PRACTICAL ETHICAL DECISION MAKING
CASE AND ANALYSIS THE KARDELL PAPER CO
(In order to accomplish the Professional Ethics for Accountants’ assignment)
Muhammad AriefFauzi 8335123535
Rico Bobman 8335123531
S1 Accounting Reguler B 2012
FACULTY OF ECONOMICS
STATE UNIVERSITY OF JAKARTA
The Kardell Paper Co.
The Kardell Paper mill was establish at the turn of the century on the Cherokee River in Southeastern Ontario by the Kardell family. By 1985, The Kardel Paper Co. Had outgrown its original mill and had encompassed several facilities in different locations, generating total revenues of $1.7 billion per year. The original mill continued to function and was the no longer owned shares in the firm, which had become a publicly traded company whose shares were widely held.
Kardell Paper Co was a firm with a record of reporting good profit and had a policy of pating generous bonuses to the chief executive officer and other senior executive.
Kardell original mill was located near Riverside, a community of 22,000. Riverside was largely dependent on the mill which employed 500 people. The plant, while somewhat outdated, was still reasonable efficient and profitable. It was not designed with enviromental protection in mind, and the waste water that discharged into the Cherokee River was sceened only to removed the level of containants required by provincial regulation. There was other industrial plants upstream from the Kardell plant.
The residential community dowwnstream from the plant, was home t many of the Kardell plant’s management, including Jack Green, a young engineer with two children, ages one and four.
Jack who was assistant production manager at the Kardell plant, was sensitive to environmental issues and made a point of keeping up on the latest paper mill technology, Jack monitored activity at the plant’s laboratory, which in 1985 employed a summer student to conduct test test on water quality in the cherokee River immediately downstream from the pant.
The test was taken across the entire width of the river. The test conducted neaarest the plant’s discharge pipe showed high readings of an industrial chemical called sonox. Farther away from the plant, and on the opposite shore of the river, the water showed only small trace amounts of sonox. Sonox was used inthe manufacture of a line of bleached kraft papaer thaat Kardell had begun to make at its plant in reecent years.
B. The Issue
The researcher discovered that the plant lab was not including the high readings of sonox in its monthly reports to management, so the student showed the complete records to Jack. In the summer of 1985, Jack made a report to the CEO with recommendation that in-depth to the CEO with a recommendation that in-depth studies be conducted into the situation and its implications for public health and longterm effects on the ecology.
In recommending that Kardell carry out an “enviromental audit” of its operations, Jack pointed out that local doctors in Riverside had been expressing concern over what appeared to be an unusually high rate of miscarriages and respiratory disorders in the community. Jack told the Ceo there were data suggesting a possible link between health problems and sonox, but no definite proof. Medical research into sonox’s possible effects on humans was continuing.
In bringing his concerrns to the CEO’s attention, Jack as a possible solution the option of Kardell adopting a new processing technology which used recycling techniques for waste water. This technology, alreadyemployed by a harmful of plants in europe, enable a plant to operate in a “closed cycle” that not only protected the environment but reclaimed was material, which was then sold to chemical producers. Thus, in the long term the new process was cost-effective. In the short run, however, refitting the existing Kardell plant to incorporate the new technlogy would cost about $70 million, and during the retofit, the plant wuld have to operate at reduced capacity levels for about a year and possibly be closed down altogether for an additional year to make the change-over.
C. The Response
Kardell’s traditional response to environtmental concerns was reactive. The company took its cues from the regulatory dimate. That is, the povincial environment ministry would apply control orders on the plants as new limits on emissions of various compounds came into effect, and Kardell would then comply with these orders.
In raising his concerns in 1985, Jack pointed out that the Ministry of Environment, responding to the serious nature of concerns raised by the sonox issue, was considering internal proposal from its staff that additional research be done into the sources and implications of sonox. Given the early stage of work in this area, Jack could offer no indication of when, if ever, the ministry would enact new regulations to do with sonox. He argued, however, that the ground rules might change, as they had with previous compounds, and that Kardell should give some thought to the worst-case scenario of how the sonox issue could turn out down road.
Kardel’s CEO was sympathetic to the concerns raised by Jack, a valued employee of the company who ad proved himself in the past by identifying many cost-efficiency measures. The Ceo felt obliged, however , to match Jack’s concerns about sonox againts the substantial cost of refitting tha plant. The CEO felt there simply was not enough data upon which to base such an important decision, and he was wary of any external force that attempted to influence the company affairs. The CEO told Jack, “we simply can’t let these “greens” tell us how to run our business.
While the CEO did not feel it would be appropriatefor Kardell to adopt the recomendations in Jack’s report, the CEOdid take the step of presenting the report to the board of directors, for discussion in the fall of 1985.
Kardell’s board of directors represented a cross section of interest groups. Everyone on the board felt a responsibility toward the shareholders, but, in addition, some members of the board also paid spacial attentin to community and labor concern. The board was composed of the CEO and president of the firm, along with several “outside” directors: two local business people from riverside, a representative of the paperworkers union at the plant, a mutual fund manager whose firm held a large block of Kardell shares on behalf of the fund’s investors, an economist, a Riverside citycouncillor, and corporation’s legal counsel.
Each member of the board spoke to Jack’s report from his or her perspective. The Riverside representatives-the city councillor and the two business peopl-wanted assurance that the commmunity was not in any danger. But they also, in the absence of any firm proof of danger, that they were satisfied Kardell probably was not a source of harmful emissions.
The lawyer pointed that legally Kardel was in the clear: it was properly observing alll existing regulations on emission levels in any case, there was no clear indication that the Kardell mill was only source of sonox emissions into the Cherokee River. While acknowledging the health concern that has recently arisen over sonox, the lawyer thought it prudent to wait for the goverment to establish an acceptable limit for sonox emissions. Esides, the lawyer added, while liability actions had been initiated againts two or three other mills producing sonox, these claims had been denied through successful defense actions in court on the grounds of lack of clear evience of a significant healt hazard.
