IAI Actuarial Core Principles · Business Finance · Ethical responsibilities of owners and managers
The board of a company is considering a project that is highly profitable but would release pollutants into a river, in breach of a regulatory limit. The fine, if caught, is estimated to be much smaller than the profit. Which view best reflects directors' ethical responsibilities?
Directors should reject a plan that knowingly breaches the law. Their duties include compliance and having regard to long-term stakeholder, community and reputational effects, so a cost-benefit comparison with the expected fine is not an acceptable ethical justification.
- AProceed, because directors' only duty is to maximise short-term shareholder wealth
- BProceed, provided the expected fine is lower than the expected profit
- CProceed, provided the matter is kept off the board minutes
- DReject any plan that knowingly breaches the law, because duties include compliance and regard for long-term stakeholder and reputational impactCorrect
- Leave the decision to the auditors, since compliance is their responsibility
Explanation
Directors must act within the law and consider the long-term interests of the company, including employees, community and reputation. Treating a fine as a cost of doing business is unethical and risky. Auditors report on accounts and do not take over the board's responsibility for compliance, and concealing the matter from minutes compounds the wrong.
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