Part 1: Brief description of Cardio-Metric and history
Cardio-Metric, a start-up company founded by Carlos Sanchez and Chris Ward, began its operations in Minneapolis in 2002 starting with a simplified blood pressure (BP) monitor for use by patients in their homes with signals sent to their physicians in the real time through internet. The company succeeded in rising venture funding of $ 6 million in 2003 in the first round of institutional financing. Daniel Kim was hired in 2002, to develop business plan, raise venture capital and to facilitate commercialization of the product. In 2004, the company launched the home market version of its product which was well received by all stakeholders. Though it was branded as ‘product of the year’ in 2005, its sales did not grow at the same pace as the reputation of the product. Due to internal chaos in Cardio-Metric the venture capital firm stopped further funding. Attempts to procure additional venture funding in 2005 and 2006 failed. A new version of home BP monitor was launched in December 2006 which had resounding sales at national level. A second-generation product was launched in mid-2008, which because of favorable U.S. regulations, was accepted by the stakeholders (patients, physicians and hospitals) as potential enabler of cost savings. But by late 2008, cuts in health care and hospital spending resulted in downward trend in sales.
Kim left the company in August 2004 to pursue MBA program in a top-rated B-School and after graduating joined an internet start-up company, as Cardio-Metric’s fortunes were not promising. When Sanchez took over as CEO he persuaded Kim to return to the company as CFO and vice president of business operations.
When Kim took over as CFO, the Cardio-Metric’s accounting records needed a through clean-up, pending accounts receivables had to be collected and a financial plan had to be developed. Kim’s professional touch and his passion to work with a start-up company and his fascination with Cardio-Metric’s product and founders, made him to work long hours and turn it around. During the clean-up process, Kim found lot of financial irregularities and unethical practices on the part of Sanchez and his personal assistant Jones- in respect of charging huge personal expenses to company account violating the company’s expense policy. In 2008, unable to bear the unethical practices of Sanchez, Kim tried his best to step down from the position of CFO. A new CFO with rich experience in successful technology companies was hired, but he resigned within five weeks of joining because of tension between him and Sanchez. Sanchez’s bizarre practice of hiring and firing continued with, a general counsel being hired and fired within a month in 2007 and three vice presidents (one male and two females) fired in 2008. In 2009, employee receivables (mainly from Sanchez and Jones) was a staggering $ 500,000 with spending not accounted for the period November 2008 to January 2009. The amount was spent on frivolous and personal items and services even in the previous period.
Part 2: Ethical Tensions and Dilemmas
Identify the key ethical tensions Kim faces, based on May’s text introduction.
Ethical tension arose because of differences in perspectives of Sanchez and Kim about personal expenses being charged to the company. This can be explained in terms of Anderson & Englehardt’s (2001) nomenclature: Foundational/Situational tension; Individual/Community tension. Kim is facing ‘foundational tension’ as his behavior is based on universal ethics of honesty and integrity, not permitting utilization of company funds for personal needs (as done by Sanchez and Jones), not allowing misrepresentation of personal expenses as company expenses (for promoting products, services and closing sales).
At the same time, Kim is facing ‘individual tension’ (libertarian approach, as coined by Anderson & Englehardt, 2001) in the sense that he is trying do individual good through his insistence on controlling personal expenses of Sanchez and Jones charged to the company account, for the sake of overall organizational good.
Kim is facing another ethical tension as to whether he should bring Sanchez and Jones to face consequences for their misdeeds (by informing the matter to the board) or be compassionate about their misdeeds and give them some more time and opportunities to rectify their wrongdoings. The problem is compounded by the fact that Sanchez fires any employee who confronts him. By exposing the misdeeds of Sanchez, Kim may lose his job and further the reputation of the company Cardio-Metric in the market may be tarnished. This would be a blow to the employees and future of the company. Kim does not have support of board members or any significant-others on his side, so that he can pursue the matter with the minimal damage. This is a sort of ‘situational tension’.
2. Identify the ethical perspective(s) that Kim holds. Describe and explain why this contributes to identified tensions.
Kim with his professional education, with his middle-income family background and his commitment to the company, has different perspectives about the situation he is currently facing: Duty; Utility; Virtue; and Relationship.
