Question

Case Study: The Good Credit Reference

Topic: Insider Information/Trading

Involved Parties:

• Kathy Ryan, Trade Credit Officer, Diversified Consolidated Corporation
• Scott Bradley, Treasurer, North Manufacturing
• Mike Walman, Credit Managers, Basic Products

Kathy Ryan, a credit officer at Diversified Consolidated Corporation (DCC), had heard rumors that North Manufacturing was in deep trouble. She is responsible for credits to North of approximately $1 million. North always pays on time and is current on outstanding payables to DCC. North, in fact, uses DCC as a credit reference with other suppliers. Nevertheless, Kathy decided a visit to North was in order.

Kathy Ryan and Scott Bradley, North’s treasurer, had developed a good working relationship and went to lunch during Kathy’s visit. After several drinks, Scott Bradley said: “Kathy, we’re fried. I have to tell you, our financial statements aren’t fraudulent, but they don’t paint the full picture. Not only are we not doing well, but we’ve been talking to bankruptcy attorneys. If things don’t turn around soon, we may file before the end of next quarter. We plan to continue paying DCC promptly because we need all the trade credit we can get. In fact, supplier credit is giving us a chance to come back. Without it, we’d be under right now; with it, we might just squeak by. Frankly, if there is any way you can encourage your competition to supply us--do it. I’ve told Purchasing to place a large order with Basic Products instead of DCC. If Basic gives us credit, we can pay DCC in full before we file. If we make it through this, DCC will get our business back, but I don’t want your career to suffer because of our problems now.”

Kathy was shaken by Scott’s comments. She knew that if North’s credit went bad she would lose her annual bonus--25 percent of her compensation--and probably any chance for promotion. At worst, she could be fired. Shortly after her visit with Scott Bradley, she received a call from her friend in the Credit Department at Basic Products, Mike Walnnan. Suppliers often share credit information on common customers, so it was not surprising that Mike called. DCC’s policy is to provide what they refer to as the “prompt payment history” for the customer. This includes recent high credit balances, any past-due balance, and how promptly customer payments had been received.

After Kathy provided North’s prompt payment history--which in fact had been good--Mike was enthusiastic. “I'm glad to hear that,” he said. “We just got a huge order to supply them through the end of the year. There are a lot of rumors floating around, but if you’re getting paid promptly on that much, I guess it's OK.” Kathy broke in at that moment. "Can you hold the line, Mike? There’s someone at my door.” She put Mike on hold, her mind racing. She could suggest that Mike look into other public information sources or contact other suppliers about credit histories with North. That would be within acceptable company practice and almost certainly would send up a red flag for Mike. But who else could supply enough credit to North for DCC to get its money out?

She couldn’t keep Mike on hold forever, she pressed the flashing button on her telephone-- “Mike?…” What should Kathy say?

______________________________

Use the Instructions for Case Analyses to craft a response to this case, articulating the main issues and ethical dilemma. Review the assessment criteria below before you begin writing.

Submit a written paper which is 2-3-pages in length exclusive of reference page and that is double-spaced. You should cite relevant resources in APA format.

Papers will be assessed using the following criteria:

The Written assignment:

• identifies all the relevant facts of the case
• articulates overarching ethical issues including the extent of Kathy's responsibility to take action
• identifies all stakeholders
• poses possible alternatives and ethics of each alternative. Paper should explore the possible alternatives and ethics from the Utilitarian Perspective, the Rights Perspective, or the Justice Perspective
• recommends a specific action Kathy should take
• is of high quality, writing is clear and professional
• conforms to the structural requirements including APA style guidelines for References.

Answer 1

Kathy is a credit officer at DCC and as such deals with North Manufacturing, Basic Products and other clients. When she hears a rumour about North, she sets out to investigate and has come into information that North is not as solvent as they appear, or have made themselves appear. While they are not doing anything illegal at this time, they are however hoping to get another supplier Basic Products into supplying them on credit so they can pay back DCC to ensure they have good trade credit. This will mean that if that transaction goes through, then DCC will be paid back and North will get a big supply order processed on credit. But this will leave Basic Products with a large order that North might not be able to pay back if they file for bankruptcy at a later date. Kathy will benefit from this transaction along with her company, her bonus and promotion will be saved. However, this can only happen if she misrepresents what she knows about North to Mike from Basic Products (BP). Mike called Kathy with the intent to get some credit information on their common customer North, and Kathy has provided the same however she is not sure if she should withhold the additional information that she learnt from Scott.

Kathy's responsibility is only to provide Mike with the information she was asked by him, which she has done so. However, as Mike is a friend Kathy is conflicted with the ethical dilemma of whether to confide in Mike about what Scott has told her. Ethically, Kathy cannot reveal all that Scott has told her (some kind of client/business confidentiality must exist) but she can point Mike towards other sources in line with the company policy, as a way to get him to do more due diligence and to not just rely on her feedback. The second ethical dilemma for Kathy is that while it would be the right thing to inform Mike to do at least do some more research on North before they accept the order, doing so will jeopardise her company's payout as well as her own bonus and promotion.

From the Utilitarian ethical perspective, Kathy can provide the information that Mike has asked for and nothing more. BP will then likely accept North's order and this will allow the maximum number of people to benefit - Scott, North, Kathy, DCC. If North is not able to resolve its financial issues BP could lose their payment amount but will be the only party affected, limiting the damage to just one company and one person (BP/Mike). This will ensure that the greater good for the greater number of people is achieved. Alternately, if Kathy decides to tell Mike about Scott's revelations or to point him towards other sources, then BP can choose not to proceed with the order and DCC will not be paid by North, leading to Kathy also losing her bonus and promotion.
The stakeholders in this case aside from Kathy, Scott and Mike are also the companies they work for as well as the shareholders, extended suppliers and customers. Kathy's Utilitarian action could be viewed as ethical fraud and contrary to the intent of business ethics. Business ethics should be practised by all employees, especially ones in key positions such as credit officers. As an employee of DCC Kathy is bound by the ethical standards defined in that organisation and that indicate that she convey to Mike the need to further enquire into North's true state of affairs. While a business's sole intent is to make profit for its shareholders, it should not be done by steering people into making wrong decisions. If roles were reversed, Kathy would have expected the same from Mike - in accordance with the Golden Rule principle 'treat others as you would want to be treated', despite the fact that full disclosure or an indication therefore could adversely affect her and her company's professional interests.

In light of the possible damage to that many parties and purely from a Utilitarian perspective, Kathy can resolve her ethical dilemma by providing Mike with just the information he has asked for and allowing him/BP to proceed to accept North's order. However, this can be perceived as collusion if it should ever be made public and this could destroy her and her company's reputation.

(Metaphysics Research Lab, 2016)

References :

Metaphysics Research Lab (2016) Business Ethics. Stanford Encyclopedia of Philosophy.