After difficult years, revenues started to grow, and according to the financial statements it seemed that profits were growing as well. But in reality, the business did not have enough cash to operate. The company’s key stakeholders, such as the bank, vendors, and investors, were applying pressure on Joe to improve earnings and cash flow. They threatened to take over the business if major changes were not made and successful.
About the same time, making matters worse, Joe was notified that several contracts, constituting about 25% of his top-line revenues, would be lost to the competition. Joe responded by laying off employees, freezing wages, and closing several marginal operations, but these efforts were not enough. Joe was still badly in need of more cash and processional management to run the business. To remain viable, he had three options: 1) He could negotiate a “capital for control” type exchange with the investor and the banks.
If he did this, the banks could help recruit new talent and offer interim financingј*la to support the company while restructuring occurred. On the downside, with this option his status in the organization would change significantly; instead of being the owner, Joe would become more of a senior manager. 2) Joe could maintain control and hire turn-around management, explaining to them that the company was in a critical turn-around phase and that the organization’s future dependent on the new managers’ ability to generate creditability and positive performance within a year.
He would have to disclose the wage freezes of the past 2 years and explain that he could not initially offer competitive salaries or certain traditional benefits. If he took this option, Joe would have difficulty recruiting skilled managers because they would not want to come into a situation with failing operations, no operating cash, and the prospects of a dramatically dwindling revenue base. If it succeeds, this option would allow Joe to keep control and save his reputation. 3) Joe could remain in control and hire turn-around management without fully explaining the serious situation.
He might say that the company is one of the fastest-growing companies in the industry that it just completed an operational turn-around, had regained profitability, and was upgrading staff to take the company to the next level. He could support his positive picture by representing pro formal financial information as though it were actual. This approach probably would be successful initially in gaining new qualified staff, but the new managers might join only to leave soon afterward. They would probably not develop into loyal, long-term employees because of Joey’s breach of trust.
This option would give Joe the opportunity to maintain control to keep all his workers employed. Questions 1) Of the three options available to Joe, which is the most ethical? 2) Which option would provide the greatest good for the greatest number? From an ethical perspective, what is Joey’s duty in this situation? 3) What pressures does Joe face regarding honesty and telling the truth about his situation?