The labor representative expressed concern about any compound that might affect the heath of Kardell employees living in the area. But the labor official also had to think about the short-term consideration of job loss at the plant and the fact taht, with the plantshut down, there were few othe employment opportunitiesin the area to fill the gap. The board representatives from Riverside pointed out that, obviously, the local economy would be severly affected by the shoutdown to refit the plant. And the mutual fund manager agreed with the CEO that, at least in the short-term, Kardell’s profitability and share price would suffer from a desicion to undertake a costly overhaul of the facility.
D. The Decision
After much debate, the board decide to defer consideration of Jack’s proposal pending the reslt of goverment research into this issue. It also asked Jack to continue monitoring the regulatory climate so that the palnt would always be in basic compliance with provincial emission stanadars.
During the next two years, Jack presented similar warnings to the board regardidng sonox and continued to meet with the same response. As precautionary measure, he kept copies of his reports in his own files, so there could never be any question of the timing or substance of his warnings to the board. During this same period, an above average incidence of miscarriages, birth defects, and respiratory ailments reported in the Riverside area.
E. The Analyze
1. Who are the stakeholders involved, and what are their interests?
The stakeholders involved within the case of Kardell Paper are all parties mentioned; and quite numerous, save for the attorneys. Attorneys are compensated to deliberate issues in lieu of solving problems which is why we must remove them collectively as stakeholders and defer to them as counsel upon matters which might result in liabilities for the company. Attorneys hereinafter shall be referred to as counsel.
All additional parties are essentially stakeholders. Kardell’s stockholders are the primary stakeholders, because they own the company. But, assuming Kardell’s Board of Directors, Upper Management, and all Employees of the company wish to retain their jobs; they too will be recognized as stakeholders. In conclusion of defining stakeholders, we must recognize the board of directosr in addition to all management and employees of Kardell in addition to stockholders. In the absence of the company, there are not shareholders, management, nor employees.
The employees and management undoubtedly recognize Kardell’s interests, which is going concern, being essential to their longevity, which ultimately poses a VERY difficult dilemma for employees such as Jack.
2. Which stakeholders and interests are the most important? Why?
The stakeholders interest deemed to be most important are the stockholders’ interest. Stockholder interest is not best served by management’s ignoring regulations nor liabilities to which the company might be subjected to which compromises returns and/or profitability. Stock-holders seek maximization of returns in comparison with exposure to relevant risk. By minimizing environmental risk, the management of Kardell can ensure maximization of stock-holder return.
3. What was wrong with the quality of the Board of Directors’ debate?
The board of directors sought to find solace in plausible deniability, while attempting to demonstrate they were adhering to a minimum standard while possibly using Jack as a sacrificial lamb. Jack is better than the role to which he has been ascribed while he seeks to protect Kardell. Jack’s a good guy and he’s also a knowledgeable guy, and the company can’t afford to lose him.
The remaining members of the board of directors essentially sought input from friends and family along with a labor representative who couldn’t care less about any potential problems facing the company. We don’t need to get into a labor dispute here but, this case illustrates the potential for elevating one’s position at the expense of all and, thus far, Jack is the only one willing to potentially sacrifice his job for what is right” for the Company & Community potentially at his own expense.
4. What is the downside if the right decision is not made? Considering economic factors along with what Jack might do
The board of directors has become complacent with management’s mediocrity and is unwilling to make decisions best serving the company. Without recognizing their role to the stock-holders, there is no hope for Kardell. The reason being; Although the current environmental standards are adhered to, it’s only a matter of time before Kardell finds themselves out of compliance. A key employee has brought his observations and findings to the attentions of both the board of directors and management while both have discounted what he offers; to the potential peril of the company’s competitive advantage. There exists no culpability nor compliance with law regarding what he has brought to the attention of the company. The company would be wise to implement measures to assure against that which is not yet required by law nor regulation while at the same time setting a standard of corporate governance for any and all future companies to adhere prior to endeavoring to undertake challenging Kardell’s dominant position.
Kardell has a brief opportunity to rise above the standard so as to set a benchmark for other companies (potential competitors) to overcome. Had the board of directors not looked to maximize short-term profits while adhering to minimal standards, the company could likely serve as a benchmark for all competitors to adhere in the future. While making use of the information and collective knowledge of the company’s testing, the company could seek to reshape governmental compliance upwards to the point of the company’s compliance. In other words, the company recognizes problems brought to their attention by management/employees while assuming the enviable position of the “go to” company of government bodies. Governmental bodies would seek the company’s input toward future governmental standards which would enable the company to establish environmental standards to which all subsequent companies would be forced to adhere. In other words, the company could have charged more for the goods and services provided by adhering to a higher standard than regulatory minimum while establishing the new minimum to which all future companies will adhere.
In Conclusion, the downside is essentially vilification which entails the company surely fails unless they can avoid such a fate by identifying with their employees, customers, governmental handlers, and the company’s investors. Kardell becomes insolvent whether the stock-holders or management realize it or not doesn’t actually matter because it won’t take long: They all lose (employees, management, investors, etc.). The other downside is not taking advantage of the standards/mandates, which will be handed down by the regulatory bodies/agencies, while Kardell has the ability to make the right decision in recognition of what is forthcoming while setting the standard which shall serve as a barrier to entry to an potential competitors.
The upside is maximization of profits, ensuring stock-holder return on investment Enabling management and employees’ compensation to not only remain sustainable but to possibly be increased, receive Government subsidies by establishing the new “status quo”, and thereby establish a benchmark for any other potential entrants into the market.