Vangeline B.

Tayaban
AEC 208- QUIZ

1. What Ethical Issues/ problems you could derive/explain on the following

cases: Enron, WorldCom, and Pharmally. - As far as the case of Pharmally is
concerned, how, as a corporate individual, are you going to deal with the Senate
Blue Ribbon Report?
Enron Case
The Enron scandal is the most significant corporate collapse in the United
States since the failure of many savings and loan banks during the 1980s. This
scandal demonstrates the need for significant reforms in accounting and
corporate governance in the United States, as well as for a close look at the
ethical quality of the culture of business generally and of business corporations
in the United States. Enron is a prominent example of a "new economy"
company. Kenneth Lay and Jeffrey Skilling claimed that Enron was the most
innovative company in the United States and at times tried to intimidate
reporters or analysts who questioned their strategy. The lack of attention shown
by members of the Enron board of directors to the off-books financial entities
with which Enron did business; and the lack of truthfulness by management
about the health of the company and its business operations. In some ways, the
culture of Enron was the primary cause of the collapse. The senior executives
believed Enron had to be the best at everything it did and that they had to protect
their reputations and their compensation as the most successful executives in
the U.S. When some of their business and trading ventures began to perform
poorly, they tried to cover up their own failures. The board of directors was not
attentive to the nature of the off-books entities created by Enron, nor to their
own obligations to monitor those entities once they were approved. The board
did not pay attention to the employees because most directors in the United
States do not consider this their responsibility. They consider themselves
representatives of the shareholders only, and not of the employees. However, in
this case they did not even represent the shareholders well-and particularly not
the employees who were shareholders.
World Com Case
Between July 2002 when WorldCom declared bankruptcy and April 2004
when it emerged from bankruptcy as MCI, company officials worked feverishly
to restate the financials and reorganize the company. The new CEO Michael
Capellas (formerly CEO of Compaq Computer) and the newly appointed CFO
Robert Blakely faced the daunting task of settling the company's outstanding
debt of around $35 billion and performing a rigorous financial audit of the
company. In addition to revealing sloppy and fraudulent bookkeeping, the post-
bankruptcy audit found two important new pieces of information that only
served to increase the amount of fraud at WorldCom. Although the newly audited
financial statements exposed the impact of the WorldCom fraud on the
company's shareholders, creditors, and other stakeholders, other information
made public since 2002 revealed the effects of the fraud on the company's
competitors and the telecommunications industry as a whole. These show that
the fall of WorldCom altered the fortunes of a number of telecommunications
industry participants, none more so than AT&T Corporation.
The top management of WorldCom had relationships that fostered
unethical behavior for the organization. The practices of authorizing wealthy
loans at shamelessly low rates, and expensing luxuries like lavish business
dinners using company funds were not necessarily illegal, but unethical. In
addition to the pressure of continuing these relationships was the added
pressure of maintaining an image of shareholder wealth and growing market
rates. This type of pressure begins to narrow the line between performing certain
activities in the best interest of the organization and not performing those same
activities in the best interest of the shareholder and customer.
Former WorldCom CEO Ebbers and CFO Sullivan being sentenced to 25
and 5 years in prison respectively in 2005 does no good in terms of reimbursing
significant losses caused to private and institutional investors, as well as,
broader damages caused to the national economy as well.
Pharmally Case
Enron was known as one of the largest companies in the world of business.
As an energy firm, Enron supplies natural gas, electricity and communicates
with customers. It is said that money is the root of evil. Enron’s managers
manipulated the company and even challenged the accounting firm and the
government by presenting fraudulent financial reports as well as its shareholders
and consumers. Pharmally also faced allegations that its goods were overpriced.
Officials of Pharmally Pharmaceutical Corp. were asked why their medical
supplies were sold to the government at a higher price when their items under a
catalog were cheaper. This leads to the bankruptcy of Enron on Dec. 2, 2001,
spawned an epic scandal, nearly two dozen criminal convictions and sweeping
government reforms. Enron became an enduring symbol of corporate fraud.\
In connection to this case, the House blue ribbon committee has
recommended the filing of ESTAFA charges against executives from the
Pharmally Pharmaceutical Corp. in connection with the government's allegedly
questionable purchase of medical supplies for the COVID-19 pandemic in 2020.
The Senate Blue Ribbon Committee has found that President Rodrigo Duterte
betrayed the public trust in connection with his actions related to the
government's multi-billion-peso contracts with Pharmally Corp.
The act of Pharmally officials in soliciting supply contracts from the
government despite full knowledge that it was grossly unqualified to do so was a
"fraudulent misrepresentation" that only resulted in damage to the government.
A disappointment of De Lima goes, “to let these people get away with plunder
and corruption smacks of gross dereliction of duty on the part of the Senate.”
Government executives who sign off on contracts of award are generally
circumspect – no one wants to be in hot water for improper acts or illegal
business that can lead to criminal indictment with plunder a signature away.

Important lessons to be gained from these particular case studies for local and
international business practices can be illustrated through the following three
points:
Firstly, clear, unambiguous and universal accounting standards need to be
introduced and its adherence needs to be ensured.
Secondly, banks should not push businesses to pursue aggressive growth
strategy without appropriate evaluations.
Thirdly, the overall levels of transparency of operations of major business
organizations need to be increased. The extent of damage of these cases could
have been reduced or the incident could have been avoided altogether if
accounting practices used in the company were subjected to investor scrutiny in
a regular manner. The role of national government and its agencies are critical
in addressing the issues of transparency of business entities.
2. Elucidate on Adam Smith’s “An Inquiry into the Nature and Causes of the
Wealth of Nation” as laying down the foundation of CSR.

