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CHAPTER 1 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 firms stock price had declined nearly $2 per share over the past 9 months. Loren indicated that she shared Dales frustration, particularly because the firms profits had been rising. Neither could understand why the firms stock price was falling as profits rose. Loren indicated that she had seen documents describing the firms profit sharing plan under which all managers were partially compensated on the basis of the f irms profits. She suggested that maybe it was profit that was important to management, because it directly affected their pay. Dale said, That doesnt make sense, because the stockholders own the firm. Shouldnt management do whats best for stockholders? Somethings wrong! Loren responded, Well, maybe that explains why the company hasnt concerned itself with the stock price. Look, the only profits that the 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 dont directly benefits from profits. That probably explains why the firm is being sued by state and federal environment officials for dumping pollutants in the adjacent stream. Why spend money for pollution control? It increases costs, lowers profits, and therefore lowers managements earning! 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.

QUESTIONS a. What should the management of Sports Products, Inc. Company pursues its overriding goals & why? b. Does the firm appear to have an agency problem, explain.

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INTRODUCTION Sports Products, Inc., is a major producer of boating equipment and accessories. Over the years, the firm had makes a profit and secure their position as a major producer. The firm profit had been rising. On the outside, the firm seems normal and gain profit, but, the firm had facing some internal problems. Even the workers can detect that the firm had facing several issues regarding their management & the stockholders. ISSUES The main issue that the firm has is they are facing agency problem where the management & the stockholder do not entirely share the same goal and had conflict interest between them. The firm had been refused to paid dividends to their stockholders during its 20-year history. Although the firm had gain profit in their earning, but the stockholders did not gain anything from that profits. It was not supposed to happen because stockholders also own the firm. The problem arise when the management and stockholder pursue different objective and going onto different path. The management pursue profit for their owned benefits. Its stated that the firms profit sharing plan under which all managers were partially compensated on the basis of the firms profits. Therefore, if the firm gain profit, the management were had increases in their pay check and vice versa. That is why the profit is important to the management team. However, only the management gain advantages through that. The production workers did not gained anything from the profit that the firms generated. The workers need to work hard in order to avoid wasting the packing materials and must efficiently and costeffectively in performing their job. This might give stress to them and they might felt unsatisfied when they were not awarded accordingly. It will affect them emotionally and might give a negative result in their future performance. Other than that, the fact that stockholders did not receive any profit may give consequences to the firm in the future. It had been almost 20 years since the stockholders receive any sort of payment from the firm although the report stated that the firm are making profit. Stockholders might reconsider their decision to stay invested to the firm or withdraw themselves from the firm. The issue here is how the firm can retain their stockholders because it is not impossible for stockholders to pull out their investment from the firm drastically.

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The stock price for the firm had declined nearly $2 per share over the past 9 months and it was a signed that there were some issues happen inside the firm. With this situation, it is hard for the firm to retain their position in the industry. The firm may put themselves in danger situation if there is no action take to prevent the stock price from keep decreasing. It will influence the stockholders to make decision whether to stay or pull out based on the firms stock price, plus they dont directly benefits from profits. The firm also had some issues with their corporate image. The firm had been sued by state and federal environmental officials for dumping pollutants in the adjacent stream. This would gave negative image for the firm and will definitely affected their profit if people aware about this issues. The firm did not want to follow the right procedure because the management afraid that it will increase costs, lowers profits and lowers managements earning if they create the pollution control. The management did not realise that their action had jeopardise the firm image and they might need to spend more money to recover their image compare to create the pollution control. Obviously, there is something wrong on how the management team managed the firm. The management team did not play their role accordingly and violated the trust that stockholders gave to them. Although the objective for the firm is to optimize profit but management need also consider the objective for stockholder who is to gain stockholders wealth not only from the cash dividend but from many other aspects. The management also need to start thinking about other workers wealth and it must be competent based the effort that they done for the firm. If there is no action taken whether from the management side or for the stockholder side, the firm will face some serious problems. Both parties need to figure out what methods they need to take in order to prevent the firm from keep suffering. The management and stockholder need to sit together and synchronize the objective that both parties want to achieve and still maintain the firm profit. The changes need to be done immediately or the firm will start to loss their profit and harm their corporate image.

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STRATEGY/RECOMMENDATION Conflict within a firm can greatly hamper the firm efficiency and decrease the productivity. In addition, it can make it an unpleasant place to work and can lead to higher employee turnover, which can lead to even lower efficiency. Therefore, it is within the firm best interest to attempt to solve this problem. This process can be done in various ways. At the first place, the management & the stockholders need to sit together and have a brief discussion on their interest towards the firm. They need to state clearly their objective or goals that they want to achieve within certain period of time. By doing this, it will prevent the Agency Problem from happening again. If the stockholders find out that they have a major conflicting interest or issue, worse come to worse, the stockholders need to change the existing management team. For example, in the case study we can see that the stockholders might seeks for wealth maximization through increases in firm value and share price and utilizes compensation to motivate the managers. The managers too, seeks wealth maximization but directly through compensation. Although wealth maximization appears to be a common goal between them, but it is misleading. So the stockholders must be sure how closely are management goals aligned with stockholder goals.

