Question

Lara Rantanen recently joined the board of directors for Clearly Closets Inc. (CCI). As a CPA and independent board member, Lara agreed to take on responsibility for monitoring and investigating information submitted on CCI's new ethics website, where employees can anonymously submit ethics complaints. Complaints are automatically forwarded to Lara, who investigates allegations and recommends a course of action to the board of directors.

Lara recently received the following anonymous tip:

Clearly Closets Inc.

Anonymous ethics complaint web form

Date submitted: June14, 2019

Tracking number: 000018

Description of complaint: I heard that Nancy Quinn took her whole family on a vacation to Mountain Majesty, all paid for by Konduru. This seems really wrong to me.

Lara gathered the following additional information:

• Nancy Quinn is a sales representative in the Burnaby, B.C., office. She recently negotiated a contract with a new customer, Konduru Corp. The customer has agreed to purchase from CCI all of the closet organizers and shelving for a new condominium project in Burnaby, at a price discounted from CCI's standard prices. The size of the discount is similar to that given to CCI's largest customers.
• A few months ago, Konduru finished developing a large ski resort condominium project called Mountain Majesty. So far, only 70% of the units have been sold. Konduru frequently invites potential buyers to spend a weekend at Mountain Majesty, free of charge. The resort also rents condominiums at rates ranging from $150 to $800 per night.
• When asked about the situation, Nancy said:

Shiva Konduru, owner of Konduru Corp., told me that I could invite my family for a free week at Mountain Majesty. The condominiums aren't all sold yet, so the company allows a lot of people to stay there free of charge. My husband, two sons, and I decided it would be fun to spend the week skiing up there as it is not normally a place we could afford. They gave us coupons for discounts on ski lift tickets, but I think they give those to everyone who stays at the resort. Shiva also took us all out to dinner one night, but I thought that was okay because I spent some time that day inspecting the closet installations at Mountain Majesty. Konduru is looking for the same basic construction techniques on the Burnaby project, and I learned more about what they will need from CCI. Besides, I know that Arnie goes golfing with customers all the time. Didn't he go golfing just the other day with Jack Jensen, president of Jensen Construction?

Anyways, my approval levels allow me to negotiate the deal with Konduru that is best. While this project is not as significant in size as our biggest customers, Konduru is starting many new projects and this will lead to big sales for us. I didn't do wrong thing.

Note: Arnie Chan is the sales manager of CCI, a major shareholder, and a member of CCI's board of directors.

• Arnie Chan stated that he often takes existing and potential customers golfing. Also, he frequently takes clients out to dinner. He charges all client-related golf and dinner costs to marketing expense.
• There is currently no policy on salespeople's interactions with potential customers.

Required:

Response to the questions below for submission.

Is there an ethical problem?

1. Which aspect(s) of Nancy's actions might be unethical? Which aspect(s) might be appropriate? Document your response in the space below. Your response should be no longer than one page.

1. How does Nancy justify her actions? Are the justifications reasonable? Document your response in the space below. Your response should be no longer than one page.

1. How are the each of the stakeholders affected? Document your response in the table below. Your response should be no longer than three pages.

Stakeholders

Positive implications of Nancy's actions

Negative implications of Nancy's actions

CCI and its shareholders

Other sales representatives

Lara (independent board member)

CCI's management and board members

New customer (Konduru Corp.)

Arnie Chan

Anonymous whistleblower

What should CCI do?

1. What recommendations might Lara consider? What are the pros/cons or costs/benefits to CCI of each alternative?

Document at least two alternative recommendations in the first column below. For each alternative, discuss at least two pros, two cons and an overall conclusion for that recommendation in the second column below. Your response should be no longer than three pages.

Recommendations

Pros/cons

Alternative #1:

Pros:

Cons:

Overall:

Alternative #2:

Pros:

Cons:

Overall:

Alternative #3:

Pros:

Cons:

Overall:

1. What changes should be made to Clearly Closet's corporate governance policies? Document your response below.

Document at least one corporate governance policy recommendation in the first column below. For each recommendation, discuss at least one pro, one con and an overall conclusion for that recommendation in the second column below. Your response should be no longer than two pages.

Recommendation

Pros/cons

Governance recommendation #1:

Pros:

Cons:

Overall:

Governance recommendation #2:

Pros:

Cons:

Overall: