in a corporate to corporate setting? Define each word that is in italics, bold, underlined. Then give an example from the newspaper of the use of each tactic by a real company. Avoid using the same example companies as other students. Properly footnote your case examples’ sources. (10 pts.)

A poison pill is a corporate strategy to help avoid a hostile takeover. The target company issues new shares of stock to dilute the ownership of the potential buyer. Even though a poison pill can have a negative impact on the company’s stock price, the management considers it necessary to save the company. Aeropostale is a recent example of a company that has used the poison pill.[2] The company increased the number of shares issued in order to avoid purchase by an investor who wanted to take the company private.

In some cases the management’s actions may be influenced by their desire to protect the company’s long term interests but that may not always be the case. When companies are bought out, the management often fears to be replaced, thus, their actions may actually end up doing more harm than good for the shareholders. First of all, the shareholders will see stock share depreciation because there is greater number of stocks now. Second, the shareholders would miss on stock appreciation that would have occurred as a result of better performance by the new management. Even if the company is intended by the buyer to be taken private, the shareholders will still enjoy capital appreciation due to the premium paid by the buyer.

Greenmail is a strategy of purchasing enough shares in a company to threaten a potential takeover without any intent to take over the company. The target company is usually forced to pay premium in order to buy back the shares and avoid the threat of a takeover. An example of greenmail was T. Boone Pickens activities related to Mesa Petroleum. Pickens built stake and used the threat of takeover to receive premium on stock transaction with the management. [3]

Greenmail is another example of how shareholders’ interests may be harmed because the management is essentially dealing to save its jobs. Greenmail might not have occurred in the first place or may not be a serious threat if the management were doing a great job of running the company and efficiently using its assets to maximize profits and return to shareholders. The management is usually forced to pay premium because it fears the investor has good probability of succeeding should he decide to extend the battle.

What is a corporate raider and how does he operate when conducting a hostile takeover? Define the two terms shown in bold italic type (and underlined) and then use a case you can mine from past issues of The Wall Street Journal or The New York Times to explain what happens when a corporate raider conducts a hostile takeover. Avoid using the same example companies as other students. Properly footnote your case examples’ sources. (10 pts.)

An example of a deontological rule would be Google’s motto “Don’t do evil”. An example of lower level managers giving teleological decision rules to their subordinates would be to maximize sales and profits and one can reasonably expect this rule to exist at Google, too. Google serves as a great example of how these two rules can clash with each other.

Google is one of the leading technology companies in the world and the largest provider of search engine services. It operates in a number of countries where free speech and democratic rights are limited and such countries include emerging economies like China. Chinese government explicitly engages in activities that may be perceived as unethical in the west such as speech censorship. Google’s motto is not to be evil which also means not agreeing to unethical demands by a government such as free speech censorship but at the same time, Google cannot afford to ignore China due to the commercial interests which give birth to conflict between the two rules. This example can also be extended to a small business. One deontological rule at a small company may be to follow all U.S. federal laws when doing business internationally. The teleological rule may be to maximize market share in a foreign market. U.S. federal laws prohibit bribery but it may not be possible for a subordinate to win a substantial government contract in a foreign market unless he bribes government officials which is a custom in the country. Without government contract, the company’s market share will be substantially lower. In such a situation, the subordinate should not bribe because profits can be earned in other projects and market share can be increased in other manners but reputation is not recovered. If the scandal is exposed, it will do a long-term damage to company’s reputation, thus, deontological rule is not more ethical in this case but may also be better from long term economic point of view.

[1] http://online.wsj.com/news/articles/SB113922278417865927.

[2] http://online.wsj.com/news/articles/SB10001424052702304465604579221782988264044.

[3] http://online.wsj.com/news/articles/SB10001424052702304854804579234503861276872.

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