Ethical Dilemma at Hunt Manufacturing: Coercing Bondholders to Convert Their Bonds

Hunt manufacturing has experienced an enormous loss that has more than offset the profits of the first three quarters. Claude Meyer, the assistant to the controller, devised a plan that involves $300 million in convertible bonds issued three years earlier. Meyer suggested that the company call the bonds at a call premium of 1%. Meyer knows, that if given the choice to either accept that redemption price or convert the stock, most will choose to convert. I do perceive an ethical dilemma. Claud is suggesting that the company essentially force their bondholders to convert to stock because most would not choose to call them because they are at the very low 1% premium. By converting the bonds to stocks, the company would be able to report a profit because the conversion would eliminate a substantial liability from their balance sheet, decrease their interest expense account significantly. As the controller stated, normally the bondholders would not have any intention to convert the bonds, so Meyer knows that in order for his plan to work, Hunt Manufacturing needs essentially force them to convert. As opposed to actually solving the real problem that the company is facing, Meyer’s plan would give the false impression that the company is doing better financially than they really are. I think that Hunt Manufacturing’s management should be more focused on why the company had such a loss.

This conversion will only have a temporary effect on the company’s financial reporting. The Bible (English standard Version) warns us of this false reporting in Leviticus 19:35-36 by stating: You shall do no wrong in judgment, in measures of length or weight or quantity. 36 You shall have just balances, just weights, a just ephah, and a just hin: I am the Lord your God, who brought you out of the land of Egypt. 37 And you shall observe all my statutes and all my rules and do them: I am the Lord. As stated before, Hunt Manufacturing would be the only ones who would benefit from this plan, but the effects would only last during the current period. If the company does not work to solve the issues that cause the loss originally such as the poor sales forecasts and production delays, then the company is bound to incur another loss. I believe that those who would be hurt by this plan include the bondholders, because they would be forced to convert the bond when they might not have had any intention to do so prior to the call premium of 1%.

Future shareholders and bondholders would be discouraged from engaging in business with Hunt Manufacturing due to how the handled the situation. Eventually Hunt Manufacturing would suffer negative consequences as well. They would be shown in a negative light for their actions and could potentially face legal repercussions. Sadly, this negative view the public might have would not be limited to those directly involved in the incident. According to Fan et al. (2020), “The spillover effect of brand scandals commonly exists, and this effect will damage the image of the company, industry or even country in which the scandal occurred”. References English Standard Version Bible. (2001). ESV Online. https://esv.literalword.com/ Fan, B., Li, C., & Jin, J. (2019;2020;). The brand scandal spillover effect at the country level: Evidence from event-related potentials.