Sports Products Inc

Essay Instructions:

Write a 700-1,050 word paper in which you respond to the questions at the end of the case a) What should management of Sports Products, Inc., pursue as its over-riding goal? Why? b) Does the firm appear to have an agency problem? Explain. c) Evaluate the firms 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 firms 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? CASE STUDY: 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 firms 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 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 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 managements 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.

Essay Sample Content Preview:

CASE STUDY: SPORTS PRODUCTS INC
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Tutor’s Name:
(22, October, 2010)
Case Study: Sports Products Inc
a) What should management of Sports Products, Inc. pursue as its over-riding goal? Why?
The overriding goal for every company including Sports Products Inc. should be to add shareholders value by ensuring that the market value of the company increases. The shareholders are the owners of the company and the primary goal should be to serve their interests. In addition to this, the methods and policies applied in adding value for the shareholders should take into consideration the stakeholders’ interests. Safeguarding the stakeholders’ interests would lead to increased shareholders wealth. The stakeholders include any individual or group that has a direct or indirect stake in the company, and may include customers, employees, the government, suppliers, environmentalists and the community. The company will be run using strong values that will give it a competitive advantage especially in the long-term.
Short term profits will not always mean adding value to the company. The management can manipulate the financial statements so as the company to look profitable; or can apply unethical policies such as selling substandard products, in creating profits. This does not add value for shareholders, nor does it consider stakeholders, interest. This is what Sports Products management did. The management used unethical means and in the process interfered with the environment and the company has to increase costs in law suits. This would have been avoided had the company been applying shareholders and stakeholders’ value and not profits.
b) Does the firm appear to have an agency problem? Explain.
Sports Products Inc. appears to have an agency problem. An agency problem exists when there is a conflict of interest between the agent (e.g. management, creditors, and suppliers) and the principal (e.g. the shareholders), as they have different goals (Chilosi, et.al. 2007). There is a conflict of interest between the management and the shareholders of Sports Products Inc. The management is interested in maximizing profits as there were benefits for the management pegged on the firm’s profits. The management as the agent engaged to manage their principal’s investments have their interests (higher profits, higher compensation) in conflict with the shareholders interests, adding shareholders value. In an attempt to increase profits, the management engaged in unethical and environmental friendly policies which lowered the value of the company. The decrease in shareholders value decreased as reflected in the stock price decrease even when the profits have increased.
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?
The firm has...

Updated on January 26, 2024

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Sports Products Inc

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