Big firms often undertake sub-contracting to complete large infrastructure projects in a timely manner. You recently joined one such firm as a manager responsible for awarding these contracts. Looking at the past records, you find that all contracts for the past few years have been awarded to a particular firm, X. Your superior has asked you to award an upcoming contract to the same firm. Although, not binding, company procedure maintains that sub-contracting work should be offered after competitive bids. This is to ensure that the firm most suitable for the project in terms of operations and finance gets the contract. When you discuss this with your superior, he insists that hiring of the firm X has been done as per legal norms of the company and no official rule has been violated. You decide to contact the owner of the firm X. After doing so, you realize that he is the nephew of your superior, who is also a shareholder in the company. (a) State the ethical issues involved in the case. (b) Does this form of transaction between two private parties constitute a conflict of interest? Justify. (c) Evaluate the possible ways of awarding contracts in such a situation with their merits and demerits. Also state which method would be more suitable in each situation.

→ The not binding company procedure → My knowledge of the owner of X being nephew of my superior → Following rules in letter, not in spirit → Conflict of interest of superior

These issues require an analysis and appropriate course of action based on business ethics.

Such a form of transaction between two private parties comes under the scope of business ethics and personal ethics. This can also constitute a conflict of interest as depicted below

↳ Detrimental to company interests if firm X is awarded contract without due procedure

Although my superior is shareholders of the company, but still he does not represent all other shareholders. Thus by awarding the contract to firm X, he is being dishonest to his co-shareholders, and also to other applicants for the contract.

Although this transaction seems private, but involves the larger interest of the firm (in which other shareholders also have stake). Thus it falls into ambit of conflict of interest - with my superior caught in two conflicting roles

→ private personal role of his duty towards his nephew → professional role as a shareholder working for profit maximisation

In cases such as above, contracts can be awarded following a certain fixed procedure -

(1) The company management can draft flexible but binding guidelines for awarding contracts, get them approved by shareholders.

(2) A provision for recusal of the person who faces a conflict of interest should be there.

(3) Objective parameters of bidding and auction, or outsourcing can be laid out.

Making the contract awarding more strict has certain merits such as

↳ Effective corporate governance ↳ Upholding shareholder interest ↳ Preventing situations with excess discretion ↳ Avoiding conflict of interest ↳ Increased efficacy of the company ↳ Better work culture

But such procedure can make some delays and thus financial losses, also it might reduce efficiency of the company as well.

A better outcome course of action will include mandatory disclosure of any conflict of interest faced by a person of the company, and his recusal from a position of power.