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CASELETS ON ETHICAL DECISIONS

A series of real ethical decision making situations are described below.

SITUATION 1

You are a start-up manufacturer of staple pins. Staple pins are used in offices as well as in
industrial packaging where they are used on large corrugated cardboard boxes. Your primary
channel for the office staples is the wholesale market in Shah Alam Market which is the centre for
stationery products. Your main wholesaler is a bearded Maulvi who si a large player in the
market. Staple pins are normally packed in small cartons of 500 or 1000 pins which are sold at a
price of roughly Rs 15 for the 500 pin packing and Rs 25 for the 1000 pin packing. Competition
is fairly stiff, both from imported (Chinese) pins as well as from Pakistani staple manufacturers
and margins are low and expected to stay that way for the foreseeable future. Several local
manufacturers are printing Made in China on their staple boxes and branding the product with
names like Sun, or Standard etc. You too are using a foreign sounding name but do not print
country of manufacture on the box.

When you seek the wholesalers advice on how to improve margins he informs you that it is very
common practice to pack fewer pins in a box say 400 in a 500 staple box even though the box
says 500 staples. In his opinion, no customer bothers to keep track of the number of pins and
thus there isn’t any problem with this plus the fact that virtually all your competitors are doing this.
Your younger brother who has just returned from education in the US is also insisting that you
not only pack fewer staples but also print Made in Japan on the staples, both the office variety
and the industrial variety. For the industrial staples, the country of origin is quite important and
where you are the only local producer, printing Made in Japan will ensure about 10% higher
margins in the industrial staples where buyers are more conscious of quality and attribute it to
country of origin. You are perplexed and don’t quite know what to do. You should:

This case was written by Associate Professor, Wasif M Khan at the Lahore University of Management
Sciences to serve as a basis for class discussion rather than to illustrate either effective or ineffective
handling of an administrative situation. This material may not be quoted, photocopied or reproduced in any
form without the prior written consent of the Lahore University of Management Sciences.

 2002 Lahore University of Management Sciences

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1) Not listen to the wholesaler, keep on supplying the printed number of staples and also
start printing Made in Pakistan on the boxes for both industrial and office staples.

2) Take the wholesalers advice on reducing the number of staples but print Made in Pakistan on
the box of office staples.

3) Ignore the wholesalers advice and supply 500 or 1000 staples per box but print Made in
China on the box of office staples.

4) Take your younger brother’s advice and not only reduce the number of staples but also print
Made in Japan on the office staples box and on the industrial staples.

5) Don’t listen to anyone on the office staples but print Made in Japan on the industrial staples.

6) Any other option

SITUATION 2

You are the country’s leading knitwear producer and exporter and have grown your business to
about Rs 1.5 billion per year. You are financially, technically, and market reputation wise
positioned to maintain an expansion of about 30% per year. The only problem is that knitwear
exports are subject to quota restrictions defined by type of product e.g. men’s T-shirt, ladies
blouses, night suits etc. by the major importing countries. You have two ways of getting extra
quota, on your historical performance depending both on volumes and value of knitwear your
firm exported and by buying quota on the open market which may add upto 20% to the cost of a
knitted shirt.

The Government of Pakistan manages the quota allotment procedure among local firms and has
the right to allow you to carry forward i.e. use from your next year’s allotment upto 6% of quota
as well as move another 6% from one quota category to another for example from ladies blouses
to men’s T-shirts. Given your standing in the market you often have greater orders than your
current quota allowance and rely on the upto 12% swing available through the government to bail
you out if an important customer comes with an order and you don’t have the quota holding for
that category. Apart from what you consider is a clearly defined right to access extra quota this
way, it is important that the paperwork approving such swings be handled efficiently as goods
manufactured and shipped without proper quota documentation cannot be cleared from foreign
ports delaying and significantly reducing your payments from your customers. Delays imposed by
late processing of quota papers may also tarnish your firm’s reputation and lead to denial of
future orders.

The Quota Management body is headed by a powerful bureaucrat who has been specially
posted there at the recommendation of an important politician who is well known for being
corrupt and unethical. This person, whom you often deal with has asked you to bring him a
specific wrist watch on your next trip to the Far East. You have not made any promises but
know what’s good for you if you are to stay on his right side. When you look for the watch at

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Changi Airport in Singapore you are amazed that it costs $29,000. You immediately ask your
Marketing Manager what you should do. He thinks you have the following options:

1) Forget the whole idea and fight for your rights as and when its necessary and be prepared to
buy expensive quota when you need it.

2) Don’t buy the expensive watch but buy a Rolex which sells for about $5000.

3) Just go ahead, buy the expensive watch and hope that the bureaucrat will help you.

4) Bring the matter up at your next industry association meeting and lobby to have this person
removed citing this incident.

5) Write a letter in the national press and to every member of parliament mentioning this incident
and seeking their help in removing this person.

6) Any other option.

