Ethics Case Studies

Answer:
The given case study pertains to the rising instances of hiring employees at very high remunerations followed by mass firing of employees due to unsustainable financial losses etc.
(a) Stakeholders involved and the associated ethical issues:

• Investors (Venture Capitalist, Angel investors, Institutional investors, High Net worth Individuals): They have invested their money and want the company to become/remain profitable.
• Top management of start-ups: They need to ensure that interests of the employees as well as investors are protected.
• Employees: They need to enquire about sound management practices in the company and its long term vision rather than getting blinded by high remunerations offered.
• Regulatory architecture: It means the development of optimum regulatory architecture, which neither stifles entrepreneurship nor lets them loose.
• Common public at IPO stage: Some early-stage investors (Venture Capitalists, Institutions etc.) get an exit through Initial Public Offering (IPO) at very high unjustified valuations in alleged connivance with investment banks. Paytm, Zomato are cases in point.

Ethical issues involved in this case are following:

• Integrity of the management: It is necessary that the management follows principles of fairness, transparency, prudence etc.
• Corporate governance: It is required that the startup is run keeping in mind principles of ethical corporate governance which is fair to the interest of investors, management as well as employees.
• Investors greed: Greed of investors for making more and more money pushes startups to follow unscrupulous business practices which are often at odds with the long term interests of the employees as well as the company.
• Exploitation of employees: These startups hire employees at higher salaries and also make them work for longer durations which is not sustainable in the long run.
• Regulatory incompetency: It poses an ethical dilemma to the government as these startups are provided some relaxations in order to lower their operational costs, however, this results in opaque business practices by the startups.
• Cheating of individual investors at the time of IPO by phoney valuations: Higher valuation causes individual/retail investors to lose their money while the promoters/angel investors recover their money at a profit.

(b) Reasons behind such irresponsible behaviour of management:

• Self-interest/selfishness: The management in the greed of better pay packages and better service conditions overlook sustainable and responsible practices creating an environment of opulence and pretense instead of focusing on the right direction and strategy for the start-up.
• Urge for empire building: Attracted by success and valuation of other entrepreneurs, managements often want to become huge in no time even even if it means irresponsible and short-sighted decision-making.
• Attracting more investments: The management in order to attract more investment at high valuations presents rosy pictures to investors, which are far from reality. This also diverts the focus from actualizing a profit-making sustainable business model and hurts the entity itself. They sometimes acquire assets by diversifying in unrelated areas.
• Poor corporate governance: Start-ups are subjected to minimum regulatory compliance for their own good but they misuse that freedom to neglect good corporate governance. This poor governance affects everything from morale of the employees to quality of product/ service of the company which minimizes the odds of it being a successful entity.
• Apathy of shareholders/investors: Since big investors are mostly not interested in everyday decision making or don’t want to interfere in regular business operations of the entity, this may give the management free hand devoid of any accountability enabling them to act on their whims and greed.
• Unnecessary expenditure: The management indulges in different kinds of unnecessary expenditures such as overseas trips, partying regularly beyond the justified requirements.
• High Merger and Acquisition Costs (M&A costs): Given the niche nature and typical ownership status of tech start-ups, their revamping through mergers etc. at the time of non- performance is a cost intensive task.

(c) Suggestions to tackle problems of new age start-ups
Measures to tackle financial mismanagement:

• Management needs to develop an appropriate responsible financial management framework which protects interests of both investors as well as employees. This can involve regular auditing and third-party certification for responsible financial management.
• Securities and Exchange Board of India (SEBI) should frame rules for correct valuation of startups at the time of IPO.
• Responsible leadership which can inculcate the values of innovation, mindful expenditure and frugality rather than splurging of valuable resources
• Developing and following a business model where incremental revenue will be profitable rather than burning of cash as happened in cases like Paytm Mall etc.

Measures that can be taken other than layoffs to control costs in a new-age start-ups:

• Minimizing spending: Through reducing undesirable expenditures like parties, curtailing non-essential expenditures, removal of service discounts to the customers etc.
• Pay cuts: Adjusting salaries may be difficult for employees but are better than layoffs. Management may compensate the employees when the business tide is in favour. Transfers and job sharing: These will lead to reduction in the scheduled hours of job and more manpower allocation in departments, which are in greater need.
• Outsourcing: Especially for the works that are not the core works of the organization.

While mass layoffs are done in the name of cost cutting and dealing with an adverse business environment, it is more desirable to explore alternative options for cost cutting by conducting cost analysis of the company and following ethical management practices, which values transparency and accurate reporting of financial health of the company.