According to May (2011), a duty perspective is concerned with the “individual’s obligations to others (often, the collective or the company or organization) and duties are viewed as natural, universal, rational and self-evident”. Within this framework, Kim is performing his duty as CFO of Cardio-Metric, trying to follow and implement expense policy of the company, prevent misuse of company funds and correct the financial indiscipline in the actions of Sanchez and Jones. This duty perspective of Kim led to the ‘foundational tension’ he is currently facing at Cardio-Metric.
Under the lens of utility perspective, Kim is looking at the consequences of actions (possible fraud and misuse of company funds over a considerable length of time) of Sanchez and Jones. As no action was taken against their misdeeds previously, about $ 500,000 has to be recovered from them, which for a company like Cardio-Metric is huge. Recovery of money from them would result in “greatest overall happiness for the greatest number”. This measure would benefit the company and further recovery of ‘amount receivable’ would ensure that such events do not occur in future. Utilitarian perspective of doing good to the larger number of people has resulted in through individual action of Kim made him to face ‘individual tension’.
Virtue perspective presupposes that all humans possess ‘inherent potential in them and they strive for self-actualization’ (May, 2011). Virtue is perceived as a characteristic of human beings that results in ethical behavior. Strengthening of personal virtues (particularly among the CEO Sanchez and his assistant Jones) would promote the company’s virtues and this would result in maximization of employee potential, within and outside the organization. Financial losses would be minimized, revenues will go up and the net profits would be positive. Such a scenario would instill confidence among venture capital firms who would willingly invest in Cardio-Metric. Virtue perspective is the cause for ‘individual tension’ in Kim, because the source of ethics in this context is Kim.
Kim has effectively used ‘relationship perspective’ by building, developing and maintaining productive and successful relationship with Sanchez over the years 2002-2009. Because of this relationship, he was welcomed back in Cardio-Metric after his MBA. Even after getting to know of the financial irregularities and company’s funds being used for personal ends, he preferred a soft kind of approach to talk to Sanchez about fraudulent practices. Kim had one-to-one talk with Sanchez about the personal expense which were charged to the company. As a last resort, before compiling the report about Sanchez’s wrongdoings, Kim sent him an e-mail about the status. Again Kim was facing ‘individual tension’ for three years (right from 2007 to 2009), trying to talk, engage in dialogue, resolve and put an end to the misappropriation of company funds by Sanchez and Jones. During 2009, he roped in the legal counsel for professional advice.
Part 3: Identify Action Options
Identify actions that would be based on duty ethical perspective, as described in May.
Action 1: ALIGNMENT: Cardio-Metric has to put in place a mechanism for aligning formal policies and procedures (e.g. ethics code for employees of all ranks right from the CEO to the shop-floor employee; employee handbook) with the organization’s informal culture (e.g. conduct within the company and outside the company, norms, rituals and narratives). The CEO and the top leadership have to strictly follow the ethics code. Kim, as the CFO should formulate the guidelines and ethics code for top level executives, particularly on their entitlement of benefits.
Action 2: DIALOGIC COMMUNICATION: Kim was fair enough in talking to Sanchez about the financial irregularities on a one-to-one basis. But this communication did not yield any result, as Sanchez felt he was entitled to get all his requirements (personal and professional) paid for by the company. Kim as a last resort began compiling a detailed report of irregularities to confront Sanchez once again with documentary proof. The communication and concern of Kim was fruitless, hence Kim should escalate the matter to the next level, namely board.
Action 3: ACCOUNTABILITY: Though Sanchez was a co-founder of Cardio-Metric, he is accountable to the board and the audit committee. Kim alone was in the know of things. But he did not confront Sanchez with the wrongdoings, false reporting to the board. It was the duty and prerogative of Kim to present the findings about Sanchez and Jones to the board as soon as possible. Kim was accountable for the finances of Cardio-Metric and any irregularities should have been reported, rectified and people found to be guilty of irregularities should have been brought to book.
