The Positive Impact of Social and Economic Factors: the Area of Investments - Research Paper Example

 The case of quandary at Puredrug is analyzed as per the 7 step model by American Accounting Association. Facts Puredrug, a large pharmaceutical company with operations and sales across the globe has been facing economic problems with decline in the market share and reduction in corporate profits. The company is having an opportunity to sign-up a contract worth $8 million with Philippines government for a drug named Travolene. However, tests conducted by the domestic government found the drug unsafe. Ethical issues Should we launch the drug in Phillipines in-spite of the fact that the drug was declared unsafe by the domestic agencies? Norms, principles, and values related to the case The value that is expected of a pharmaceutical company is that they release drugs with minimum side effects and maximum benefits at reasonable prices. As a pharmaceutical company, it is our responsibility to take care of the health of people in which it makes sales. Alternative courses of action Option 1 available with the company is to sign the contract with the Philippines Government. Option 2 available with the company is to not release the drug. Option consistent with values Option 2 where we do not release the drug is more consistent with the values. We will take a hit on our profitability but will not release the drug. Consequences of options Option 1 will have a considerable impact on the profitability. However, it is possible that the drug might have significant side effects. This will have a negative impact on the image of the company not only in the country but also around the world. Option 2 will enhance the reputation of the organization. The company can do some more R&D and release an improved version which can clear the domestic tests as well, the company can then launch the product in domestic as well as foreign market. Decision Based on the consistency with the values, the company should not sign up the contract with the Government, do more R&D and release a better product with no side-effects. Section B: Ethical Investment In the recent history there has been increased emphasis on the area of investments being socially responsible ad ethical. Investors now make investments that are consistent with the principles of ethical investment. Ethical investment can be defined as the application of ethical and social principles while selecting and managing investment portfolios (Cowton, 1994). In the area of ethical investment, companies as well as individuals make investment that clear the tests of being ethically and socially correct. The area of ethical investment, also referred to as Socially responsible investment (SRI) has been researched considerably in the recent past. The two aspects of ethical investments that have been researched include economic aspects and social aspects of the area. Social aspects of ethical investments Ethical investments have a significant positive social impact on an entity making investments. Ethical investments will ensure that the investments made by the organization are consistent with the personal values of the people making investment decision. These investments also increase common investor’s understanding of organizations that are not consistent to principles of ethical investments (Sauer, 1997). Organizations practicing ethical investments enjoy increased reputation as a socially responsible corporate. Through ethical investments, organizations can be clear about their risks and their mitigation plans to the general public. Companies that disassociate themselves from environmental and social issues might find itself in trouble that might arise out of certain unethical decisions. The dumping of oil platform in North Sea in 1995 by Shell resulted in the company shifting its focus from its operations to other side issues which resulted its performance. This made the company realize that “The separation of business from wider society is no longer possible” (Financial Times, 1998). Economic aspects of ethical investment Proponents of ethical investments claim that organizations that screen their investments for being ethically and socially correct can be sure of protection against social and environmental crises. Ethically incorrect investments by organization might lead to increase in the cost of production, wastage of labor and higher indemnity charges. A case in example is Satyam Ltd from India. The managers of the company made ethically incorrect investments and misreported their cash and bank balances to the extent of USD 1.03 billion (Bloomberg, 2009). When the fraud was uncovered, the organization took a heavy beating. Clients moved away to its competitors. The stock price of the company dropped considerably and the company had to cough out large sums of money to investors worldwide. Cobham (2006) argued that negative “events” or unethical activities by an organization hamper its economic performance whereas a strongly correct environmental performance leads to enhanced economic returns. Organizations having a negative reputation on environmental issues face higher risks. This leads to a significant impact on the share price. Feldman, Soyka and Ameer (1997) and Klassen & McLaughlin (1996) found out that environmental events lead to abnormal returns of upto 5% and 1.5% respectively. Gunthorpe (1997) in his study analyzed the impact of illegal corporate behavior claims on organizations. He found that the cost of such