Felicia & Fred’s board has hired a new Chief Operating Officer (COO) to assist t

Question

Felicia & Fred’s board has hired a new Chief Operating Officer (COO) to assist them in expanding their operations globally. A close friend of Fred’s from childhood, the new COO, has extensive experience in importing goods and maximizing value for shareholders through outsourcing activities, and recently left a large Fortune 500 company to join Felicia & Fred. Logistics and supply chain are of primary concern, as the demand for the company’s handbag product line has grown steadily. Rather than expanding the inventory as well as the need for additional warehousing space and working capital, the COO believes that inventory turnover may be increased through quicker replenishment and shipment directly to stores rather than to a centralized warehouse, and indicates that previously, he was able to take an approach with a manufacturer that was successful. He has not articulated the plan as yet, but assures Fred that it can be done.

A few weeks after the COO is hired, you meet a marketing department colleague in the cafeteria, who confides the following: “I read something unusual in the Financial Times today. It appears that the company from which our new COO hails is being investigated for potential violation of the Foreign Corrupt Practices Act. It is speculated that the company paid bribes to local officials in Hong Kong, classifying these as ‘commissions,’ in order to gain access to various manufacturing plants’ idle capacity at short notice. It seems to me that this would be a supply chain responsibility. It did not mention any names, but the investigation is ongoing.”

Do you have any concerns regarding the background of the new COO’s background, or questions regarding his potential approach to maximizing inventory turnover? In the context of the CFA Institute Code and Standards, would there be any required action on your part to take to investigate further the potential plans of the COO? How might you assess whether the approach is legitimate?

Explanation / Answer

YES THE BACKGROUND OF THE NEW COO IS OF GREAT CONCERN AS HE IS HIRED BECAUSE HE HAS EXTENSIVE EXPERIENCE IN IMPORTING GOODS AND MAXIMISING VALUE OF SHAREHOLDERS THROUGH OUTSOURCING ACTIVITIES.IN THE ARTICLE IT APPEARS THAT FORTUNE 500 COMPANY FROM WHERE HE COMES IS BEING INVESTIGATED FOR POTENTIAL VIOLATION OF THE FOREIGN CORRUPT PRACTICES ACT AND IT SEEMS THAT IT WOULD BE A SUPPLY CHAIN RESPONSIBILITY.HIS POTENTIAL APPROACH TO MAXIMISING INVENTORY TURNOVER SURELY CANNOT BE QUESTIONED AS SHIPMENT DIRECTLY TO STORES RATHER THAN TO CENTRALISED WAREHOUSE WILL REDUCE THE TIME OF EACH INVENTORY TURNOVER.

CFA INSTITUTE CODE AND STANDARDS STATES THAT

The Code of Ethics maintains that you must:

The Standards of Professional Conduct cover:

HENCE INTEGRITY IS OF GREAT IMPORTANCE AND EACH AND EVERY ONE SHOULD PERFORM THEIR RESPONSIBILITIES WITH INTEGRITY.SO ACTION IS REQUIRED TO BE TAKEN ON OUR PART TO INVESTIGATE FURTHER THE POTENTIAL PLANS OF THE COO.

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