SITUATION 3

You are the Chief Executive of the most reputable woollen yarn mill in Pakistan. You have put
together the best machinery, the best technical manager, and use the world’s best wool from
Australia. Your yarn is in high demand because it matches the best Japanese yarn in quality, but
sells for about 5% less. You normally book yarn orders averaging around 200,000 kgs. and go
over to Australia to buy the wool yourself. Transactions within Pakistan are usually on word of
mouth basis, where you quote a certain price and the buyer gives oral agreement, you go ahead
and manufacture the order, he picks up the goods and pays within a few days. Having booked
such an order at a price that gives you a reasonable profit based on a wool purchase price of Rs
55/kg, you fly over to Australia and purchase the wool at roughly Rs 55/kg. When you return to
the office in Pakistan a couple of days later you are surprised to find a major buyer waiting for
you. While you are trying to figure out what brings him to your office today as he is just making
polite conversation you finally ask him directly why he’s there? He is surprised and asks you to
go and see your elder brother, who is the Chairman of your company. Your brother tells you that
a major drought has killed several hundred thousand sheep in Australia and the wool prices have
risen to Rs 75/kg. He asks you to now reconsider all your oral commitments since you would
gain at least 30-40% more profit if you revise the price. While you are pondering over the issue
several end product manufacturers (who buy yarn from the dealers you sell to) show up in your
office carrying briefcases full of cash offering you much higher prices for the yarn if only you
would sell it to them directly. You have the following options:

1) Revise the price upward by 30-40% based on the new market price of Australian wool for
the yarn supply contracts you committed orally.

2) Split the difference, that is, revise upwards by 15% or so to share the advantage and burden
of the new wool prices.

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3) Cancel your old contracts and seek new buyers who would be easy to find.

4) Sell the yarn to the end product manufacturers at the price they are offering and compensate
your dealers to the tune of a couple of hundred thousand rupees each.

5) Supply at the prices you have committed orally knowing you could have made another 30-40
million rupees in profit.

SITUATION 4

In the company in Situation 4 you are averaging about Rs 90,000 p.m. in electricity bills based on
the meter reading. One day you are visited by a low level local power company operative who
tells you that similar mills in your area are only averaging around Rs 22,000 p.m. because of
payments to him and that you too will have to pay him around Rs 15,000 and have your official
bill reduced to approximately Rs 22,000 p.m. to avoid his having any problems with his
organisation. When you offer some resistance to his proposal he informs you that it would be
extremely easy for him to have your power disconnected on one pretext or another and you
could then go ahead and spend your time fighting it out at higher levels. You make some inquiries
and learn that the money would not be only for the low level operative’s consumption but would
be shared up within the organisation. You are 25 years old, have never yet given a bribe but
confirm that it is indeed possible for the operative to shut your factory down. You are employing
about 450 people and want to establish your company’s name as being the best producer of
woollen yarn. You decide to approach the leading religious scholar in Lahore and seek guidance
from him. As you discuss options one through three with him he brings up option four. What
should you do?

1) Pay the man whatever he wants, reduce your bill significantly and use the money saved for
mill growth or employee benefits.

2) Pay the man whatever he wants, get the bill reduced but distribute the savings as Khairat.

3) Not pay a penny and just face the consequences.

4) Pay the man off but insist that you will also pay your full metered bill.

5) Any other option.

SITUATION 5

Your highly successful knitwear operation, now split over two companies is growing rapidly but
facing the barrier of having to buy expensive quota to continue increasing exports at the rate you
and your buyers would like. To reduce this expense, you have started a small cutting and stitching
facility in the Sultanate of Oman where you have “rented” quota. (Renting quota refers to paying
a certain sum to some other quota holder on a temporary basis while he continues to legally own
the quota thus being able to withdraw your rental privileges at any time). Your Pakistan
operations send fabric to Oman where it is cut and stitched and bears a Made in Oman label

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(legally allowable) for onward shipment to your buyers. Oman charges a 20% tax on profits
which you had originally not planned for since you were sharing the ownership of the Omani
based company with a Omani national allowing you a tax holiday. However, the Omani
government ruled that since you had purchased an existing firm that had already utilised its tax
holiday your new company could not avail the tax holiday simply because of change of
ownership. Obviously, the higher the transfer price you charge for your fabric, the lower your
declared profits in Oman. Also, the Government of Pakistan pays a 5% rebate in foreign
exchange on exports and thus the higher price for fabric leaving Pakistan gives you an added
advantage. You export similar fabric to some foreign customers at $6.50/kg but company
management is pressing you to charge at least $7.00/kg. for fabric exports to Oman. One reason
being cited is the fact that your current company has provided all the management and technical
know-how for the Omani operation and since the final profits are flowing to the Pakistani parent
company, the Chief Operating Officer wants a higher price to compensate his company for their
contribution. (the Omani partner does not share in the profits; he has collected an initial fee for
helping you get the license to do business in his country). You think you have the following
choices:

1) Charge at least $7.00/kg and possibly higher to reduce the Omani tax burden and collect the
highest possible export rebate from the Govt of Pakistan.

2) Charge no more than $6.50/kg. since that is the accepted “market” price for similar fabric
and keep running the Omani operation.

3) Charge $7.00/kg. or higher and distribute the extra income earned from the export rebate
(above $6.50/kg) as Khairat.

4) Charge $7.00/kg. and distribute both the incremental tax savings and the export rebate as
Khairat.

5) Do the same as Option 4 but use the funds for worker benefits.

6) Any other option.