Question

Ethical scenario: (Professional Ethics)

In March 2012 the operations director of HFIC, Chris Lee, recommended to the board of directors that the company should purchase a fashion design company based in Hong Kong, Elite Fashion Limited. This was a private company with extensive experience in designing fashion clothing for markets in Asia. The full board of HFIC considered this recommendation and decided to make an offer for the company. After friendly negotiations, 100% of the shares in Elite Fashion were purchased in August 2012 for a substantial price, in cash. On 15 September 2012, the chairman of HFIC, Kenneth Chan, was visited by Jonathan Lu, the Deputy Operations Director, who said that he had acquired some disturbing information about the acquisition of Elite Fashion, which he had found by accident. It would appear that before recommending the purchase of Elite Fashion to the board of HFIC, Chris Lee had bought a substantial quantity of shares in the company from a retiring director, and had paid a low price for them. He had used a company owned by himself to make the purchase, in order to keep his identity hidden. When HFIC bought Elite Fashion, Chris Lee made a large personal profit from the sale of his shares. Jonathan Lu said that he was giving this information to Kenneth Chan in confidence, and expected his identity as the informer to be kept hidden. Kenneth Chan immediately met with Chris Lee in his office, asking whether this information was correct. Kenneth Chan did not tell Chris Lee how he had obtained the information, but Chris Lee suspected that a person in his office must have been the informer. Chris Lee confessed that the information was correct, and that he had been aware when he bought the shares in Elite Fashion that the company’s other major shareholders would be pleased to receive a takeover bid from a company such as HFIC. Chris Lee had, to date, been an excellent Chief Operations Officer, Kenneth Chan had stated his expectation to the rest of the board and also to the financial media that he wanted Chris Lee to be appointed as Chief Executive Officer of the company when the current CEO retired in a few years’ time. Kenneth Chan was shocked and disappointed by Chris Lee’s confession, and was not sure what to do. He did not know whether Chris Lee had acted illegally or was in breach of any regulations or code of conduct, and he was not sure what action (if any) should be taken against Chris Lee. He therefore considers inviting two individuals to a private meeting, to ask for their views and advice. These were people that Kenneth Chan had known for many years, and respected greatly. One of them is Jian Jiang, an enforcement officer at the Stock Exchange of Hong Kong Limited – SEHK. Jian Jiang is also a friend of Chris Lee, and they play golf together regularly. The other person is Mary Leung, a senior manager in Platinum Investments, an investment organisation that owns shares in HFIC. She has been a great supporter of HFIC and was recently responsible for a decision by Platinum Investments to buy an additional 1% of the equity shares of HFIC.

Requirement: Outline the ethical issues from the perspective of the Chairman of the Board of HFIC in the ethical scenario. If you were the Chairman, what actions would you take in both short term and long term when Mr. Chris Lee confessed his act to you.

Answer 1

Facts of the case:

• Operations director of HFIC, Chris Lee, recommended to the board of directors that the company should purchase a fashion design company based in Hong Kong, Elite Fashion Limited.

• On recommendation of Chris Lee, Board of HFIC has made the offer to Elite Fasion Limited and purchased 100% of the shares of Elite Fashion Limited in August 2012.

• In September 2012, Chairman of HFIC was came to know about the misconduct done by Mr. Chris Lee.

• After been confessed by Mr. Chris Lee, Chairman invited two individuals to ask their views.

Ethics Matter:

• The facts of the clearly indicates that Mr. Chris Lee has acted against the professional ethics. He was aware that on his recommendation Board of HFIC will definitely have a look at the proposal therefore he has already bought the substantial quantity of shares of Elite Fashion Limited from A retiring director.

• On this deal Mr. Chris Lee has earned a great profit which may be the case of insider trading or may be against the local laws of the country. Also it’s a case of misconduct under professional ethics.

From the perspective of Chairman of the Board, following are the main ethical issues:

1. HFIC has bought a company based on recommendation of the operational director who has acted against the professional ethics and personally earned great money from that deal.
2. After confession of Mr. Chris Lee, Chairman appointed two individuals for asking their views. However, it seems that there would be the issue of independency on the views of the two individuals since both the individuals are more or less connected with Mr. Chris Lee and HFIC. So there might be chances that their views are not independent.

If I were at the place of Chairman, I would be appointing at least three individuals having competence on the subject matter so that there would be majority of opinion. Also I would be appointing individuals who are completely independent i.e. no where connected with HFIC and Mr. Chris Lee.

After that views would be placed in the Board Meeting and based on the majority views and views of the Board of Directors, further course of Action would be taken which will be in sack of HFIC.