Then, the management should pay higher dividend to the stockholders and reducing earning per share, so the firms stock price will increase & the organization will have a stronger corporate image and stay ahead from their competitors as they do not ignore the importance of stockholders in doing business. Besides that, management and stockholders are not the only parties with an interest in the firm's decisions. Employees, customers, suppliers, public and even the government all have an interest in the firm. Taken together, these various groups are called stakeholders in the firm. To make the management of the firm more effective and efficient, the management and the stockholder must also consider the stakeholder view. This can be done by creating an open forum for discussion. If problems are not brought out into the open, then they tend to fester. By creating a forum in which employees can bring management's attention to problems, without fear of reprisal, the agency takes a first step to resolving the issues that need addressing. A firm should consider a town hall forum or other public space. The discussion that they had might help the management and the stockholders to see whether there are other issues that been left out for their consideration.

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Based on the discussion with stakeholder on certain matters arise, the management and the stockholders must revise back their existing firm policy and future planning, so that it will not create serious problems. By referring to Dale complaints on how he and his coworkers always worked hard trying to do work efficiently and cost effective but had gain nothing, maybe the management can give incentive that relates to job prospects where better performers within the firm will tend to get promoted. This incentive will motivate the employees to work better & reduce the employees turnover. Another recommendation for Sports Products, Inc., to solve their issue for being sued by state & federal environmental officials for dumping pollutants in the adjacent streams is to try to implement new policy in their firm. So that the pollution can be control at the early stage. For example they can consider to implement policy that followed ISO practices such as 6S, standard operating procedure and Safety & Health policy. By followed the right guidelines or procedures that been approved by the government, the firm will not being sued again. After all, prevent is better than cure.

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FUTURE OUTLOOKS OR EXPECTATIONS OF SPORTS PRODUCTS INC The future outlook or expectation for Sports Products Inc will depends on the actions taken by the organization. These will lead to positive and negative future outlooks. If Sports Products Inc decides to take an immediate action to solve the current issue, these are the future outlooks of the organization. First of all, Sports Products Inc will be able to sustain longer in the business world. As we know, this organization is currently facing the problem of declining firms stock price. Based on the recommendations suggested earlier, this problem can be solved by the company with an immediate corrective action. By paying higher dividend to the stockholders and reducing earning per share, firms stock price will increase. Other than that, the organization will have a stronger corporate image and stay ahead from their competitors as they do not ignore the importance of shareholders in doing business. They will show that the company is able to maximize profits and maximize shareholders wealth. Thus, Sports Products Inc will have the competitive advantage, longer sustainability and better growth in the future. Second, Sports Products Inc is recommended to do the pollution control. This is because we want to avoid from being sued again by the government. In the future, they do not have to bear any additional costs that will affect the companys profits. Furthermore, government encourages any organization to perform Corporate Social Responsibility (CSR) to the environment. Tax reductions and subsidies will be given to them. Thus, pollution control will benefit Sports Products Inc in the long-term period. The organization will have positive and better future outlooks if they take immediate actions. What will happen if the organization decides not to take any corrective actions? They have to bear the negative outcomes. We predict that Sports Products Inc will not be able to sustain their business more than 2 (two) years. We know that the firms stock price had declined nearly $2 per share over the past 9 months. If any immediate actions are not taken, the stock price will decline continuously. Sports Products Incs stockholders will gain nothing because of it and they will decide to leave the company and no longer investing their money. Thus, the organization will lose their stockholders faith and destroy their corporate image. Sports Products Inc will not be able to sustain and may lead to bankruptcy. Although they are making profits in the business, profits would not be enough to cover all the costs of organization. They still need the shares from the shareholders. Other than that, if the organization did not take any immediate action on pollution control, they will have to bear additional costs because of being sued by state and federal environment officials over and over again. The organization will have negative and bad future outlooks if they decide not to take any actions in solving the current issues faced by them.

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CONCLUSIONS As a conclusion, Sports Products Inc is recommended to take immediate actions to solve few issues highlighted earlier. These will ensure the sustainability and growth of the organization. They might faced some challenges at beginning of implementing the corrective actions but in long-term period, Sports Products Inc will be benefitted from it. They will be able to achieve the objectives of profit-maximization and shareholders wealth maximization.

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