What are friends for?

Enlightened Entertainment, Inc. (EEI) is a publicly-traded company that engages in the production and distribution of motion picture entertainment products online and through traditional delivery arrangements.Ira Simon founded the company in Southern California some twenty-five years ago and, after later taking the company public, remains as chairman of the board of directors and Chief Executive Officer (CEO). Even though the total capitalization of EEI is only $220 million, there is a full complement of executives including the president, chief operating officer, chief financial officer, chief information officer, and general counsel.EEI decision-making appears to be based on the perceived benefit of executive management.There is no mission statement or strategic plan for the company.Strategic decisions are made with the stated intention of maximizing stock value although it appears many such decisions are also made with the intent of ensuring that the CEO maintains his position in the company. The compensation level of executive management is approximately 25% above the norm for companies of comparable size. Neither the company nor its management participates in any civic or philanthropic activities.

Ira Simon met Billy Meacham when Ira was struggling to get on his feet financially with his new company (EEI).Since that time, they have remained fast friends and have belonged to the same social circles for decades. They occasionally get together for dinner, drinks, and discussions about various topics.Meacham owns several automobile dealerships in the Los Angeles area.Meacham was one of the early investors in EEI and still owns 1,000,000 shares (<2%) of EEI stock.

Boyd Ashcroft has been a very successful businessman, owning several local franchise restaurants.Ashcroft and Meacham, in addition to their respective individual businesses, had formed a partnership, B & B Partners, to facilitate other investments.Fifteen years ago, B & B Partners Loaned $2,000,000 to EEI when EEI was experiencing a cash crunch. Twelve years ago, EEI repaid the $2,000,000 plus interest to Ashcroft as instructed by B & B Partners as payment in full.Unfortunately, Ashcroft was experiencing financial difficulties and did not remit to Meacham as agreed. Meacham sued Ashcroft but was unsuccessful in collecting any awards.Meacham then sued EEI for one-half of the amount, $1,000,000 plus interest, and litigation had been ongoing for the last 10 years.EEI's general counsel, Rick Turner, indicated on multiple occasions that there was a high probability that EEI would win the case based on his assessment and the of outside counsel.

In the last quarter of 2008, the U.S. economy was under severe stress with record unemployment, massive financial institution failures, and near trillion-dollar federal "bailouts."The domestic auto industry was on the verge of bankruptcy due in no small part to sales declines of forty percent or more.As a result, Billy Meacham was experiencing financial setbacks unimagined just months prior and stood to lose virtually all the personal wealth he had amassed over his lifetime.

At the beginning of December, Simon Called Chris Meyers, a Certified Public Accountant (CPA) and the Chief Financial Officer (CFO) of EEI, and Rick Turner, the general counsel, into his office on a Monday morning.Simon provided the two with a brief overview of the history of B & B Partners' dealings with EEI, including recent settlement discussions between Simon and Meacham.Then he directed Turner to Write up an agreement between EEI and Meacham effectively ending the ongoing litigation in return for a $50,000 cash payment from EEI to Meacham.Meyers was concurrently directed to issue a check for $50,000 to Billy Meacham.Turned and Meyers expressed severe reservations to Simon since all indications were that the litigation may well have been near-final resolution in the judicial process.Simon ended the exchange by saying it was a business decision he made to end the litigation and put an end to the ongoing legal costs.Legal costs to date were approximately $20,000, an amount which EEI stood to recover if the judicial outcome was favorable to EEI.

After a lengthy discussion, Meyers, and Turner scheduled another meeting with Simon on Tuesday morning to discuss the proposed Meacham settlement.Meyers and Turner presented what they believed were well-reasoned arguments as to why the proposed settlement was not advisable.Simon was unmoved and reiterated his position that he was making a business decision that, in his opinion as CEO, was best for all concerned.

Meyers is very uncomfortable with the decision made by Simon and is considering taking the issue to the board of directors. However, the board members were all handpicked by Simon and are unlikely to risk opposing their benefactor.Each board member receives $25,000 for each of the four one-day board meetings they attend annually.Additionally, only one of the nine board members (an attorney) is sophisticated enough in business dealings to understand the potential ramifications of Simon's actions

1)What are the facts relating to the proposed settlement?

2)If there is an ethical dilemma, what is it?

3)Who are the stakeholders in this situation?

4)What are the alternatives?

5)What is the best alternative for Chris Meyers?

Question 2

Krispy Kreme Doughnut, Inc. sells donuts through its network of stores owned and operated by independent franchisees. Franchisees criticized Krispy Kreme's former CEO, Scott Livengood, for forcing companies with which Krispy Kreme did business to contribute $500,000 to sponsor a "storytelling festival" in the hometown of Mr. Livengood's wife. According to an independent investigation, this expenditure benefited Mr. Livengood and his wife, but did not provide Krispy Kreme with any marketing or promotional benefits.

a. Was Mr. Livengood's insistence that these companies fund the storytelling festival ethical?

b. Did Mr. Livengood likely have an improper tax motivation for structuring the funding of the storytelling festival in this manner?

Question 3

A health insurance company sold insurance policies that allow policyholders to obtain services from selected hospitals. The policies fully disclosed the names of these hospitals. However, the insurance company did not mention that the hospitals did not have the capability to perform certain costly procedures, such as heart bypass operations. As a result, if a policyholder one day developed a severe heart blockage, the patient would not have insurance coverage to pay for such a heart bypass procedure.

a. If the insurance company, to save money, deliberately selected hospitals that lack the capability of performing heart bypass operations, was its disclosure of the names of the hospitals available to patients adequate?

b. If the insurance company did not deliberately select hospitals that lack the capability of performing heart bypass operations, but it knew that these hospitals were smaller regional hospitals that were likely to lack certain advanced capabilities, was its disclosure of the names of the hospitals available to patients adequate?

c. If the insurance company deliberated selected low-cost hospitals that lack certain capabilities and passed these reduced costs along to policyholders, did the insurance companies act unethically?