Video Case Transcript MICHAEL MARKS: Right, Wrong or Just Business?

Challenge

I'm Michael Marks. I was formerly the chief executive officer of Flextronics International between the years of 1993 and 2005. In 2006 I was the nonexecutive chairman. Flextronics is one of the two largest electronics manufacturing companies in the world, serving such large companies as Cisco, IBM, Hewlett-Packard, Motorola, Apple, Nokia, and so on.

One of the things that's very important to Flextronics is that the company not take inventory risk. Very low-margin business, customer orders inventory, they have to take it. We had a situation at the end of 1999, right before the meltdown in 2000, with a data/communications giant that was placing orders with us. Inventory's beginning to pile up, we can see that they're not getting the orders, and so several times I go to see the senior vice president of operations, warn him that we can see the inventory piling up ($30 million extra at the end of October, $60 million at the end of November).

I continue to get assurances that they're going to take the inventory, that they're going to sell it, that there won't be a problem, and in fact at the end of December of that quarter, which was the beginning of the bad period, there was $100 million of extra inventory. I wentin tothe customer, asked him to execute on the contract to purchase the inventory, and they said they would not.

So this was a huge problem, as you can imagine. $100 million is a lot of money, even for a company that was $10 billion of revenue at the time. Our business with this customer was about $1 billion, roughly 10 percent of our revenue. We had a good, long-standing relationship, andbasicallytheir position was, "You've been a partner with us in good times. You need to be a partner with us in bad times. You need to write off this inventory. We're going to take a lot of inventory write-offs ourselves."

So we tried a bunch of negotiation, we tried different ways to resolve the problem over time, and in the end we were just faced with an ultimatum: either we eat the inventory, we write it off ourselves, and continue to have a good relationship with this customer, or we decide that we should execute on the contract, ask them to pay the $100 million, in which case the threat, which was pretty explicit, was that they would take away all of our business.

So obviously this was a big issue for us. We had a lot of internal discussions; we talked about what the implications might be. If we asked for the money, we figured they would punish us. We didn't think they would punish us a huge amount because these are very complex relationships in business in lots of different geographies and so on. So we had to make the decision whether we were going to go ahead and allow them to nod out of the contract or ask them to do what we agreed to do.

Decision

So you need to understand: I was completely outraged by this. This is something everybody understands in the business. They understand what the customer's obligations are; they understand what Flextronics' obligations are. Here I'd personally warned the guy several times, I've gone in, laid it out in advance, and they ignored all of that and basically said, "Write off $100 million." $100 million!

But for us, it was really an ethical dilemma. Some people would say this is just a business issue; but this is a contract, it's very clear, it really matters to our company, we've been explicit with the customer, we've warned them what the implications are, so there was no " it was complete transparency on both sides about what the issue was.

So I asked them to pay the $100 million; and they said they would, but we should understand that if they paid that money, which was their obligation, that they were going to take away all of our business, which is just stunning, unimaginable. I mean here's 10,000 people working, a very long relationship with this company and they're threatening to take all this away, only because we asked them to honor their obligations. Outrageous!

Results

These kinds of disputes are really a part of everyday business, but they're rarely this large and with these kinds of implications; and so we really, we expected we would be in the penalty box for a while, but what they actually did was they took away all the business. It took about a year, 18 months, for the business to drain away, but this was a gigantic impact.

Stockprice dropped, analysts asked about this for years and years. What happenedwiththis customer? Were we ever going to get business back? And of course, we couldn't really talk about all the inner workings of this, but it was bad. We took as many employees as we could, shifted them over to other programs, but at the end of thedaythere were a lot of layoffs as well. So this was a very, very nasty event for Flextronics.

What's very surprising to me is that we weren't able to come up with some resolution.There'slots of ways to deal with this. They could have given usextramargin for a while in exchange for the write off; they could have given us additional business in exchange for thewrite offs; we could have written off some; they could have written off some. There were lots of ways. This happens in business all the time. The fact that they were unwilling to do any of this was what was sosurprising,because there should have been a resolution that would have been fine.

I will say that the fact that the company stood upin this casegot to be known. The company got a reputation for being stand-up citizens, and that really has helped the company over the long term, and in fact, after I left the company " after I left Flextronics " this particular company started doing business with Flextronics again and now is a major customer. So at the end of thedayit worked out okay, and I think that customer had respect for the decision we made.

Lessons Learned

So one of the lessons I learned is that good people do bad things. I never imagined that this would be the outcome. These were good people, they made decisions that I thought were really inappropriate, but now I've learned that; I'm more cynical about it. As a consequence of that, when faced with other similar decisions like this, I won't make the decisions myself. I will talk with the board of directors or other people who may have a different point of view, try to find a way to deal with my cynicism so that we can have a better outcome.

So another lesson for me is that while I have a personal point of view that's very clear, there are other ways to look at this. I viewed it as an ethical problem; other people view this as simply a business negotiation. In the context of a business negotiation, taking a write off that would preserve a lot of jobs makes a lot of sense. So for me, it was an ethical problem; it was a very clear line. .For others, this is really a negotiable business situation, and in that context, it might have made some sense to make an accommodation that I wasn't personally comfortable with but that would have provided a better outcome for all the people in the company.

But these are really personal decisions. You actually should think about it in advance; try to understand what your sense of right and wrong is so that you'll have some guideposts to work with when you're faced with a really difficult problem like this one.

Answer the following questions:

1. Define the ethical issue. What are the two possible actions that Michael Marks must decide between?
2. Who are the stakeholders in this case? Try to identify all of the individuals/parties who would be affected by Mark's decision?
3. Which ethical decision-making framework (consequentialist, deontological, or virtue ethics) do you think Marks relied on most when deciding what to do about the consumer? Explain why using your knowledge of these frameworks and Mark's description and reaction to the dilemma.