Alex McAdams, the recently retired CEO of Athletic Shoes, was honored to be asked to join the Board of Consolidated Mines International Inc. Alex continues to sit on the Board of Athletic Shoes, as well as the Board of Pharma-Advantage, another publicly traded company on the New York Stock Exchange. However, CMI, as it is known, is a major step up for Alex.

CMI was formed as the United Mines Company in the 1870s by an American railway magnate, and in 1985, it became Consolidated Mines International Inc. It operates mines in Central America and northern South America. In 2004, its revenues were approximately \($4.5\) billion, and it employed about 25,000 people worldwide.

In deciding whether to accept the board seat, Alex conducted his own due diligence.

As a result, there were two issues that he wanted to raise with Cameron Derry, the CEO of CMI. One concerned the allegations of questionable business practices.

The other concerned the political instability in several of the Latin American countries in which the CMI mines are located. Today, Alex was meeting with Cameron at the Long Bar Lounge.

During lunch, Cameron candidly talked about the history of the company and the bad press that it often received. “In the 1920s we were accused of bribing government officials and using our political connections to have unions outlawed. In the 1950s we were accused of participating in the overthrow of a Latin American government.

In the 1990s there were charges that we were exploiting our employees, polluting the environment, and facilitating the importation of cocaine into the U.S. But, none of these allegations has ever been proven in a court of law,” said Cameron.

“And we’ve even successfully sued one newspaper chain that published a series of these unproven stories about us.

“As for the political environment, Alex, you’re right. There is no effective government in many of the countries in which we operate. In fact it is often the paramilitary that are in control of the countryside where we have our mines. These are very unsavory organizations, Alex. They have their own death squads. They have been involved in the massacre, assassination, kidnapping, and torture of tens of thousands of Latin Americans, most of them peasants and workers, as well as trade unionists and left-wing political figures.”

“Do they interfere with CMI’s operations?”

asked Alex.

“No, and that’s because we’ve been paying them off. It’s now 2007 and we’ve been paying them since 1997. To date we’ve given them about \($1.7\) million in total.

Don’t look so shocked, Alex. Occasionally, we have to do business with some very unsavory characters. And the United Peoples Liberation Front that controls much of the region around our mines is probably the worst of the lot. They are involved in disappearances, murder, rape, and drug trafficking. The payments we make to them are for our protection. If we don’t make these payments it could result in harm to our personnel and property.”

“That’s extortion!”

“We don’t call it that. We list these payments as being for ‘security services,’ but we have no invoices to support the payments, and beginning in 2002 we began making direct cash payments to them.

“But, we now have an additional problem.

The United States government has declared the United Peoples Liberation Front to be a terrorist organization, and our outside legal counsel has advised us to stop making the payments. But if we stop I’m afraid of what might happen to our employees. I don’t want to support drug trafficking and terrorism, but I need our mines to stay open.

“I’m telling you this, Alex, because if you join the Board, the first item on next month’s agenda is these payments. I want the Board to approve that we continue to make these payments in order to ensure the safety of our Latin American employees and operations.”

Questions:-

1. Should Alex join the Board of Directors of Consolidated Mines International Inc.?
2. If Alex joins the Board, should he vote in favor of continuing to make the payments to the United Peoples Liberation Front?
3. What other options are available to Alex?