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IAI Actuarial Core Principles · Business Finance · Ethical responsibilities of owners and managers

A director of Sundaram Textiles Ltd discovers that his brother's firm could supply raw cotton to the company at a price slightly above the market rate. What is the most appropriate ethical response?

The director should disclose the family interest to the board and abstain from the decision so that independent directors can judge the terms. Hiding the link, or using a friend as a front, would breach his duty to act in the company's interest.

  1. AApprove the contract quietly because the extra cost is small
  2. BDisclose the interest to the board and abstain from the decision, leaving independent directors to assess the termsCorrect
  3. CResign from the board only after the contract is signed
  4. DPersuade other directors to approve it without mentioning the family link
  5. Arrange for the contract to be placed in a friend's name instead

Explanation

A conflict of interest should be disclosed in full and the conflicted director should not take part in the decision. Independent directors can then judge whether the terms are fair. Concealing the link or routing the deal via a friend only disguises the conflict.

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