Pierre Garvey, the CEO of Revel Information Technology, sat back in his chair and looked at his assistants. He frowned. “My son has been diagnosed with MLD,” he said.

They all looked at him with shock. “Its proper name is metachromatic leukodystrophy, and it’s caused by an enzyme deficiency that will eventually destroy his nervous system.”

“I’m so sorry, Pierre.” “That’s awful.”

“Oh, my God! Is there anything that can be done?” They all spoke at once.

“It’s an extremely rare disease. There’s no known cure and no standard form of treatment,” he went on. “But there has been research into bone marrow and stem cell transplant therapies. So, what I would like you to do, Gloria, is have 50% of our corporate charitable contributions redirected to organizations that are working on stem cell research.”

She stared straight at her boss and said,

“There is a formal procedure for how we allocate our charity.”

Before she could say anything further, Pierre stopped her. “You’re in charge of that committee! Fill out all the necessary forms and paperwork, but I want 50% of our corporate contributions to go to stem cell research. Do I make myself clear?” She nodded and remained silent throughout the rest of the meeting.

“I’ve decided to exercise some of my stock options and then donate the stock to the Lascelles Institute, which is working on bone marrow therapy.” As CEO, Pierre had been given multiple stock options that varied in price from \($17.51\) to \($29.87\). Shares of Revel Information Technology have been trading in the \($19\) range for the last month. The current share price is $19.25.

“I’m going to exercise 50,000 at \($17.51\) and then donate the stock to the Lascelles Institute.

They’ll then give me a tax receipt for the fair market value of the shares.”

“Wouldn’t it be easier for you to exercise the options, sell the shares, and then donate the cash proceeds to the charity?” asked Carol, the executive vice president.

“No,” said Lin, the controller. “If Pierre exercises the options and sells the stock, he has to pay capital gains. But because of the recent changes to the Income Tax Act, there are no capital gains if shares are donated to a charity.”

“But isn’t this subject to insider trading rules?”

“That’s right,” said Pierre, “but, because I’m donating the shares, there are no proceeds tome, and so the securities commission is not interested because I’m not receiving any cash and there’s no capital gain.”

“This is all quite legal,” added Lin.

“However, I’m concerned about this quarter’s financial results and what it will do to our stock price. Our earnings and net income are down substantially from the analysts’ forecasts. I think that our stock will take a beating after we release our results and my stock options may no longer be in the money.”

“That’s right, Pierre,” said Carol. “We lost sales to cheap imports from China, our competitors lowered their prices and stole some of our customers, our obsolete machinery finally broke down and had to be replaced, and we got hammered on those security-backed investments we bought with our surplus funds.”

“Once we release this quarter’s results, we should expect out stock to fall to about \($17\). Maybe a bit more,” said Lin.

“Okay, this is what you do. Gloria, I want you to arrange that our corporate donations go to stem cell research. I also want you to contact the Lascelles Institute and let them know that I’m going to be donating 50,000 shares of Revel Information Technology to them tomorrow, on Thursday. I also want a tax receipt at whatever price our shares are trading at tomorrow, probably at about \($19\) per share.

“Carol, I want you to get in touch with legal and arrange for me to exercise 50,000 options at \($17.51\). I then want them to change the ownership on the certificates to the Lascelles Institute. “Finally, Lin, I don’t want you to release this quarter’s financial statements tomorrow.

Wait until Monday morning of next week.

“Everybody clear? Good. Off you go.”

Questions:-

1. Is it right that a CEO can direct the charitable donations of his or her company to the charity of his or her choice?
2. Comment on the ethical aspects of Pierre’s stock option/stock donation strategy.
3. If you were Gloria, what should you do? Would this change if you were a donations specialist, a lawyer, or a professional accountant?