Question Details

Operation Management Homework

Read the following case study and answer the followingQuestions about the case: As Jerry looked around at theother members of the board, he wondered if it was too late toresign. How could he have been stupid enough to be dragged intothis ethics audit quagmire? It had started innocently enough. Withthe passing of the Sarbanes–Oxley Act, everyone was aware of theconsequences of accounting problems and their potential negativeimpact on a company, its board members, and its employees. So whenJerry’s friend John, the president of Soumey Corporation, had askedhim to be on the company’s board of directors, Jerry had checkedout the company. It wasn’t that he didn’t trust John; he just feltthat he should never take unnecessary chances. But when Jerry’sinvestigation of Soumey uncovered nothing unusual, he accepted theboard position. Soumey’s board of directors included John Jacobs,Soumey’s president; Alan Kerns, a retired Soumey executive; AliceFinkelstein, a retired executive from a similar company; LatishaTimme, a consultant within the industry; and Jerry. With Jerry onboard, one of the board’s first tasks was to conduct an ethicsaudit. The directors decided to contract the task to Teico, Inron,and Wurrel (TIW), an accounting firm highly recommended by Latisha.A few months later, TIW filed its final report of the audit withthe board. The report indicated that, with a few exceptions, Soumeywas doing a good job of monitoring ethical issues. Among therecommendations that the report offered were that the companyshould appoint a person with high managerial authority to beresponsible for its ethical compliance program, that it establish aconfidential hotline for employees who had ethical or legalconcerns, and that it create an ethics committee to address ethicalissues in the organization. At the next board meeting, Johnsuggested that Alan be the ethics compliance officer because helived close to the main offices and had time to do it. Alan quicklyagreed, provided there was substantial remuneration for his time,which John affirmed. Jerry asked a few questions such as whetherAlan had sufficient managerial authority. Alice responded, “Jerry,this industry is rather small with only a few large players, Soumeybeing one of them. Trust me when I say that Alan, as a retiredpresident of the company, will definitely have the respect of theemployees.” Jerry had no more questions, and Alan became Soumey’snew compliance officer. The confidential hotline was quicklyinstalled, and announcements about its existence were widelydistributed around the various offices and plant buildings toensure it reached all of the firm’s several thousand employees. Theboard also discussed TIW’s final suggestion for an ethicscommittee, and all but Jerry agreed that the board could handlethat task as well. Jerry pointed out, “I don’t think this is wise,John. This is a conflict of interest for you, isn’t it?” After amoment of hesitation, John replied, “You’re right, Jerry, it is aconflict of interest that I be on the ethics committee.” Afteranother bit of silence, John suggested, “Wouldn’t you agree that Ishould not be on the committee, Alan, Alice, and Latisha?” They alldiscussed the matter and agreed that Jerry’s suggestion madeperfect sense. Time passed and the board held its quarterlymeetings. Nothing unusual was brought up, just the same old issuesthat any publicly held company must deal with relative toshareholders, lawyers, regulators, and the public. Alan hadsuggested that the ethics compliance committee meet twice a year sothat he could fill everyone in on what was happening. At thesemeetings, Alan would usually report the number of calls to thehotline, the status of complaints, and whether there were anyserious allegations such as sexual harassment or any reported formsof race, sex, or age discrimination in hiring personnel. After twoyears of quarterly board meetings and semiannual ethics meetings,Jerry suggested to Alan that they conduct another ethics audit.“Why would we want to do that, Jerry? Things are going smoothlywith the approach we’re taking. Why have another outside audit? Doyou think that we’re doing a bad job?” Jerry hedged, “I’m notsaying that, Alan. What I’m saying is that we may need to have anoutside audit just to make sure everything looks good to thepublic. Why don’t we discuss this with Latisha and Alice thisweek?” Alan agreed but when the ethics committee met that week itwas obvious to Jerry that Alan had spoken to Alice and Latishaabout his and Alan’s meeting. He wasn’t surprised when thecommittee decided another audit would diminish the confidence inAlan’s performance as ethics compliance officer. Several weekslater, John sent all the board members a letter announcing anincrease in their pay as board directors as well as doubling theirpay as ethics