Case: Assessing the Goal of Sports Products, Inc.
Loren Seguara and Dale Johnson both work for Sports Products, Inc., a major producer of boating equipment and accessories. Loren works as a clerical assistant in the Accounting Department, and Dale works as a packager in the
Shipping Department. During their lunch break one day, they began talking about the company. Dale complained that he had always worked hard trying not to waste packing materials and efficiently and cost-effectively performing his job.
In spite of his efforts and those of his co-workers in the department, the firm's stock price had declined nearly $2 per share over the past 9 months. Loren indicated that she shared Dale's frustration, particularly because the firm's profits
had been rising. Neither could understand why the firm's stock price was falling as profits rose. Loren indicated that she had seen documents describing the firm's profitsharing plan under which all managers were partially compensated on the basis
of the firm's profits. She suggested that maybe it was profit that was important to management, because it directly affected their pay. Dale said, "That doesn't make sense, because the stockholders own the firm. Shouldn't management do what's
best for stockholders? Something's wrong!" Loren responded, "Well, maybe that explains why the company hasn't concerned itself with the stock price. Look, the only profits that stockholders receive are in the form of cash dividends, and this
firm has never paid dividends during its 20-year history. We as stockholders therefore don't directly benefit from profits. The only way we benefit is for the stock price to rise." Dale chimed in, "That probably explains why the firm is being sued by state and federal environmental officials for dumping pollutants in the adjacent stream. Why spend money for pollution control? It increases costs, lowers profits, and therefore lowers management's earnings!"
Loren and Dale realized that the lunch break had ended and they must quickly return to work. Before leaving, they decided to meet the next day to continue their discussion.
a. What should the management of Sports Products, Inc., pursue as its overriding goal? Why?
b. Does the firm appear to have an agency problem? Explain.
c. Evaluate the firm's approach to pollution control. Does it seem to be ethical? Why might incurring the expense to control pollution be in the best interests of the firm's owners despite its negative effect on profits?
d. Does the firm appear to have an effective corporate governance structure? Explain any shortcomings.
Answer a: The overriding goal of any corporation should be to maximize shareholder value. Shareholder value may be maximized by maximizing profits. However, there are a number of other factors that determine shareholder value. Profits can be artificially inflated to help management. The overarching goal for any organization should be to maximize shareholder's value.
Answer b: Yes, the firm ...
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