Reference no: EM132833437

Mini-Case Refund

Bernard is an IT specialist tasked to manage the customer management system of a prominent electric utility. He reports directly to the Vice-President of Customer Process, Ryan. Ryan's wife, Diane, who also works in the same company, happens to be the Head of the Corporate Social Responsibility Office (CSRO) Office under the Office of the Chairman. Bernard, already in his late 50's is already looking forward to his retirement within the next two years to spend more quality time to his family which he missed badly after rendering more than 25 years to the company.

Bernard's task is to ensure the accuracy and availability of the utility's customer database. Due to its confidentiality, all requested information on any customer account should be duly approved by Ryan before Bernard can do an any data extraction using his self-developed database management program.

For the past several decades, the utility enjoyed robust and steady income. Part of their income were plowed hack to their CSRO projects like supporting Gawad Kalinga, construction of school buildings for the poor, scholarship programs for vocational courses, Christmas giveaways to the orphans, and occasionally relief goods to flood and fire victims. Target recipients of these projects are identified by Diane whose main criteria for selection are areas within their franchise area in wherein the government fails to provide. Given the company's efforts in its various CSRO projects, the company has received several citations and awards every year. Thus, Diane was further instructed to cover areas even outside their franchise area for their CSRO projects for the coming years.

In 2005, after more than five years of legal battle, the Supreme Court ordered the utility to refund to all its customers the corporate income tax it collected through its rates from 1985 to 2000, a practice previously allowed by the utility's regulator. The refund will cost the company an estimated 040 billion.

Given the detrimental effects of the refund, the company obliged with the order but requested the Regulators to give them ample time to make the refund and have it spread for a period of 15 years, The Court and the regulators agreed with the company's proposal and further instructed the company that all refunds to consumers that can no longer be traced or cannot be accounted for (i.e. terminated electric services or customers who have already moved out) shall be placed in an escrow account. If after five years, no legal claims are established on this account, the money may be turned over to the government.

The Management immediately gave instructions to Ryan to extract from the customer management system all information on customers who will be entitled for the refund and those accounts that were considered terminated or has moved out. The information will serve as input as to how much will be set aside for the escrow account. From the report submitted to the regulators, the escrow account is estimated to reach around 1.60 million.

Meanwhile, Diane was instructed to reduce her CSRO projects given the big cash flow problem being faced by the company. She was also instructed to find other means Sc fund and sustain existing scholarship programs and other annual dole outs as the refund will last for 15 years. Faced with this problem, Diane mentioned her dilemma to Ryan on how can her office survive with limited funds and where to source the additional funds of around 1.2M annually.

After a week, Ryan received the report from Bernard which indicated that the refund for the terminated accounts totaled to P100M, most of which are expected to have moved out and claimants for such refund would be nil.

Ryan decided to call for a closed-door meeting with Bernard, Diane, the Corporate Finance Officer (CFO) together with the Chairman to discuss Bryan's report. At the start of the meeting, the CFO disclosed to the Chairman that the creditors are reluctant to provide financial relief to existing debts of the company and the banks are asking for higher interest rates for the new credit they are requesting to initially finance the refund and maintain acceptable each flows for the company. Worse, the value of the company's common stock listed in the stocks exchange plummeted to almost near par value. He was requested by Ryan to attend this meeting to hear his proposal.

Ryan proposed to the Chairman that the escrow account may reach P100M instead of only P5OM as initially reported to the regulators. Thus, the company will save around P40M in refunds. He also proposed that the company can use the savings to support the needed funds of CSRO so that it can continue with its noble projects. This could be done by altering the customer database that can be easily done by Bernard and the changes are unnoticeable. After hearing this, the CFO suggested that the company may declare in its books the 1.100M as refund expenses and the "sayings" can be declared as donations from other sources. He also suggested that the company may use the "savings" to support its CSRO projects rather than the whole escrow account will be turned over to the government whom he distrust because of its rampant corrupt practices. The Chairman approved of the proposal and thanked Ryan's group for their valuable support and contribution to the company. Before parting, the Chairman instructed the CFO to look further on how to reduce the cost of refund.

Questions:

1. Is the action taken by the Chairman be considered an act of common good? Briefly discuss why or why not?

2. If you were Bernard, who has only two years to stay with the company before retiring and is much concerned with his retirement benefits, will you be able to justify that your action is morally good? Please provide a short explanation.

3. Can the principle of double-effect be applied to the actions by Ryan and Diane? Explain briefly.

4. Is it right to "cheat" a corrupt government? Why or why not?

Chapter 15: Mini-Case

Deep Sea Oil Drilling Disasters

On Apr. 20, 2010, the Fantastic Deep Sea Explorer offshore oil drilling platform leased by Orient Oil caught fire and sank, killing 11 men. The resulting oil spill spread to cover an area of several thousand square kilometers, making it the largest accidental spill in history. In addition to the tragic loss of life, the incident had a devastating impact on the following: the environment, the livelihood of thousands of Americans, the share price of Orient Oil and the income of shareholders.

In the three weeks following the explosion, Orient Oil's share value fell by around £44 billion (1/3 of its value), and the direct costs to Orient Oil of the response and clean-up operation are already well in excess of $8 billion. The sheer financial and political scale of the disaster forced Orient Oil to cancel its dividends. As yet the full costs of litigation, fines and environmental clean-up are unknown. Described by Orient Oil only as "sizeable", most estimates predict these costs will rise above the $20 billion mark. Along with the millions affected along the Shoal Coast, institutional investors in this country too are now suffering the consequences. Orient Oil is an enormously important stock for British pension funds and the financial ramifications of its precipitous drop in value, its cancellation of dividend payments and the very real threat of a long term drop in the company's profitability are clear.

Of course, while investors could not have been expected to foresee the precise circumstances of the Fantastic disaster, it does seem clear that there was sufficient cause for concern about Orient Oil's attitude to safety and environmental risk to have warranted more robust engagement from shareholders to safeguard their assets. Orient Oil has a track record of neglecting environmental and safety risks, and ultimately paying the price: the 2005 Texas City oil refinery explosion cost it $137 million in fines alone, while in 2009 the Natural Resources Agency (NRA) proposed to levy a fine of $87 million for alleged failures to rectify willful violations of health and safety standards. The same year, Orient Oil successfully gained an exemption for the Fantastic Deep Sea Explorer operation from Legislation requiring an environmental impact analysis.

Adequate assessment and consideration of NRA issues can often be presented as being of ethical value only. However, as the Fantastic disaster has illustrated, failure to properly address and manage NRA risks by both Orient Oil's Board and by the investors in the company has resulted not only in an unprecedented environmental catastrophe but in massive financial losses. This demonstrates a clear need for investors to take steps to guard against such risks in the future.

Questions:

1. What lessons could be learned from this disaster in relation to the investment markets?

2. What ethical considerations and governance standards are not met in this situation?

3. What risks should have been considered by the potential investors in this kind of investment venture?

4. Climate change is imminent, what is most likely to pose one of the biggest challenges to oil companies?

5. What should investors need to engage with oil companies to ensure that they have adequately assessed the transformational risks posed by climate change?