On March 9, 1776, An Inquiry into the Nature and Causes of the Wealth
of Nations—commonly referred to simply as The Wealth of Nations—was first
published. Smith, a Scottish moral philosopher by trade, wrote the book to
describe the industrialized capitalist system that was upending the mercantilist
system. The Wealth of Nations argues three basic principles and, by plain
thinking and plentiful examples, proves them. Even intellectuals should have no
trouble understanding Smith's ideas.
Economic progress depends upon a trinity of individual prerogatives:
pursuit of self-interest, division of labor, and freedom of trade. Smith’s informal
style, and his fearlessness in criticizing the folly of rulers and the corrupting
effects of vested interests, made him into a popular figure. Wealth of Nation is
divided into five (5) books and each book is devoted essentially to attacking
mercantilism. Some people say it's a moral book and a worth to read. It's a book
about individual freedom, about individual liberty, and about individual
responsibility. And the fundamental thesis of "The Wealth of Nations" is that to
the extent that we are free and to the extent that we are equal before the law and
to the extent that that law is a just and reasonable law, that is the extent to
which we get rich. Other countries are becoming rich while others remain at the
bottom, why? Finland for example, Finland is a rich country. What have they
got? They got Nokia phones and plywood. Why U.S.is rich? It is the world's
largest producer of petroleum and natural gas. How did they get so rich? Because
they are free. Smith introduced the concept that free trade would benefit
individuals and society as a whole. He believed that governments should not
impose policies that interfered with free trade, domestically and abroad. Free-
market capitalism as an economic system that supports the free flow of capital
and exchange of goods between individuals and nations without governments
intervening to control that flow. In a free market, people in the market will price
goods and services more effectively than a government. Smith argues that it does
not actually matter if societies are mainly driven by self-interest, since the overall
effect is good. The ‘invisible hand’ of the free market makes sure that individuals
acting to their own highest benefit end up elevating the whole. This is not an
excuse to act greedily or unjustly. It simply means that a person’s honest labors
to progress in life for the sake of himself or his family will lead to a good use of
resources.
A society allowed to act in this way will inevitably make the most of what
it has, and over time grow prosperous. Rich countries characteristically have a
much greater ‘division of labor’ than poor ones. There is great efficiency in
dividing up tasks according to the ability of people best able to do them, and time
is saved in not changing from one task to another. As for the final words, Smith
provides a simple recipe for how countries can become wealthy, which begins
with their citizens being good savers. These savings are then invested toward
productive ends.

3. In the case of Mac Donald’s (Obesity case), how do you think the company
satisfies the CSR assessment and practice issues? Explain well your answer.

A variety of businesses operate in the supply end for these retailers,

producing the food that will eventually be sold. Distributors often serve as
middlemen in the process, acting as commodities agents between producers and
retailers. The supply chain management and its linkage to quality food
production and innovation at McDonald’s as an example. McDonald’s ranked #3
on the 2012 Gartner’s Supply Chain Top 25 list. This list has been published
since 2004, and is ranked based on the idea of demand-driven leadership.
McDonald’s routinely involves its testing kitchens and marketing staff at its
corporate headquarters with its suppliers and its customers. This is termed the
company’s “three-legged stool” approach (Petrak, 2005).
Products are regularly and randomly pulled from restaurants into
McDonald’s laboratories for testing. This method is also employed at suppliers
for the company. Quality and consistency are top priorities, and adjustments
will be made if either of these factors begins to falter. In the food industry, there
are several issues that are beginning to become more prominent in regard to
corporate responsibility. On research conducted by Scott, 2011, one way that
McDonald’s attempts to be a responsible corporation is through promotion of
sustainable farming methods. McDonald’s joined Unilever and Nestle in pledging
to shift to entirely sustainably-sourced palm oil by 2015. Clearcutting for palm
tree plantation systems is a source of greenhouse gases, and the scales of the
materials these companies use indirectly leads to a great deal of this negative
outcome. By shifting to sustainable practices for palm oil, this negative climate
effect can be mitigated to a certain extent. Another example of McDonald’s efforts
at corporate responsibility can be found in its funding and support of the Ronald
McDonald House. This entity provides housing and some limited indirect
financial support for families whose children are undergoing treatment for life-
threatening illnesses. The group is funded not only by McDonald’s, but also by
a number of the suppliers in its supply chain (Smith, 1994). While these are each
good examples, McDonald’s isn’t entirely without fault. Recently, negative
publicity surrounding its employee payscales has begun to grow. Negativity
surrounding its contributions to the growing American obesity epidemic has also
continued to grow, despite efforts by the company to introduce and promote
salad items and healthier low-fat options (Maloni and Brown, 2006; Petrak,
2005). Silvestri Solutions Inc. has been hired by the American Diabetes
Association to respond to the issue of growing childhood and minority obesity
and health risks—like Type 2 Diabetes— and develop a Corporate Social
Responsibility (CSR) agenda with strategies to improve healthy options at
McDonald’s and similar fast food chains.
The new focus on healthy choices worked, and customers started
returning. McDonald’s salads were well received and accounted for about 10
percent of sales. Overall, things improved financially for the company: Sales
increased and profits rose. To complete the transition to a healthier image,
McDonald’s came up with a new theme: helping adults and children live a
balanced, active lifestyle. To go along with the theme, it launched a new active-
life public-awareness campaign with the tagline “It’s what I eat and what I
do…I’m lovin’ it.” McDonald’s demonstrated its concern for the health of its
customers through permanent menu changes and an emphasis on the value of
physical fitness.