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Loren Seguara and Dale Johnson: Assessing the Goal of Sports Products, Inc.

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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 profit-sharing 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.
e. On the basis of the information provided, what specific recommendations would you offer the firm?

Solution Preview

Before beginning with this part of the query, it is required to thoroughly go through the given scenario, other wise it will be difficult to provide an appropriate answer. This scenario deals with the Sports Products, Inc. Below I provide the information regarding what the management of Sports Products, Inc. should pursue as its overriding goal.

Sports Products Inc

Sports Products Inc. Is a major producer of the boating equipment and accessories. The case discussed here revolves round the character - Loren Seguara who is employed in the Accounting Department as the clerical assistant. Another character in this case is Dale Johnson who is working in the Shipping Department as a packager.

The problem in this case is the ailments of Dale which he talks about from Loren during the lunch break. Dale complained that in spite of his hard efforts being put; the company is not recognizing it. While carrying out his work, he's putting his best towards the concept of waste management I.e. Not wasting the packing materials and using the resources in an efficient and in a cost-effective way. In spite of carrying out the work with full efficiency and in a group with co-workers of the department, the outcome is the decline in the stock price of the firm by nearly $2 per share in the last nine months.

A) The management of Sports Products, Inc. should pursue its over-riding goal in rendering the best products (in terms of quality) and service at the lowest and the minimum price charged from ...

Solution Summary

The response addresses the queries posted in 834 words with references.