This Week In Finance

"Ethics and Finance: Oxymoronic? The Case of Rite-Aid"

What do you tell your corpfin students about short-term finance? For many instructors, lectures can be summed up in one sentence: "Collect as quickly as possible, and pay as slowly as possible." Of course, one has to keep in mind the competitive forces which restrict the seller's ability to modify credit terms, and the legal and ethical issues involved when one attempts to slow, disbursements. With respect to the latter, a recent Wall Street Journal article indicates just how far at least one firm is willing to go in this context, and provides a good springboard for class discussion of both ethical issues and trade credit practices.

The front page of the Wednesday, March 31st issue of The Wall Street Journal contains a fascinating story dealing with what appears to be an unusual situation between Rite-Aid Corp. (the nation's third largest drugstore chain) and its suppliers. It is alleged in the article that Rite-Aid has been taking excessive "deductions" from the funds owed to suppliers. The stated reason for the deductions is for damaged and otherwise unsalable merchandise received by Rite-Aid; sources quoted in the article, however, suggest that the deductions have been taken to bolster the firm's quarterly earnings by reducing reported costs. Further, it is suggested that the practice has become so common that "a small industry of 'deduction management companies' has sprung up . . . to comb through [retailers'] records to find invoice discrepancies, unbilled claims for shared advertising and the like."

After describing the situation to your class, ask as to the ethical and financial implications. Does the fact that some level of deductions is generally warranted affect the answer? Would this behavior be more prevalent when short-term rates are high? That is, some firms apparently take excessive deductions, report more favorable quarterly earnings, then pay back some of the "excess" deductions, effectively borrowing on a short-term basis at no cost.

From here, the discussion should take off on its own. What role does ethics play in finance? Was Gordon ("Greed is good.") Gekko right? How about Ray ("It's not a dog-eat-dog world out there anymore, it's rat-eat-rat" Kroc right? Or does virtually every financial decision impound ethical issues? (My own personal belief.) It's your call . . .

RWJ Discussion Starters Archives

Adopter Resource Page