committee members. The letter stated, “SoumeyCorporation has decided that your service to the company has beenexemplary both as board members and as an ethics committee.” InJerry’s third year on the board of directors, he was finally ableto attend Soumey’s annual company picnic with his wife andchildren. They arrived late after all of the introductions, andeveryone was already in the buffet line. As a result, no one reallyknew who he was. The kids were having fun, and Jerry and his wife,Rosa, were too. However, after a while Jerry began to overhear someinteresting comments. In one conversation, a production workerspoke about a toxic spill that had occurred because of the lack ofsafeguards. He told his companion, “Yeah, I know it was prettymessy, but only a few of my crew were hurt.” His friend asked, “Didthey or you report it to management?” He exclaimed, “Are youkidding? My guys don’t want to lose their bonuses. Remember whathappened to Bob’s crew when the same thing happened and some of hisguys complained. They had them filling out paperwork for a wholeday, and the next week they were assigned a project with noincentives. They lost 40 percent of what they had been making withall the overtime and performance-based stuff. The guys and I agreednot to report it for those reasons.” Jerry couldn’t helpinterrupting, “So why didn’t the company fix the problem after ithappened the first time?” One of the men asked, “Are you new here?”“Yeah, been here only a few weeks,” Jerry lied. The productionworker answered, “You want to boost your pay, right? So you cut afew corners to get by.” Later that evening after Jerry and hisfamily returned home, Rosa told him about a conversation she hadoverheard. “These women were talking about how unfair it is thatmost of the incentivebased pay seems to go to men with families.One woman said that she heard of a man over 55 who should havegotten a promotion but who was turned down because his supervisorwas told not to give it to him. Rumor was that this guy had buckedthe last president of Soumey, and this was his payback. Jerry, youshould have heard what they say about Alan, that he’s like SantaClaus and the Grinch. You never see him, and if you do, it’s not apleasant experience. One woman told me that when she was workingfor him, he used to be a little too friendly. She said that’s whyno one really uses the ethics hotline for certain issues: They knowthat the fox is guarding the hen house.” A little later, one ofJerry’s sons bounced into the room and asked him a question aboutthe picnic. “Dad, how come all the Spanish workers are on the nightshift? It really makes it hard for a couple of my friends to gettheir parents to drop them off for soccer.” The picnic had openedJerry’s eyes about an uglier side of Soumey. At the next boardmeeting, he indirectly addressed some of the problems he hadnoticed. But John responded, “We’re going into a recession, and wehave to cut a few corners to keep our dividends up to the market’sexpectations. Latisha has been watching and consulting me on thebest way to keep ahead of the pack on this.” Latisha and Alice bothcommented, “Thank goodness we have a large Spanish workforce tooffset some price increases. They’re hard workers and don’tcomplain.” “You’re absolutely right,” said Alan. “We don’t have theEPA, OSHA, or other agencies on our backs because these people knowhow to work and keep quiet. If some federal agencies do start topoke around, I have some contingency plans to prevent any type ofethical disaster.” That evening Jerry and Rosa were talking aboutthe situation. He told Rosa, “I think Soumey has some potentiallyethical issues that need to be addressed, but what can I do?”“Well,” sighed Rosa, “We’ve lived in this town for a long time. Weknow the families that are on the board. They’re good people.However, there’s one thing you didn’t hear at that picnic becauseof your lack of Spanish. I’ve told you that it’s
important to learn it, even if it’s just for my family. A few ofthe people I overheard were talking about how the hotline isn’treally anonymous. That’s just not right, Jerry. You need to dosomething even if it does mean losing the extra income.” Rosa’spoints struck a nerve because Jerry knew they were a littleoverextended financially. “I’ll see what I can do,” he told her.Still, she warned him, “That’s good, honey, but remember I don’twant you to make too many waves. We still have to live here, andyou know we can’t swing a dead cat and not hit one of the people atSoumey.”
QUESTIONS • EXERCISES 1. What areas of its ethics audit shouldSoumey change? 2. Does Jerry have a legal duty to report any of theitems that he has heard to an outside authority? 3. Discuss themakeup of Soumey’s board of directors. Is it ethical? 4. Is Jerryliable for the problems associated with Soumey over the last threeyears? Explain why or why not.