Question

Ethical DilemmaThis Is a Good Investment—Be Sure the Numbers Show That It Is!Oliver Greene is the assistant to the financial manager at Cybercomp Inc., a company that develops software to drive network communications for personal computers. Oliver joined Cybercomp 3 years ago, following his graduation from college. His primary responsibility has been to evaluate capital budgeting projects and make investment recommendations to the board of directors. Oliver enjoys his job very much; he often finds himself challenged with interesting tasks, and he is paid extremely well. Last week Oliver started evaluating the capital projects that have been proposed for investment this year. One proposal calls for Cybercomp to purchase NetWare Products, a company that manufactures circuit boards called network cards, which are required to achieve communication connectivity between personal computers. Cybercomp packages network cards with the software that it sells, but it currently purchases those circuit boards from another manufacturer. The proposal, which was submitted by Nadine Wilson, Cybercomp’s CEO, suggests that the company might reduce costs and increase profit margins by producing the network cards in-house. Oliver barely had time to scan the proposal when he was summoned to Mrs. Wilson’s office. The meeting was short and to the point. Mrs. Wilson instructed Oliver to “make the numbers for NetWare Products look good because we want to buy that company.” She also gave Oliver and evaluation of NetWare completed two years ago by an independent appraiser that suggests NetWare might not be worth the amount that Cybercomp is willing to pay. Mrs. Wilson instructed Oliver to find a way to rebut the findings of the report. Oliver was troubled by the meeting. His gut feeling was that something was wrong, but he hadn’t yet had time to carefully examine the proposal. In fact, his evaluation was very cursory, and he was far from making a final decision about the acceptability of the proposed capital budgeting project. Oliver felt he needed much more information before he could make a final recommendation. Oliver has spent the entire day examining the appraisal report provided by Mrs. Wilson and trying to gather additional information about the proposed investment. The report contains some background information concerning NetWare’s operations, but crucial financial data are missing. Further investigation into NetWare Products has produced little information. Oliver has discovered that the company’s stock is closely held by a small group of investors. These investors own numerous businesses and contribute generously to the local university, which happens to be Mrs. Wilson’s alma mater. In addition, Oliver’s secretary has informed him that the gossip around the “water cooler” at

CFIN6© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Cybercomp suggests that Mrs. Wilson and the owners of NetWare are old college buddies, and that she might even have a stake in NetWare.This morning, Mrs. Wilson called Oliver and repeated her feelings concerning the purchase of NetWare. This time she said: “We really want to purchase NetWare. Some people might not believe so, but it’s a very good deal. It’s your job to make the numbers work—that’s why we pay you the big bucks!” As a result of the conversation, Oliver has the impression that his job might be in jeopardy if he doesn’t make the “right” decision. This added pressure has made Oliver very tense.What should he do? What would you do if you were Oliver? Would your answer change if you knew Mrs. Wilson had recently sold much of her Cybercomp stock?

Answer 1

Oliver should carefully pocess the due diligence required towards Netware. Also all the elevant standard operating procedures need to be followed so as to maintain the best trust level among all stake holders of Cybercomp Inc and not just the CEO.

I would have done the same as things mentioned in the first paragraph because trust and integrity are two most important underlying components for the growth of the company and the associated stakeholders.

My answer would remain the same, as the due diligence and the analysis would be based on company operating procedures and not on CEOs personal stock portfolio structure.

Selling and buying of the company stock by the CEO should not be viewed as a suspision and should not be correlated with any operations of the firm unless and untill it involves insider trading. The research and analysis should be focussed but limited to the  target company's operational and financial stability and performance and the possible synergy. The findings should be neutral and should be specific to Cybercomp's requirement.