claims on the share price averages out to be 1.3% per day to 2.3% per week. Industries that are strong in high growth witness a positive correlation coefficient between environmental performance and economic outcomes (Russo & Fouts, 1997). Researchers indicate that ethical investments play catch-up with those investments that are not screened for ethicality over a period of time. Bauer, Otten & Rad (2006) and Bauer, Koedijk and Otten (2005) analyzed the returns of ethical investment funds viz-a-viz normal funds in 4 countries. The researchers found that the normal funds outperform the ethical funds in the beginning. However, with passage of time, the returns from ethical funds start increasing and become equal to the other group. Researchers also claim that the reduction in options to invest on the basis of SRI principles has had little significant impact on the returns of these funds (Guerard, 1997). However opponents of ethical investment raise concern about the increased economic consequences of the same. Critics argue that ethically screening investments lead to increase in costs as a result of the additional effort and time that is needed for screening the investments. Temper (1991) argues that ethical investments may underperform unscreened investments because of the additional screening and monitoring costs, availability of smaller investment universe, and restricted potential for diversification. The World Business Council for Sustainable Development in its report said that ethical investment has its share of downsides which include: increased cost of capital, liability claims, insurance costs, and environmental taxes (Blumberg, Blum & Korsvold, 1997). Ethical investment at Puredrug Being a pharmaceutical company, it is the responsibility of PureDrug to make drugs at minimum costs and side effects. The company did manufacture large amounts of Travolene. However the drug was tested unsafe by the domestic agencies. The company in order to sign-up the deal with Philippines will have to make significant investments in the country in setting up its distribution channel. However the investment does not pass the test of ethicality. The company can’t have two different standards for domestic and foreign countries. If the side-effects of the drug do take place in Philippines, it will lead to extensive negative publicity for the company in Philippines as well as other Asian countries where it wants to establish presence. Moreover, the company might also be held responsible for the damage and be liable to pay damages to the people who have got side-effects. However, if the company makes some more investments in R&D and improve the product, then the drug can be used to treat viral infections in domestic as well as foreign markets. Conclusion From the analysis it is clear that there is significant positive impact of screening investment options. The positive impact is in terms of both: social as well as economic factors. Organizations making ethical investments gain from enhanced positive reputation, increased respect from all the stakeholders, reduced costs of liability charges, insurance and capital, and reduced effort in terms of management and employees focusing on social controversies. On the basis of principles of ethical investments, Puredrug should not sign-up the deal with the Philippines Government. References Bauer, R., Otten, R. and Rad, A. (2006), “Ethical investing in Australia: Is there a financial penalty?” Pacific-Basin Finance Journal 14(1). Bauer, R., Koedij k, K. and Otten, R. (2005), “International evidence on ethical mutual fund performance and investment style”, Journal of Banking and Finance 29(7). Blumberg, Blum & Korsvold (1997), Environmental Performance and Shareholder Value, The World Business Council for Sustainable Development Chatterjee, S. (2009). Satyam Founder Sparks India’s Enron With Fake Reports (Update2). [Online]. Available on: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=akJyO8yxmXTY [Last accessed on 30th March 2011]. Cobham, A. (2006), “No more excuses: The returns to ethical investment”, The Oxford Council on Good Governance, OCGC Economic Recommendation No. 7, October, 2006. Cowton, C.J. (1994), "The Development of Ethical Investment Products", in A.R. Pindl and B. Prodhan (eds), Ethical Conflicts in Finance, Oxford: Blackwell. Feldman, S. J., Soyka, P. A., & Ameer, P. G. (1997), “Does improving a firm’s environmental management system and environmental performance result in a higher stock price?”, Journal of Investing, 6(4). Financial Times, 1998, “Financial Times Guide to Responsible Business”, Mark Moody-Stuart, Chairman, Shell Transport & Trading. Guerard, J. B. (1997), “Is there a cost to being socially responsible in investing”, Journal of Investing, 6(2). Gunthorpe, D. L. (1997), “A quantitative analysis of the impact of unethical behavior by publicly traded corporations”, Journal of Business Ethics, 16(5). Klassen, R. D.,&McLaughlin, C. P. (1996), “The impact of environmental management on firm performance”, Management Science, 42(8). Russo, M. V., & Fouts, P. A. (1997), “A resource-based perspective on corporate environmental performance and profitability”, Academy of Management, Journal, 40(3). Sauer, D. (1997), “The Impact of Social-Responsibility Screens on Investment Performance: Evidence from the Domini 400 Social Index and Domini Equity Mutual Funds”, Review of Financial Economics, 6(2), 137-49. Temper, J. (1991), "The Cost of Social Criteria", Pensions & Investments (May), 13, 34. Read More