Let’s say there is a company “A” that is a wholly owned subsidiary of X Enterprises, a family owned corporation. The founder of X Enterprises inserts his son as President of company A but the son is incompetent and a new CEO is brought in and is given an ownership position in company A. Company A is in dire need of a supplier for a particular part. The new CEO just happens to own a controlling interest in a company B that soon become the designated supplier of the part in question to company A. However, company B’s part is plagued with problems and fails to perform as required. Company A’s engineering team is tasked with assisting Company B’s engineering team to help solve the problem. Company B’s engineering team has no experience with Company A’s products and the problems persist. The new CEO insists that Company B’s product will improve in time and no other vendor is sought. At present, both company A & B are on the brink of bankruptcy but the CEO has made a killing during his tenure. Bearing in mind that none of these companies are public corporations, has the CEO behaved ethically? I say that no case can be made that he has. Am I right or wrong?
You’re not leaving a lot of flexibility in your hypothetical situation. Given what facts you’ve presented, it’s not exactly an interesting case for a business class or - I’d guess - a message board. But from what you’ve said, it seems clear the CEO has a conflict of interest and has not been acting with proper purpose.
Well, I was considering the difference between public and private corporations and if the same ethical conduct should apply in both cases. You’re right, though, it isn’t very interesting and my interest is really more curiosity than anything else.
I suppose it depends on whether the founder of X enterprises (who I assume is the owner still) knows what’s going on.
It’s certainly unethical, though.
I didn’t mean to be rude. I just meant there’s no gray in the situation if I’m going to take what you said at face value. I could come up with ‘what if’ scenarios or make conjecture and tweak the example, but you took the time to write out a very specific hypothetical. That hypothetical you presented is clearly unethical. I don`t think you’d find anyone to say it isn’t.
To be honest though I completely missed that you were thinking there might be a difference between public and private corporations. To that point, there’s a big difference in securities law between private and public corporations, but no question its unethical behavior in either case.
No, the founder is dead, his spouse is unaware and his son is useless. The actual ownership is split between the spouse, his son, and the CEO. I don’t know what percentage each owns but I doubt its a three way split.
To be honest, this is a real situation and it lays out like I’ve explained. A few of the remaining employees are people I’ve known for thirty years and more. I’ve been asked if the behavior of the CEO is illegal and I have replied that I don’t believe it is illegal but that it is unethical. From what I can gather, there has been some talk among the employees of a lawsuit although I am not at all sure if that is a fact.
No, the CEO has not behaved ethically in his position. IANAL, but I imagine that he could be subject to a lawsuit by the company’s owners if he is placing his own interests ahead of the company. What you are talking about is what we call “agency issues”. The CEO is expected to behave as an agent of the owners and do what is in their best interests.
There is no difference in the ethics of this situation whether the company is public or private. The other owners of Company A, whether they are two other people or 10,000 other shareholders, have a right to have their investment protected better than that by someone they have hired to do so.
Roddy
Thanks for the inputs.