2. Identify actions that would be based on a utility ethical perspective, as described in May.
Action 1: TRANSPARENCY: By making governance, policies, procedures and guidelines transparent, Cardio-Metric can send a bold message that the company is being managed effectively, which in turn would increase its perceived value both within and outside the company. The various types of benefits and their quantum that CEO and the senior executives are entitled to, from the company should be clearly spelt out and recorded. This would make monitoring, controlling and giving timely feedback about any violations. Kim, as CFO should pursue framing of policies and code of ethics for the top executives and get it approved by the board.
Action 2: COURAGE: Kim should muster the courage to confront the uncontrolled personal spending by Sanchez and Jones and should have brought it to the notice of the board. According to Peterson & Seligman (2004), courage or bravery (in the context of organizations) is defined as “acting with valor by not shrinking from threat, challenge, difficulty, nor pain; speaking up for what is right even when opposition exists; and acting upon conviction despite facing an unpopular environment”. As a brave executive Kim should “take the lead on unpopular but necessary actions because of his moral courage” (Gardner, Avolio, Luthans, May, & Walumbwa, 2005).
Part 4: Recommend Course of Action
Determine a recommended course of action for Kim.
Kim has given enough time and opportunity for Sanchez to rectify the improper charging of personal expenses to the company. Now Kim has to muster the courage to bring it to the notice of the board with all the documentary evidence that he and his team compiled, irrespective of the consequences for his own position. This would be in the larger interests of the company and would demonstrate the integrity of Kim. Even if he is fired from Cardio-Metric this virtue of confronting financial irregularities would be a merit for him to get a suitable position in any other company.
2. Justify your recommendation using our class supplementary readings and text. (Lectures may be helpful to review, but do not cite them as a source.) This is your opportunity to demonstrate what you have learned i.e. comparing and contrasting other case study situations, and backing up your justification with course materials.
Part 5: Identify Stakeholders and Key Messages Based on Action
1. Identify key stakeholders in the case (who needs to be communicated with?)
Key stakeholders in the case are: Kim, Sanchez, Jones, board of Cardio-Metric, executives in the accounts department and the legal counsel of the company. Kim as the CFO should communicate to the board, without further delay, as he had already had dialogue with Sanchez at different points of time.
2. Briefly (a few sentences) state what key messages each stakeholder/group should receive regarding the situation.
Message to Sanchez and Jones: “Stop using the company funds for personal needs. Whatever expenditure has been charged to the company account through credit cards and checks should be properly accounted for within a fortnight time, before the next audit commences”.
Message to the board: “Sanchez and Jones have been misusing the company’s funds and the unjustified expenditure by them is now to the tune of $ 500,000. In spite of being warned and instructed to submit bills and receipts for the expenses, they have partially complied. Disciplinary action should be initiated against them as per the rules, regulations and code of ethics”.
Message to the executives in the accounts department: “Do not approve or any bills submitted by Sanchez and Jones, till the board takes a decision and gives instructions”.
Message to the legal counsel: “Suggest measures to initiate action for recovery of funds from Sanchez and Jones, without making the episode public”.
Part 6: Conclusion
The case study reflects the rise and fall of a start-up entity (Cardio-Metric) and the dilemmas faced by Daniel Kim, the CFO of the company. The dilemma involved the CEO of the company Carlos Sanchez, who indulged in unethical practices of financial fraud and misrepresentation of the company’s financial stability and future projections.
Executives who were hired and fired in the past were victims of fear culture created by Sanchez. Any whistle-blowing activity or confrontationist approach was answered by firing the employee. Hence, Sanchez and Jones had a free hand in using the company’s funds for their personal use. Seebauer (2001) and Seebauer & Barry (2004) categorically state that “duty to blow the whistle increases as the gravity of wrongdoing increases”. Wrongdoing by Sanchez and Jones touched the $ 500,000 limit. If Kim still follows the soft option of talking and convincing Sanchez, it may be construed as cooperation in wrongdoing. Cardio-Metric should formulate policies for code of ethics and conduct of executives and these policies with period checks and balances should be implemented without fear or favor by competent authorities irrespective of the hierarchical level of the executive.
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